Classic supply and demand graph, showing the impact on quantity of a tax driven rise in price per unit. In this case quantity is assumed to be a proxy for economic activity.

Coal Use Drives EU Carbon Prices to a Record High

Guest essay by Eric Worrall

Cold weather, high gas prices, political manipulation of the market and a drop in wind power output created a perfect storm, which is driving up the cost off energy in Europe.

WHY PRICES OF EU CARBON PERMITS ARE AT RECORD HIGHS

January 5, 2022

By Valerie Hernandez, International Banker

n September 27, the price of European Union (EU) carbon-emission permits surged over €65 per metric tonne for the first time, extending a remarkably long rally for the carbon permits that began as far back as March 2020 and shows plenty of signs of continuing skyward.

So, why are carbon-permit prices at record levels at present? A few key factors can explain the ongoing bullishness, but the current shortage of natural gas is perhaps the most impactful. The supply crunch across much of Europe is not only forcing up gas prices—regional gas prices surged more than 350 percent in 2021 to October and by 140 percent during the last three months—but also driving power producers towards cheaper coal, a significantly more pollutive resource than gas.

As such, demand for coal from the power-generation industry soared throughout much of 2021, which, in turn, has boosted demand for carbon permits under both the EU and UK emissions-trading schemes. Indeed, early September saw coal account for more than 5 percent of the United Kingdom’s power generation, its highest level since March. As Tom Lord, head of trading at consultancy Redshaw Advisors, told the Financial Times in early October, the price rises are “being driven, we believe, by increased utility demand, as a result of increased fossil fuel generation”.

Part of the rally in carbon permits is also attributable to political reforms that have been made this year to achieve Europe’s climate targets. In July, the EC introduced a set of proposals to expand the scope of the EU ETS from around 22 percent of EU greenhouse-gas emissions currently to more than two-thirds by 2030. Known as the Fit for 55 package, the proposals also widen the EU ETS to include coverage of the high-emitting shipping industry, reduce the number of permits given to certain industries for free (initially a move designed to help them compete internationally) and decrease the number of permits in circulation each year at a faster rate than is the case at present.

As such, the resulting reduction in the supply of carbon permits should apply considerable upwards pressure on prices. “This is a pioneering package to make polluters pay, extending an EU-wide carbon price to over two-thirds of EU emissions by the end of the decade,” according to Tim Gore, head of the Low Carbon and Circular Economy programme at the Institute for European Environmental Policy (IEEP). “Energy intensive industries are the big remaining free riders—the proposal to only phase-out their emission allowance hand-outs by 2036 must be strengthened.”

It would seem that prices will depend at least partly on gas prices. But a colder-than-normal winter could sustain buoyant demand for coal. “A tight gas market should continue to pull EUA prices higher,” Citigroup analysts reported in late September. …

Over a longer time horizon, moreover, the Fit for 55 reforms that are intended to lower the overall supply of carbon permits to help the bloc meet its 55-percent emission-reduction target is likely to lend considerable support to carbon prices. …

Read more: https://internationalbanker.com/brokerage/why-prices-of-eu-carbon-permits-are-at-record-highs/

Hands up who wants to open a new factory in an EU country.

The rise in gas prices was partly driven by Russia diverting energy to China, after Premier Xi Jinping’s ill considered attempt to force a reduction in coal burning in the leadup to COP26 caused desperate Chinese inventory shortages and widespread blackouts.

But the European Union in my opinion is culpable for the chain of decisions which made Europe so dependent on Russian gas, and for betting the house on unreliable sources of energy like wind power. A fact the EU has tacitly recognised, with their recent shock decision to include gas and nuclear power in their definition of “green energy”.

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Dave Fair
January 7, 2022 10:18 pm

“This is a pioneering package to make polluters pay …” Yeah, this will cost consumers nothing, just the plutocrats making profits off the little guy will pay.

Dennis
Reply to  Dave Fair
January 7, 2022 10:34 pm

Emissions Trading Scheme.

Wealth creation scheme for investors, like subsidised renewable energy and electric vehicles.

Tom Abbott
Reply to  Dave Fair
January 8, 2022 4:02 am

It’s the little guy that pays the price. The “polluters” just pass any cost increases onto their customers. Politicians know this and don’t care.

MarkW
Reply to  Tom Abbott
January 8, 2022 10:53 am

This has been a well known fact regarding all taxes.
For example, the half of Social Security taxes that are allegedly paid by the employer, actually are taken from the employees wages. Just as surely as the half directly paid by the employee.

Dave Fair
Reply to  Tom Abbott
January 8, 2022 11:35 am

Its a feature, not a bug, of Crony Capitalism which destroy Free Markets. Politician payoffs (think Hunter and campaign “donations”) and Deep State revolving door job payoffs.

StephenP
January 7, 2022 10:22 pm

People like Tim Gore won’t have a justifiable reason to complain when they get their next electricity and gas bills.

Dennis
January 7, 2022 10:36 pm

By builder son told me that well off woke people are paying for carbon credits for construction or renovation of their home.

It apparently makes them feel better and provides bragging rights and virtue signalling.

gringojay
Reply to  Dennis
January 7, 2022 11:06 pm

Roof top solar capacity got nothing to brag about compared to how many panels are getting put up on arable land.

EF014E5E-B4E5-439C-98CA-70130B9C5A61.jpeg
LdB
Reply to  gringojay
January 7, 2022 11:43 pm

Yes but you can feel good and less guilt about yourself as you starve to death … it’s called the woke two step.

MarkW
Reply to  LdB
January 8, 2022 10:55 am

The problem is, it’s not the social justice warriors who will be starving to death. It will be the poor who have no say in this nonsense.

Joseph Zorzin
Reply to  gringojay
January 8, 2022 3:46 am

I find it mind blowing that environmentalists think a solar “farm” is a wonderful, beautiful thing. They want to save the Earth by destroying it.

Derg
Reply to  gringojay
January 8, 2022 4:10 am

That is such as sad picture

Dean
Reply to  gringojay
January 8, 2022 5:27 am

I had a friend who wondered why this had any impact. Just raise the height of the panels off the ground so you could continue farming……………

The solutions are just so obvious!

MarkW
Reply to  Dean
January 8, 2022 10:55 am

I’m going to guess that your friend has not spent much time outside the city.

Dave Fair
Reply to  MarkW
January 8, 2022 11:39 am

Nor has his government teachers’ union taught him about photosynthesis and plant growth.

Last edited 19 days ago by Dave Fair
Mike Jonas(@egrey1)
Editor
January 8, 2022 12:04 am

So the EU have included gas and nuclear power in their definition of “green energy”. If they just added in coal too, then all their problems would soon be over.

January 8, 2022 12:31 am

Well done! Would love to see you add one more item in a red tone. Small. In front of white gate and inside the other items.

Redge
Reply to  zee raja
January 8, 2022 1:25 am

Mods: The above comment is spam – don’t click on the authors name

griff
January 8, 2022 1:09 am

Hands up who wants to open a new factory in an EU country.

Volvo, for one.

commieBob
Reply to  griff
January 8, 2022 1:59 am

That’s not firm yet. link I think they’re still at the stage where various jurisdictions bend over backwards to attract Volvo. If they are offered large enough subsidies, they will build in Europe.

Here’s a list of Volvo plants. Most of its factories are outside Europe but the two European factories still have the bulk of the production.

Maybe someone can explain to me why it is that, although Europe and America farmed most of their manufacturing out to China, that hasn’t happened with cars and trucks.

Krishna Gans
Reply to  commieBob
January 8, 2022 5:29 am

I used to have some Volvo cars im my life. Most of Belgian origin.
The last one, a Swedish one from 1994, I drive now since 2009, no problems, no greater repairs, no rust at all, best exhaust values.

It’s not a Diesel.

Last edited 19 days ago by Krishna Gans
Dave Fair
Reply to  commieBob
January 8, 2022 11:43 am

Targeted subsidies are wonderful stimuli for the target industries and the career tenure and wealth accumulation of their political backers.

old engineer
Reply to  commieBob
January 8, 2022 3:35 pm

CommieBob

Did you look at who owns Volvo?

“Volvo is currently owned by the Zhejiang Geely Holding Group, a company which owns over 15 other vehicle makers.”

“The Zhejiang Geely Holding Group is based in Hangzhou, which is located in south-east China’s Zhejiang Province. The company launched their automotive business in 1997 and eventually took over ownership of the Swedish-made Volvo brand in 2010.”

From: Who Owns and Makes Volvo Models? | Volvo of Waterloo

Ron Long
Reply to  griff
January 8, 2022 2:00 am

OK, who is the second?

Bruce Cobb
Reply to  Ron Long
January 8, 2022 6:32 am

No, he’s on first. What’s on second.

Dave Fair
Reply to  Bruce Cobb
January 8, 2022 12:59 pm

I Don’t Know on third
Why in left field [Along with all the other CliSciFi clowns.]

Drake
Reply to  Ron Long
January 8, 2022 12:07 pm

I don’t know—3rd base.

Pat from kerbob
Reply to  griff
January 8, 2022 10:08 am

Griff, what you are pointing out is merely the effect of subsidies.
Bad energy policy then forces governments to give companies subsidies to locate a factory, subsidies which wouldn’t be necessary without the bad energy policy.

Looked at another way, it’s like plunging a sword into your own heart on purpose, then plastering bandaids on the hole to fix it

MarkW
Reply to  griff
January 8, 2022 10:57 am

In griff’s world, a press release regarding future plans, is the same as the plan already having been executed.

Vincent Causey
January 8, 2022 1:19 am

The situation regarding Russian gas is not well known. Alexander Mercouris has discussed this on his podcast. Basically, the problem for Europe and the UK stems from the fact that they have moved away from long term contracts, to buying gas on the spot market – ie short term gas contracts. The “thinking” behind this, according to a UK spokesman was that the day to day prices in the long term contracts were tied to the price of oil, and when oil prices went up, so went the price europe had to pay to Russia. Let the market decide on supply and demand, was the cry.

The problem with all this is that not just price shocks, but also supply shocks cometh. The long term contracts (of which still some remain, fortunately), mandate Russia fulfills a contracted amount of gas supply. Although they did so, the contracted supplies were less than the total amount needed. Russia was therefore under no contractual obligation to supply more gas than contracted for. Ironically, the Nord stream 2 pipeline was finished just in time, but the EU say it will not be certified until July 2022.

The “thinking” behind this political ploy is that the loss of revenue to Russia would act as a lever to make Russia act in a certain way. I’m not sure about that, as they are selling record amounts of gas to China. Still, the bottom line is that abandoning long term contracts for short term spot market trading was a disaster waiting to happen.

bonbon
Reply to  Vincent Causey
January 8, 2022 3:43 am

That is the Enron model, well understood since 2001. Only radical economic ideology could have possibly caused a repeat on a vast scale. This is the London School of Economics in full view.

Derg
Reply to  bonbon
January 8, 2022 4:14 am

True but Europe is wasting vast amounts of capital on wind .

John Garrett
Reply to  Vincent Causey
January 8, 2022 4:19 am

The Europeans rolled the dice— and lost.

Now, they’re trying to shift the blame for their own poor judgement to Gazprom.

Western journalists and politicians— who are almost completely clueless when it comes to commercial affairs— are complicit in the attempt to blame Gazprom.

Last edited 20 days ago by John Garrett
Dave Fair
Reply to  Vincent Causey
January 8, 2022 12:05 pm

Riding the spot market can save money (see Texas power supply market performance) but society requires some stability to function adequately (also see Texas power supply market performance). Overloading a supply system with relatively cheap but unstable sources leads to very predictable and expensive (including in lives) periodic shortages.

Hedging for likely future events costs money but it a well known tactic in free markets. Governments’ demanding and subsidizing expensive and unreliable electric generation sources are politicized activities, not free market exercises to meet societies’ needs. But all that detail means nothing when you are ideologically saving the world.

Ron Long
January 8, 2022 2:06 am

All of these supply/demand/price consequence plots and curves look like variants of the Laffer Curve. The Economist Arthur Laffer drew, on a napkin at an airport waiting area, a curve showing tax rates versus tax revenue. Surprise, higher tax rates, after a certain level, don’t increase tax revenue, instead persons start cheating and dodging the taxes. Same with access to energy: when “clean” demands, punitive taxes, and erratic availability exceed some limit the voters will rebel. Looks to me like the UK will add to the Brexit deal with some kind of energy demand soon (like when they are freezing in the dark this winter and the interconnector from Nuclear France is down).

Leo Smith
Reply to  Ron Long
January 8, 2022 3:07 am

The French interconnector is already half down and mostly the electricity has been flowing into France this winter.

It really is rather dumb to confuse necessity with arbitrage.

Ron Long
Reply to  Leo Smith
January 8, 2022 4:08 am

“…dumb…? I utilized arbitrage to buy/sell stock options at four different companies.

Dave Fair
Reply to  Ron Long
January 8, 2022 12:08 pm

But did you use necessity, Ron?

MarkW
Reply to  Ron Long
January 8, 2022 11:34 am

Taking advantage of differences in tax laws is not cheating.
By government policy, different types of economic activity are taxed at certain rates.
As taxes go up, companies naturally shift activity from areas that are highly taxed, to areas that are less heavily taxed.
Without high levels of taxation, these switches do not make economic sense, and result in fewer gains economically, but they do result in the company paying less in taxes.

When taxes go down as they did under Kennedy and Reagan, companies stop investing based on tax rates and start investing based on what will cause the most growth.

Drake
Reply to  MarkW
January 8, 2022 12:11 pm

And TRUMP!.

Leo Smith
January 8, 2022 3:03 am

It was always simply a scam for profit but the politicians let it get out of hand.
They darent retract on climate change, because that would show them up too much, so they are going to weasle this by making gas and nuclear ‘renewable’ and quitely phasing out windmills and solar panels…

Derg
Reply to  Leo Smith
January 8, 2022 4:18 am

You are probably right, but I find it hard to believe more stupid windmills and solar panels won’t be built.

TonyL
January 8, 2022 3:04 am

“Hands up who wants to open a new factory in an EU country.”

ME!!!
I want to manufacture Carbon Emissions Permits.

“carbon-emission permits surged over €65 per metric tonne for the first time”

I know I can manufacture and sell them for way less than that. All I need to do is undercut the EU price by 5%, and I will own the whole market. By carefully controlling the amount of permits I sell, I can maintain the price at an optimum level.

Then there is the matter of regulatory enforcement and other such unpleasantries. This is what “excess” profits are for.Everybody is in it for the money, and they all just need to get their cut of the action. This, after all, was the real reason for Carbon Trading in the first place. Once the system is put in place and mandated, the money starts flowing. With the money flowing, opportunities for skimming off your share arise. This is how it works. This was the point of the exercise.

I am sure that with way the market is set up, I can sell for huge profits, pay off all the EU officials who need their cut, and still retain a tidy little profit.

Science!

bonbon
Reply to  TonyL
January 8, 2022 3:45 am

LOL! And where the money flows!

Dave Fair
Reply to  bonbon
January 8, 2022 12:10 pm

Wasn’t there a book “Where the River Flows?”

Drake
Reply to  TonyL
January 8, 2022 12:21 pm

The reason EVERY 8th grade student should be required to watch “Trading Places” with a guide and test to explain how the traders ALWAYS get a %, win or lose. .1% of trillions adds up pretty fast.

I just watched it with my grandson and explained the whole stock market, bond market, commodities market traders get a cut on every transaction.

I go back to Will Rodgers comment on investing. Of course you never OWN real estate, you only rent if from the government. If you don’t think that is right, just refuse to pay your property taxes and see what happens.

Real estate is the best investment in the world because it is the only thing they’re not making any more.
— Will Rogers

Coeur de Lion
January 8, 2022 3:30 am

Versus China, economic suicide. Time to expose the futility.

bonbon
January 8, 2022 3:39 am

Even Bloomberg notes the price hikes had nothing to do with Russia-EU contracts. It is the Enron model of spot-pricing that is the problem.

This radical free-market narrative from the London School of Economics which blew Enron out in TX in 2001, is in full play at the Ranch of the Crooked EU.

The EU Classifying nuclear as green, will not rectify this financial model – it must be overhauled. No more Enron’s!

Derg
Reply to  bonbon
January 8, 2022 4:24 am

Well if you buy energy from someone and you don’t demand that they provide a specific amount at a specific time without penalties then it doesn’t really matter if it’s the Enron model or not. Unreliable energy can always underbid.

MarkW
Reply to  Derg
January 8, 2022 11:38 am

In bonbon’s mind, anything less than full on government control, is the Enron model.

MarkW
Reply to  bonbon
January 8, 2022 11:37 am

Bloomberg is even further to the left than you are.

It really is fascinating that in your “mind”, everything that is bad is the “Enron” model.
As near as I can tell, the “Enron” model is everything that isn’t pure communism.

As to your hatred of the Free Market, …

Tom Abbott
January 8, 2022 3:46 am

From the article: “regional gas prices surged more than 350 percent in 2021 to October and by 140 percent during the last three months”

Those EU/UK politicians are doing a great job, aren’t they.

I still think Boris may have been adversely affected by the Wuhan virus. The Wuhan virus kills brain cells, you know. Boris was in the hospital a long time. Plenty of opportunities for the Wuhan.

Graemethecat
Reply to  Tom Abbott
January 8, 2022 8:11 am

Boris is utterly in thrall to his radical green floozy.

Dave Fair
Reply to  Graemethecat
January 8, 2022 1:07 pm

The little head controls Man’s large head. It makes for a fun personal roller coaster but, uncontrolled, it is a bitch for public policy.

Dave Andrews
Reply to  Tom Abbott
January 8, 2022 9:11 am

BoJo has been killing his brain cells ever since his alcohol strewn days as a bona fide member of the Bullingdon Club at Oxford whose only rationale was to visit restaurants, have a meal, smash the place up and get their wealthy parents to pay for all the breakages.

Peter Barrett
January 8, 2022 5:06 am

“This is a pioneering package to make polluters pay” – using Google to translate from administrative gobbledygook to English gives “This is yet another way of immiserating the middle class”.

“The rise in gas prices was partly driven by Russia diverting energy to China”. If anything was diverted it was gas. China is a rapidly growing market for Russian gas and there is increasing détente between the two powers with a new pipeline from Siberia being built. Despite the best efforts of the EU (Nord Stream 2) and the UK (Ukraine and Kazakhstan) to piss off the Kremlin it must be stated that Gazprom has fulfilled in full and on time all supply contracts to the EU and other European nations where there was no outstanding indebtedness. Supply was only “diverted” when competing markets made it judicious to do so.

DMacKenzie
January 8, 2022 5:34 am

Your Econ 101 graph is very YESTERDAY…in Modern Monetary Theory, the Brown line is “Consumption” not “demand”, and the green line is “money in the economy” not “supply+tax”…..with the result that the carbon tax will obviously put more money into the economy. The tax dollars will be spent on something, and go into somebody’s bank account, so is good economic stimulus. The possibility of more money chasing fewer goods and services requiring more tax increases in future is considered a positive feedback feature of MMT…. /s

2hotel9
January 8, 2022 5:35 am

Carbon costs nothing.

Dave Fair
Reply to  2hotel9
January 8, 2022 12:41 pm

It costs something if you want to extract carbon and convert it into something useful, 2hotel9. Carbon (CO2) taxes, however, are a moneymaker even if there are no costs associated with producing CO2.

“Social Cost of Carbon” has no supporting cost/benefit analysis so there is no demonstrable cost of carbon (CO2). Hell, the U.S. EPA “Social Cost of Carbon” to the U.S. was based on speculative worldwide costs of assumed negative impacts of CO2 production compared to Deep State bureaucratic “estimates” of benefits accruing worldwide. It had to use wildly low discount rates even to show net costs.

The U.S. laws and regulations specify that the U.S. EPA only use U.S. data when calculating the U.S. social cost of carbon (CO2) to be applied to U.S. agencies’ rulemaking. Eventually this issue will get to the SCOTUS in a rational manner and the current crap will be thrown out. [SCOTUS – Supreme Court of the United States]

Anyway, cost/benefit analysis of periods extending beyond the normal 20 to 30-year planning horizon are nothing but wild, ideologically-driven speculation. Extending cost/benefit analyses to 100 and 300-year periods is Looney Tune science and economics, but not as funny.

2hotel9
Reply to  Dave Fair
January 8, 2022 2:45 pm

Carbon simply is, putting a price on it is a leftist ploy, nothing more. Coal costs. Oil costs. Hydro costs. Nuclear costs. Carbon? No. Putting a politically motivated name on it and sticking a price tag under it is simply meant to stop people from doing, well, anything. Stop being a patsy, be a Human Being, Dave.

Dave Fair
Reply to  2hotel9
January 8, 2022 5:40 pm

Stop being a patsy, be a Human Being, Dave.” What the hell do you mean by that, 2hotel9?

2hotel9
Reply to  Dave Fair
January 9, 2022 3:44 am

Quit buying into their crap. Leftists merrily dance on the corpses of anyone who gives them the benefit of doubt. Stop believing anything they spew. It is all lies, no matter how reasonably they state them.

Dave Fair
Reply to  2hotel9
January 9, 2022 10:44 am

In what way is my statement “buying into their crap,” 2hotel9? I pretty much destroyed the basis of their “crap.”

gbaikie
January 8, 2022 5:36 am

And it doesn’t seem EU is not lowering their CO2 emission and certainly not lowering global CO2 emissions.
And it very cold in Europe. And will remain cold.
If Europe was a lot warmer, they would emit less CO2.

John the Econ
January 8, 2022 6:32 am

Play stupid games, win stupid prizes.

R Taylor
January 8, 2022 6:41 am

With regard to the price-quantity chart, since there are few economical substitutes for hydrocarbons, demand has hardly changed even as tax has become significant. If you’re in the political class or a client of it, this is practically ideal. If you’re not, well, it’s nothing new, and I like Repin’s portayal of “The Yellow Vesters Reply to President Macron”,comment image

Dave Fair
Reply to  R Taylor
January 8, 2022 12:49 pm

Same message by current Yellow Vestees, just a different level of humor. Common people being screwed by government insanity “have no sense of humor that we know of.” [Men in Black]

DMacKenzie
Reply to  R Taylor
January 8, 2022 8:35 pm

Yes, the demand line is nearly vertical. It is a Revenue departments’s dream for tax revenue…increasing taxes has little effect on demand. However, it can have significant effect on the public’s demand to reduce the artificial price. Check Kazakhstan this past week….started with state dictated fuel price increases….much more violent than Macron’s Yellow Jacket epiphany.

https://www.bbc.com/news/explainers-59894266

Alex
January 8, 2022 8:04 am

Germany 2022.
Electricity price hits new records.
90ct (Euro) = $1.10 per kWh.

Pat from kerbob
Reply to  Alex
January 8, 2022 9:57 am

Wow
10x what I pay in alberta

CD in Wisconsin
January 8, 2022 9:14 am

“But the European Union in my opinion is culpable for the chain of decisions which made Europe so dependent on Russian gas, and for betting the house on unreliable sources of energy like wind power.”

*******

If indeed the EU and the governments of the individual EU states are responsible for this mess, I have only one thing to say that I have said before…

“To err is human, but to REALLY screw things up requires government.”

Doonman
January 8, 2022 10:52 am

Here’s the deal. You can pay for the gas directly to stay warm or you can pay for the gas directly to stay warm and pay for carbon credits too.

Which one would you choose?

Ragnaar
January 8, 2022 1:48 pm

Your demand curve should be more vertical. People will use energy. How many people will stop using energy? Industry can shut down yes. But home use is constant for most people.

walt
January 9, 2022 7:41 pm

Maybe kids who behave badly don’t get coal in their stocking anymore.

ResourceGuy
January 11, 2022 1:30 pm
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