The price of permits on the European Union's carbon market reached 100 euros ($106.57) a tonne for the first time on Feb. 17, reflecting the increased costs that factories and power plants must bear when they pollute.
EUAs are the primary currency in the European Union's Emissions Trading System (ETS), which requires manufacturers, electricity firms, and airlines to pay for each tonne of carbon dioxide they release as part of the EU’s commitment to reaching its climate targets.
Traders said that cooler temperatures combined with reduced wind speeds would increase demand for power from Europe's fossil-fuel-powered facilities which are mandated to purchase carbon permits to offset their emissions.
“Temperatures in Northern Europe are actually now forecasted to go below seasonal averages next week, which might instigate utilities to increase their hedging activities,” said Gregory Idil, a senior carbon emissions trader at Vertis.
Since the beginning of the year, the benchmark contract has surged over 20%, owing in part to optimism that Europe's economies will begin to strengthen as energy costs fall from record highs. Speculative buying has also contributed to price increases this year, according to traders.
The EU ETS was implemented in 2005, and the price fell to practically zero during the global financial crisis in 2007, when the market was severely oversupplied. Years of weakness followed until the EU agreed to remove surplus permits from the market in 2018.
Prices rallied by 150% in 2021 when EU policymakers set out their latest CO2-cutting laws, prompting utilities to shift to gas to avoid paying a bigger carbon bill.
In 2022, the outbreak of Russia-Ukraine war resulted in a slump in natural gas supply, fueling a 7% increase in coal-fired power generation in the EU, despite the high CO2 price.
EU’s shift back to coal has raised concerns about its climate targets, but EU policymakers claim that it is a short-term reaction, and that the high price of fossil fuels such as coal and gas will eventually expedite the transition to renewable energy.
The price of 100 euros has long been proposed as a price that could incentivise some of the costly technologies thought to be required to limit global warming.
Yet, rising carbon costs continue to be a cause of political tension in the EU, and crossing the 100 euro threshold is certain to revive price arguments.