The price of emission allowances in the EU has already exceeded 90 euros per tonne of CO2, has risen by about 50 percent since the beginning of November, and growth in recent months is also one of the factors contributing to higher energy prices.
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The rise in the price of emission allowances is due to higher gas prices, which make it more economical for power companies to use coal. Electricity production from coal generates twice as much carbon dioxide emissions as gas production, so it requires more emission allowances.
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The price of a key futures contract for natural gas in the EU has risen by as much as ten percent today, according to analysts, mainly due to the prospect of colder weather, maintenance of gas infrastructure and tensions between Russia and Western countries.
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SEB commodity market analyst Bjarne Schieldrop estimates that the price of allowances could climb to 100 euros per tonne by 25 December. Analyst Lawson Steele from Berenberg predicted that the price would rise to 110 euros per tonne by the end of the year.
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The European Emissions Trading Scheme (ETS) is the main tool for reducing greenhouse gas emissions. It sets limits on the total amount of greenhouse gases that can be emitted by sectors within its scope, while allowing companies to obtain or purchase emission allowances that can be traded as needed. As the price of allowances increases, so does the motivation of companies to try to reduce emissions.
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According to Reuters, economists believe that the prices of allowances should be around 90 euros per tonne, in order to force companies to reduce emissions to such an extent that would ensure that the goals of the Paris Agreement of 2015 are met.
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The European Commission (EC) said in May that the number of allowances in circulation had increased last year as the covid-19 pandemic led to lower emissions. At the end of last year, according to the commission, about 1.579 billion allowances were in circulation, 14 percent more than a year ago. The Commission has therefore decided to withdraw 378.9 million allowances from future auctions and place them in the market stabilization reserve.
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