Environmental Engineering Reference
In-Depth Information
5 Extrinsic Elements
5.1 Dark/Spark Spread
One of the main drivers in the carbon market is the spread between the generation
of power with coal or with gas, commonly known in the market as the
“
dark
”
“
”
spread
respectively. If spreads include the cost of CO
2
, they
are referred to as the clean dark/spark spread.
A look at the behaviour of this spread reveals that when the price of carbon
decreases the spread increases, i.e. there is an inverse relationship. This is because
producing with coal is cheaper than with gas, but it is more polluting, thus
increasing production costs since more emission allowances are needed (Fig.
4
).
and the
spark spread
5.2 Weather
With power utilities being the main sector in the EU ETS, the weather is a key
factor affecting emissions and thus driving EUA prices. Extreme conditions affect
the demand for allowances. Cold winters increase the consumption of coal and gas
for heating, while hot summers increase power consumption for air conditioning.
The wind and the sun can also change the power mix through renewable energy,
increasing or decreasing demand for allowances.
Fig. 4 Carbon price versus clean dark/spark spreads. Source own work based on Bloomberg data
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