High natural-gas prices and a summer heatwave are pushing the cost of European allowances to emit carbon dioxide sharply upwards.

At the European Energy Exchange (EEX) in Leipzig, Germany, an allowance entitling the bearer to emit one extra tonne of carbon dioxide per year peaked earlier this month at almost €30 (US$36) — double its value in May. The price subsequently dipped somewhat (see Graph).

Since January, large companies in Europe have been required to possess an allowance for each tonne of carbon dioxide they emit. If they need more allowances than they get from their national government, they can purchase additional ones on the market.

Credit: EUROPEAN ENERGY EXCHANGE

The EEX launched its European Carbon Index last October, based on daily notifications from the trade departments of eight large energy companies. The value of the options has soared from about €8 since trading started in January.

Stefan Kleeberg of Frankfurt-based Climate Change Consulting explains that the high price of natural gas is boosting the generation of electricity from coal — as is a warm, dry summer in southern Europe, which is cutting generation from hydropower and from some coolant-thirsty nuclear power plants. Higher carbon dioxide emissions from coal burning may be fuelling demand for extra allowances, he says.

But trading volume remains small, and no one is sure whether the current high prices are sustainable — or just a quirk caused by the natural volatility of a young market. Kleeberg thinks demand for the allowances will stay strong. “The sentiment is bullish,” he says.