Carbon boom to hit energy bills

THE price of pollution rocketed by almost 50% last week as one of the world's newest financial markets saw its first trading boom. The market, which allows energy companies to buy and sell 'rights' to generate carbon dioxide gas, is still in its infancy, but it is poised to become a key force in setting energy prices for British businesses and households.

Analysts said the sharp rise in the price of CO2 could lead to an increase of about 6% in domestic electricity bills within the next couple of years.

The carbon emissions market was set up after the Kyoto agreement between governments aimed at cutting the generation of carbon dioxide, which is blamed for global warming. Under this system, governments are allocated a quota of carbon dioxide that their industries - mainly power stations - are allowed to create. These emission allowances, measured in tonnes of CO2, are then allocated to individual companies.

The trading market allows companies to buy and sell those rights. Those which cut output can sell their rights while those wishing to emit more CO2 must buy more rights.

The European Union's emissions trading scheme has been properly under way since the start of the year, but last week saw its first major shift as the price of emission rights leapt 46% from £7.60 per tonne to a peak of more than £11.10 before easing back to end the week at £9.30.

The gain was prompted by the rising cost of gas, according to analysts. Chris Rowland, analyst at investment bank Dresdner Kleinwort Wasserstein, said: 'The rising price of gas is making it even more expensive for generators in Europe to make electricity with gas.

'So if you have any spare coal-fired generating capacity, you will switch more output to coal, where your margins are bigger. The only problem is that you would need more emissions allowances, so you would be buying as many as you could get hold of.'

Rowland said the price of CO2 emissions would average about £10.40 a tonne for the next three years, adding about 15% to the cost of generating electricity. Electricity generation is only one element in household power bills, but the increase in this cost would add about 6% to domestic bills.