The price of benchmark European Union carbon permits rose to a record high of 45 euros ($54) a tonne on Tuesday, increasing costs for polluters.
The contract for EU Allowances (EUAs) was up nearly 2% at 45.12 euros a tonne at around 1430 GMT, its highest since the EU's Emissions Trading System (ETS) was launched in 2005, before dipping back under 45 euros.
Prices have been rising sharply since the European Union agreed last year to toughen its climate targets, which will increase demand for permits to emit.
The EU ETS is the 27-country bloc's main tool to reduce the greenhouse gas emissions that cause climate change.
It forces power plants, factories and airlines running European flights to buy a permit for each tonne of CO2 they emit, effectively putting a price on pollution.
In the power sector, it has helped to make coal plants uneconomic, compared with less-polluting gas plants or renewables.
Last week, the European Commission said emissions regulated by the carbon market fell by 13.3% last year, as pandemic restrictions stifled economic activity and grounded flights.
However, success in cutting emissions has taken time and carbon prices dropped to nearly zero in 2007 during the financial crisis.
The Commission is expected to publish details in June on how the carbon market will be reformed to help achieve its tougher climate target, which is expected to lead to greater demand and scarcity of carbon allowances.
On Tuesday, analysts raised their European carbon market average price forecasts on expectations of the tougher target and as cold weather drove up the cost of permits. read more
However, the carbon price needs to increase much further - to around 100 euros - to push industry towards investing further in emissions-cutting technologies, such as hydrogen, analysts say.
It also has to be high enough to enable the 27-nation bloc cut emissions to net zero by mid-century.
"The carbon price has to rise sufficiently to trigger emission reductions through improved efficiency, something that we believe industrials have largely neglected since the EU ETS began in 2005," said analysts at investment bank Berenberg.
A price of over 100 euros would raise wholesale electricity prices which would translate into higher industrial electricity costs as well, they added.
($1 = 0.8299 euros)
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