Rising CO₂ quota price to bring heftier winter electricity bills
The price of carbon quotas in Europe has quietly climbed to €80 per ton since spring and market experts say it's likely to keep rising for several reasons.
The price of carbon allowances or carbon credits has been quietly but steadily rising on the European market over the past six months. At the end of January, the price peaked at nearly €84 per ton, followed by a sharp drop over the next couple of months, falling to nearly €60. It has since climbed back to around €80.
Compared with the same time last year, the price is more than 15 percent higher. Energy market participants confirmed that this is not a seasonal price increase.
Several factors have contributed to the continued upward trend, according to Kalvi Nõu, head of energy trading at Alexela. One of those drivers has been the EU's 2040 climate targets.
"Demand is being driven by the European Union's ambitious climate policy, as well as by the economic recovery and the resulting increase in energy consumption. Expectations among market participants regarding future regulations and the supply of allowances also play a role. That's why the price movement cannot be considered seasonal — it's more about structural factors," Nõu said.
While the price of CO₂ has historically moved more or less in tandem with the price of natural gas, that pattern has now changed.
Marko Allikson of Baltic Energy Partners noted that the price of carbon allowances has risen even though the price of gas has remained virtually unchanged.
"The reasons mainly lie in expectations around the reduction of free quota allocations in the coming years and the addition of new sectors to the trading system, which is prompting prices to seek a new, higher equilibrium," he said.
Triin Reisner, strategic development project manager at Eesti Energia, pointed out that the price of carbon allowances hit its all-time high during the 2022 energy crisis, when the price of natural gas also reached record levels.
"The usual explanation for the correlation between natural gas and carbon allowance prices is that when the price of natural gas rises, coal-fired power plants become more competitive on the European electricity market. Because coal plants emit nearly twice as much CO2 as gas plants, periods of high natural gas prices lead to a significant increase in demand for carbon allowances," Reisner explained.
Price to keep rising
Reisner noted that there is indeed a certain seasonal effect contributing to the price increase. As of September 30, operators responsible for CO2 emissions were required to surrender carbon allowances corresponding to their emissions from the previous year, which drove up demand. She also pointed out that the European Union's climate policy decisions tied to its 2040 targets played a role in pushing prices higher.
Although there is uncertainty surrounding climate policy decisions, some further increase in the price of allowances is expected, Reisner said.
Exactly where the carbon price will find a new equilibrium or what level it will stabilize at is difficult to predict, but it could approach €100 per ton.
"Carbon prices are largely influenced by market expectations, political decisions and the overall economic situation. While it's hard to forecast the future with precision, our outlook is that due to decreasing auction volumes, prices are likely to rise in 2026. It's quite possible the price could climb above €90," said Nõu.
Allikson added that when the price of carbon credits reached €82 in April, the next price level to watch was €98 and above — levels that were seen in 2023.
Electricity prices in Estonia affected during cold spells
Because there is less renewable energy — particularly solar — available during the winter season, electricity producers that rely on fossil fuels and must purchase carbon allowances gain greater access to the market. This means that rising carbon prices can also drive up electricity prices.
"The price of CO₂ directly affects the production cost of electricity generated from fossil fuels such as oil shale and natural gas. If this type of generation sets the market price for Estonia's price zone at a given time, then the increase in carbon prices will be reflected in the electricity price as well. However, other factors also influence day-ahead market prices — for example, weather conditions, the availability of renewable energy and the situation in neighboring markets," said Nõu.
In other words, when renewable energy is scarce, such as on windless days, a high carbon price contributes to higher electricity prices on the power exchange. The effect is more pronounced for electricity produced from oil shale and less so for gas-fired generation.
"This impact is felt especially on windless days and during morning and evening peak hours. If the cost of oil shale generation includes, roughly, the full cost of one ton of carbon per megawatt-hour of electricity, then the impact on gas-fired electricity is about 2.5 times smaller. So, if the carbon price is €80 per ton, it adds just over €30 per megawatt-hour to the electricity price," Allikson explained.
Reisner also noted that the extent to which fossil fuel-based power plants enter the market largely depends on weather conditions, but also on the functioning of cross-border interconnections.
"Generally speaking, when the marginal producer is a fossil-fuel-based unit, emission costs typically make up 10 to 35 percent of the wholesale electricity price per megawatt-hour produced," said Reisner.
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Editor: Marcus Turovski
