PUNTERS on carbon credits have a new reason to worry: the rapid increase in global coal prices. For carbon credit sellers such as India, life is good when companies in Europe burn dirty fuel and buy carbon credits from them to clean up the mess. However, that could well change if coal becomes too expensive. The use of coal in Europe is important to maintain the head of steam under carbon credit prices. Power utilities in Europe, for instance, are major buyers of certified emission reduction (CER) because they use coal, which was till now the cheapest fuel. The emission factor for coalfired generation in Europe is about 0.9 tonnes of CO 2 per MWh, nearly double the factor for gas-fired generation. So, utilities wanting to burn coal need about twice as many European Union Allowances (EUA) as they do for natural gas under the 27-nation bloc’s plan to limit carbon-dioxide emissions. Consequently, the more the coal-fired stations run, the greater the demand for carbon credits and profits for Indian CER sellers. However, a combination of bad weather, transportation glitches and higher demand is pushing up coal prices. Natural gas is the second-best option to coal. As long as coal remains cheaper relative to gas, coal is attractive as a source of power. However, while coal prices are rising, natural gas prices are flat. This has narrowed the price differential between natural gas and coal. If coal prices continue to rise and the gap becomes even smaller, it would soon become worthwhile for EU utilities to switch to a cleaner fuel like natural gas from coal. That would impact CER demand. Generators such as E.ON AG, Germany’s biggest, can switch between fuels to cut costs. From January end, there has been a record increase in the price of coal across Asia and Europe. Coal has rallied 11% from mid-January to $140 per tonne from $126 per tonne. Floods in Australia, severe weather in China and power cuts in South Africa restricted output. European coal prices, which rose by more than 85% last year, climbed again in January. EU gets coal mainly from South Africa, where South Africa’s second-largest producer Anglo American was forced to shut production because of electricity shortages. South African coal for delivery to Amsterdam, Rotterdam or Antwerp reached more than $112 per tonne by January end. More than 25% of all Europe’s thermal coal is shipped from South Africa’s Richards Bay, where stockpiles at January end stood at just over 2 million tonnes against a more usual 4 million tonnes. Market analysts don’t expect supplies to become normal any time soon, which would exacerbate coal price rise. Meanwhile, though there has been a € 1.50 increase in secondary CER prices over last week, they have still not reached the levels seen in early January. “This increase is a short-term price adjustment and the recovery is not yet full. The threat posed by higher coal and natural gas prices means CER demand would be under pressure. A large gap between coal and natural gas prices increases CER prices while a small gap reduces CER prices. Right now, the gap is narrowing fast,’’ said Dr Ram Babu, managing director of CantorCO2e India, local arm of a US carbon brokerage and consultancy firm. Brokers in Mumbai, however, are bullish and believe CERs are a good buy at current prices, “Prices are likely to creep up. So we suggest accumulating at these prices.”