Heatwave sweeping Europe pushes up emissions certificate prices as hydro production falls and demand rises

Drought that has been affecting large parts of Europe has pushed up carbon emission certificate prices as hydro-electricity resources dwindle.

With electricity prices also rising, the carbon price is hovering above €24/tonne or close to four times its price at the beginning of the year, with analysts seeing little prospect of prices falling soon.

Indeed, increased global warming is likely to force carbon prices still higher with countries more reliant on hydroelectricity, such as those in Scandinavia or the Iberian peninsular, forced to turn to thermal resources.

Even France, which is heavily dependent on nuclear capacity, could be forced to increase its use of carbon-based fuels as river levels fall, leaving reactor cooling water unavailable or restricting their use on environmental grounds.

However, with greater demand for gas, generators tend to switch to coal in the face of high prices, consequently creating more demand for carbon credits.

With the first phase of the European Emissions Trading scheme due to come to a close in late 2007, political pressure on the scheme is likely to mount as tougher emissions caps are due to be imposed. Governments must negotiate emissions limits before the end of next year with industrial lobbies expected to push for larger allocations.

Meanwhile, the UK’s Department of Trade and Industry says that CO2 emissions will only fall 14% below 1990 levels by 2010 at current production levels, well below the 20% target. Despite this, the UK is likely to meet its Kyoto Protocol target of reducing greenhouse gas emissions by 12.5% by 2012.

The revelations come from a second review of the UK’s 2003 Energy White Paper. The report, published jointly by the Department of Trade and Industry (DTI) and the Department of the Environment, Farming and Rural Affairs (Defra), outlines progress in ensuring security of supply, lowering emissions, improving competitive markets and reducing fuel poverty.

A statutory consultation document, detailing plans to improve the Renewables Obligation is due to be published later this year.