LONDON - European Union carbon prices on Thursday followed oil upwards, in a trend which has seen the cost of emissions permits rise 10 percent in the past four days. The EU's carbon trading scheme requires industrial installations to buy carbon emissions permits called EU allowances (EUAs) above a certain quota which they get for free. EUAs were trading at 23.57 euros late on Thursday, up 65 cents on the day and up 9.6 percent on a low of 21.5 euros last Friday.

Oil prices touched the $100 barrier for the first time on Wednesday. Higher oil and gas prices encourage power generators to burn coal instead, and because coal produces more carbon emissions that drives up the demand for and price of EUAs. "My sense it's on the fuel price movements," said Abyd Karmali, global head of carbon emissions at Merrill Lynch. Karmali added that uncertainty about the supply of carbon offsets to EU industry this year could also drive up EUA prices.

Participants in the EU trading scheme can meet part of any EUA shortage by funding emissions-cutting projects in developing countries, getting certified emissions reductions (CERs) in return under a U.N.-run Kyoto Protocol scheme. A profit warning by project developer EcoSecurities last November underlined U.N. project approval risks when trying to generate CERs, for example by installing wind farms in India or improve energy efficiency in China. "The question is whether that's temporary. That's clearly weighing on traders' minds," said Karmali.

Carbon prices also rise with European power prices in a feedback loop whereby higher power prices encourage more power generation, fuelling demand for EUAs, the price of which utilities pass on to the power price. Forward European power prices rose sharply on Thursday following oil's record highs, which drew financial investors into the energy market.

(Reuters, 03/01/2008)