EU carbon price hits record above 50 euros per tonne

These include policy support from the EU's new climate goal, plus increased permit demand from financial investors tempted into the market by soaring prices and a consensus among analysts that prices are likely to climb further in the coming years.

Brussels will this summer present a package of policies to slash emissions across all sectors to meet the target, including reforms to the EU carbon market. That is expected to lead to greater demand for CO2 permits and to make them more scarce.

Sorhus said low European natural gas storage levels had also reduced the potential for coal-to-gas switching to temper demand for CO2 permits.

European gas stores are around 30 per cent full, compared with around 64 per cent this time last year, based on latest available data from Gas Infrastructure Europe.

INDUSTRIAL EMISSIONS

Emissions from power plants and industry covered by the EU carbon market plunged by 35 per cent from 2005 to 2019.

So far, most of those cuts have come from the power sector, as higher CO2 prices have helped make coal-fuelled power plants uneconomical, triggering a switch from coal to gas, which emits less CO2.

But analysts say the EU carbon price now needs to rise to levels high enough to trigger CO2 cuts in industry, where low-carbon alternatives cannot yet compete on cost with traditional fossil-fuel based technologies.

"We've done the easy bit, which is the coal to gas switch in the power sector," said Berenberg analyst Lawson Steele, who expects the EU carbon price to more than double by the end of this year. "Industry now needs to step up and do their bit."

Mark Lewis, Chief Sustainability Strategist at BNP Paribas, said the EU's target to make its economy climate neutral by 2050 means the CO2 price must reach levels that would make hydrogen fuel produced from renewable energy competitive with hydrogen produced from fossil fuels.

"On this basis I think around 90 euros a tonne is a reasonable expectation by 2030," Lewis said.

For industry, the EU's carbon market reforms will likely also mean a reduction in the free carbon permits the EU currently gives industry to protect firms from competitors in countries without a carbon price.

To help European companies stay competitive as they face higher carbon costs, Brussels also plans to introduce a carbon border tariff on imports of polluting goods from abroad.

But with that not expected to come into force for another few years, some companies say soaring CO2 prices are already hitting their businesses.