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19 June 2008 - Record high oil prices and a lower-than-anticipated supply of international carbon credits mean carbon allowances will trade at €32/tonne ($50) on average during the second phase of the European Union's cap-and-trade scheme, according to analysts Point Carbon.
According to the analysis, which appears in Point Carbon's most recent Carbon Market Brief, the spike in oil prices, currently at record levels, have driven up the price of natural gas, which in turn has prompted power generators to burn coal and buy carbon allowances instead.
"We see €32/tonne as a fair price for phase 2 European Union Allowances (EUAs), up €2/tonne from our previous assessment of March this year. We see a higher CO2 forecast due to a widening of the gas-to-coal price differential", explained Kjersti Ulset, Manager of Point Carbon's EU ETS team.
The current gas-to-coal price differential, which is also known as the fuel switching level, measures how much it costs for a power producer to use natural gas as fuel instead of using coal and buying more carbon credits.
"Although fuel switching levels are currently at a record high, the carbon price so far in 2008 has incentivized power generators to burn natural gas rather than coal", said Kjersti Ulset. "As a result, we have seen internal abatement," she added.
The report estimates that emissions in the power and heat sector in the European Union's
Emissions Trading Scheme (EU ETS) have been cut by 20 million tonnes (mt) as a result of carbon prices so far in 2008.
Mild and wet weather conditions have also contributed to 24 mt fewer tonnes of emissions than average weather conditions would produce.
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