The EU carbon market is seeing its highest prices in almost a year with carbon emission permits, EUAs, spiking on rising gas prices – and analysts saying the market could go higher.

The price of the benchmark December 2008 forward contract for EUAs broke through the €25 mark for the first time since May 2007 this week. Dec 08 EUAs closed at €25.14 on the European Climate Exchange (ECX) on April 15, a level they last hit briefly in late May last year. But sustained carbon prices at these levels have not been recorded for two years – just before the carbon market plunged on the release of the first ever verified emissions data for the EU.

Rising oil and gas prices are combining with a bullish long term outlook for the EU’s emissions reduction market that has taken hold in the last month or so. The spiralling cost of oil is seeing gas prices surge too. Coal prices have also risen but not nearly as much. The difference between gas and coal prices is crucial for the price of EUA emission permits under the EU Emissions Trading Scheme (EU ETS).

The EU ETS is dominated by power utilities, which must hold EUA permits for every tonne of carbon dioxide (CO2) emitted when burning fuel to generate power. Most fossil fuel generators burn either coal or gas. When the price of gas rises, it makes burning coal more economic. But burning dirtier coal means almost twice as much in CO2 emissions and the need to hold more emissions permits. Many generators switch to coal and then buy more EUAs to on the market to cover themselves.

Trading volumes have continued to rise, with 5 to 10 million EUAs changing hands daily via the ECX over the past week.

The lift in EUAs has barely been reflected in the secondary CER market, which is out of favour among carbon market players. Dec08 CERs have crept up, closing at €16.40/50 on April 15.

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