Pollution Costs at Decade High Squeeze Industry, Coal in Europe

(Bloomberg) -- Europe’s coal producers and energy intensive industries are the most exposed to a surge in the price on releasing the most common greenhouse gas into the atmosphere.

Carbon futures in the continent’s Emissions Trading System reached their highest in a decade on Thursday, surpassing the psychological threshold of 20 euros ($23) a ton when energy users start taking note of the price. That’s up more than five-fold from less than 5 euros little more than a year ago.

Pollution Costs at Decade High Squeeze Industry, Coal in Europe

The market is one of the tools European Union lawmakers have deployed to nudge the economy away from fossil fuels. By adding to the cost of using the most polluting fuels, higher carbon prices are already persuading utilities to burn more natural gas and less coal and for energy-intensive users to invest in efficiency. It’s driven up electricity prices from Britain to Germany and Italy, prompting industry complaints.

“We are in a world now of higher carbon,” Hanns Koenig, project leader at Aurora Energy Research Ltd. in Berlin. “The expectation is that we’ll go up from current levels over the next decade. The question is -- how far?”

The rally began about a year ago after EU policymakers sealed a deal to cut the excess of allowances known as EUAs that’s weighed on prices ever since the financial crisis a decade ago. Speculators have since returned to what was once a moribund market.

“Financial players such as banks and funds are behind carbon’s price increase,” said Jahn Olsen, an analyst who tracks the market at Bloomberg NEF in London. Out of almost 1.8 billion allowances supplied this year, he said, “we believe several hundred million EUAs and derivatives are now held by speculators.”

The resulting higher price touches many markets and industries. Here’s a list of some of the likely impacts:

UTILITIES

While utilities are the biggest buyers of carbon permits, some of them may actually benefit from higher prices, according to John Musk, utilities analyst at RBC Europe Ltd. That’s because they’ve already spent years preparing for tighter environmental regulations.

Pollution Costs at Decade High Squeeze Industry, Coal in Europe

RWE AG, for example, is the biggest power producer in Germany. It bought all the carbon permits it needs until the early 2020s, meaning this year’s gains in the commodity won’t affect its strategy unless the price sticks for years.

A handful of other utilities with big portfolios of low-carbon plants will benefit. Those include big nuclear operators like Electricite de France SA and Fortum Oyj. Those with sizable hydro-electric assets such as Verbund AG will also will be better off.

RWE and EON SE and have seen the squeeze on coal coming. They organized a complex asset swap earlier this year that will streamline RWE into a renewable energy producer while EON SE will handle grids and customers. France’s Engie SA separated clean forms of generation from coal, gas and nuclear. Others like Vattenfall AB moved to divest coal.

“The higher CO2 price, combined with rising coal and gas prices, mean that a new tipping point has been created,” said David Jones, power and gas analyst at the energy consultant Sandbag. “Wind and solar are now cheaper than existing coal and gas plants.”

CONSUMERS

Power consumers -- especially heavy industry -- have the most to lose from rising carbon prices because it has pushed up the cost of electricity. The Federation of German Industry is already complaining that tighter environmental rules are squeezing business.

“Germany’s climate protection and energy policies are on a dangerous collision course, something the government urgently needs to correct,” said Dieter Kempf, president of the organization known as the BDI.

Pollution Costs at Decade High Squeeze Industry, Coal in Europe

Rising electricity costs blunt profits for manufacturers across Europe, said Emma Wiesner, an energy markets consultant at Sweco AB in Stockholm. Unless prices in the U.S., Russia or Canada advance, EU’s factories will lose competitiveness, she said.

FOSSIL FUELS

Higher carbon prices would ordinarily tilt power generation business toward burning more natural gas. But the economics of switching from coal to gas have been complicated by a jump in gas prices.

In countries like the U.K., Italy, Spain, the Netherlands and France, gas is taking more market share to make up for shortfalls as coal plants have become unprofitable to run. In Germany, the older and least efficient coal stations are now being pushed out by the most efficient gas plants.

“A higher carbon price will impact the long-run margins of coal-fired capacity,” said Matt Gray, a power analyst at the research group Carbon Tracker.

RENEWABLES

While higher carbon prices have little direct impact on renewables, stronger wholesale power prices may spur a new generation of plants that won’t rely on subsidies and instead sell their output into the market, said Bruno Brunetti, managing director of global power analysis at S&P Global Platts.

Those wind and solar plants that get built without subsidy “are looking increasingly competitive in this context of higher power prices,” Brunetti said.

©2018 Bloomberg L.P.