EU carbon price may hit 100 euros this year, buoyed by gas price surge

ThyssenKrupp AG steel plant in Duisburg
General view of the ThyssenKrupp Steel Europe plant in Duisburg, Germany, January 7, 2020. REUTERS/Leon Kuegeler

LONDON, Dec 8 (Reuters) - Europe's benchmark carbon price could hit 100 euros ($113) a tonne by the end of 2021, analysts said, after soaring 50% since the start of November to record levels with the help of rising gas prices and the looming expiry of options.

The carbon benchmark hit a fresh record of 90.75 euros on Wednesday.

The Emissions Trading System (ETS), requiring manufacturers, power firms and airlines to pay for each tonne of carbon dioxide they emit, is central to European Union efforts to cut net greenhouse gas emissions by 55% from 1990 levels by 2030.

Economists polled by Reuters have said the scheme needs prices of around 90 euros or $100 a tonne to encourage companies to switch to cleaner fuels and technology to cut emissions in line with goals in the 2015 Paris climate accords. read more

Traders and analysts said the price could climb to 100 euros helped by options expiry and higher gas prices, which encourages more use of coal power plants that need to buy more carbon permits to account for their higher emissions.

"The escalating situation on the European gas market is additionally driving (carbon) prices up now," said Commerzbank analyst Barbara Lambrech in a daily report.

The benchmark Dutch front-month gas contract rose as much as 10% on Wednesday on colder weather forecasts, maintenance of major gas infrastructure and tensions between gas producing Russia and the West.

Wednesday's options expiry were also supporting carbon prices. "It's possible prices could head to 100 euros/tonne to get all of the open interest on call options on that strike into the money," Energy Aspects analyst Trevor Sikorski said.

Berenberg analyst Lawson Steele said he expected the carbon contract to reach 110 euros by the end of 2021, while SEB bank commodities analyst Bjarne Schieldrop said the 100 euro price level could be hit before Dec. 25.

Britain launched a domestic ETS in 2021 after leaving the European Union scheme following Brexit. The benchmark British contract is trading at 73 pounds ($96) a tonne, cheaper than the its EU counterpart after the European price surge.

Britain's ETS has a cost containment mechanism, or CCM, which is triggered if average prices remain above a certain level for three consecutive months.

This price level was triggered for December and traders said expectations that Britain may now intervene in the market had capped price gains in the British market.

The UK ETS Authority is set to decide by Dec. 14 whether to implement any measures to curb prices, which could involve issuing more permits for sale.

Any action could prompt European states to call for similar action by the EU, traders said. read more

($1 = 0.8845 euros)

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Reporting By Susanna Twidale; Editing by Jane Merriman and Edmund Blair

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