Record European CO2 Prices Seen Going Higher Still

At that point, the demand for CO2 allowances will drop, pressuring prices, as the European Union's emissions trading scheme starts to deliver real cuts in industry's output of the greenhouse gas.

"At the moment it is more economical to run coal plants," said Paul Golby, chief executive of E.ON UK, one of the country's biggest power producers.

"That's what the market signals are telling us to do," he told reporters on the fringes of an emissions trading conference in London this week.

European CO2 prices on Friday touched a new high of 20.85 euros a tonne, up 35 cents from Thursday.

COAL OR GAS?

Generators and emissions traders are tracking the relative cost of coal and gas -- the underlying driver of the CO2 market.

Coal prices have been fairly stable in recent months. Gas prices -- led by strong oil prices and concerns in the UK about dropping gas output from ageing North Sea fields -- have soared to record levels.

"CO2 prices are not driven by the supply/demand fundamentals of CO2 allowances," said Seb Walhain, director of environmental products at Fortis Bank.

"Prices are driven by the cost of switching from coal to gas-fired generation," he told this week's conference.

Sharp gains in CO2 prices have started to draw out sellers of allowances, though this has yet to slow the rally, traders say.

Companies in the cement and steel industries, which have decided they have more allowances than they need to cover their CO2 output in the first year of the European Union's emissions trading scheme, have sold in recent days, Albert de Haan, commercial director of the European Climate Exchange, said De Haan said the number of companies buying and selling allowances via his exchange had more than doubled to about 45 in the last couple of weeks. The increase had come as participation in the CO2 market expanded beyond a core group of power utilities which have dominated the market up to now.