Gas prices and carbon costs shape Europe’s energy outlook
Gas prices have fallen from their peak but remain high enough to influence electricity bills. Across Europe, the price for gas hovers around €40 per megawatt-hour (MWh), well above the long-term average near €20, yet far from the peak levels seen in the summer and after the 2022 energy shock. Even as the raw gas price eases, electricity costs frequently top €100 per MWh, driven in part by the costs attached to emissions allowances demanded by power producers. The burden falls most heavily on coal and gas-fired plants that rely on these permits to emit carbon while generating electricity, making the carbon price a persistent market force in the energy mix.
Since 2005, Europe has operated the Emissions Trading System (ETS), a cap-and-trade framework that limits how much CO2 can be released by energy-intensive facilities and airlines. Participants receive a rights allocation for free, which declines over time, and any additional emissions must be covered by purchasing allowances on the market through auctions. This mechanism is designed to gradually tighten the cap and encourage lower emissions, while the market price for allowances acts as a signal for investment in cleaner technology.
The government has already spent 500 million to reduce the gas bill of 2.5 million homes.
Industry leaders point to several factors driving the carbon price higher, including market speculation and the view of emission rights as a stable store of value. As the renewal cycle approaches, allowances become scarcer, nudging prices upward. Imports of high-emission goods may also face border adjustments as new rules are introduced, adding another layer of cost for polluting products entering the region.
Analysts note that the climb in CO2 costs has not just been a spike but part of a longer trend. Historically, carbon rights started at a modest €4 per tonne in 2018 and climbed to €23 in 2019, €48 in 2021, and now sit around €90 per MWh equivalent in electricity markets. The trajectory suggests volatility will persist, but the system remains tight as the supply and demand dynamics interact with policy plans and economic activity. Industry voices caution that a sustained decline in price would require a commensurate drop in demand that lowers emissions or an expansion of supply without compromising environmental goals.
Light on the energy mix and its implications
Research from energy economists highlights how carbon pricing transmits into electricity costs. A Seville study analyzing the Spanish market found that modest increases in carbon costs can lift electricity prices, but the overall effect depends on the balance between supply, demand, and the fuel mix. The study notes that price rises in carbon can push electricity costs higher by a few percent, while the environmental benefit depends on broader systemic changes in energy production and consumption patterns.
Spain closes the winter with 78% gas reserves, doubling the EU target
Experts estimate that a standard gas-fired combined-cycle project might show a gas component near €80, a carbon component around €34, and a margin covering other costs. Coal-fired generation, when available, carries higher emissions costs, complicating the decision to rely on coal as a stable energy source. In response to rising prices, the government considered measures in 2021 to curb excessive revenue from non-emitting power plants like nuclear and hydro while preserving the compensation mechanisms they provide. Subsequent policy iterations aimed to reduce windfalls for gas and other generators while keeping carbon pricing intact. The policy process has faced pauses and delays, reflecting the ongoing negotiation between energy security and climate goals. Public announcements and regulatory inquiries have continued into the following year as authorities seek a stable and predictable framework for energy pricing.
As the market evolves, the emphasis remains on managing emissions while maintaining affordable and reliable electricity. The carbon price is a critical lever in this equation, guiding investment toward cleaner technologies and influencing the structure of the power sector for years to come.