Carbon prices on the European Union's emissions trading scheme hit a two-year high in early trading on Thursday, as the most traded contract hit 26.55 euros ($41.85) on the European Climate Exchange. The rise had most to do with record oil prices. “Oil is the primary reason for this morning's surge,” said a carbon trader at Fortis Bank in Amsterdam. Oil galloped to a high above $135 on Thursday, extending this month's near 20 percent rally after a sharp drop in US crude stocks and the weakening US dollar triggered short covering by investors. Higher oil and gas prices raise the price of electricity, often produced from burning high carbon-emitting fossil fuels, which in turn leads to an expectation of more power production and more demand for carbon emissions permits called EUAs. That leads utilities to buy more emissions permits to try and lock in profit margins. But the EUA price surge also reflects a revival in confidence in the carbon market after the EU last year set tougher caps on industry carbon emissions under the second phase of the scheme from 2008-12, driving up EUA demand. Carbon prices collapsed in 2006 after a surplus of permits emerged under the first phase of the EU scheme from 2005-07, meaning that there were more permits than actual emissions. The price of benchmark EUAs for 2008 delivery on Thursday passed a high of 26 euros set in May last year, and is now higher than at any time since the EU carbon market crashed in April 2006 from an all-time peak then of 33.7 euros. Cap and trade schemes force participants – often energy-intensive industries -- to buy permits to emit greenhouse gases such as carbon dioxide, which is produced from burning fossil fuels. The European Union launched its cap and trade scheme in 2005, and now other governments are turning to emissions trading as a weapon to fight climate change in a carbon market worth $64 billion last year.
