Analysts said Europe's reference carbon price could hit 100 euros ($113) per tonne by the end of 2021, after hitting record highs aided by gas prices, which have increased by 50% since the beginning of November.
The carbon benchmark set a new record of 90.75 euros on Wednesday.
The Emissions Trading System (ETS), which requires manufacturers, energy companies and airlines to pay for every tonne of carbon dioxide they emit, is at the center of the European Union's efforts to reduce net greenhouse gas emissions by 55% from 1990 levels by 2030.
Economists polled by Reuters said the plan needs prices of around €90, or $100 per tonne, to encourage companies to move to cleaner fuels and technology to reduce emissions in line with the targets in the 2015 Paris climate agreements.
Traders and analysts said the price could climb to €100, aided by expiration of options and higher gas prices, encouraging greater use of coal plants, which need more carbon permits to account for their higher emissions.
"The escalating situation in the European gas market is now driving up (carbon) prices as well," Commerzbank analyst Barbara Lambrech said in a daily report.
The Netherlands' preliminary monthly gas contract rose as much as 10% on Wednesday amid cold weather forecasts, maintenance of major gas infrastructure and tensions between gas producer Russia and the West.
Wednesday's options expiration also bolstered carbon prices. "Prices are likely to go up to €100/tonne to cash out all open interest on call options on this strike," said Energy Aspects analyst Trevor Sikorski.
Berenberg analyst Lawson Steele said he expects the carbon contract to reach 110 euros by the end of 2021, while SEB bank commodity analyst Bjarne Schieldrop said the 100 euro price level could hit before December 25.
The UK launched a local ETS in 2021 after leaving the European Union program after Brexit. The benchmark British contract is trading at £73 ($96) per tonne, less than its EU counterpart after the European price hike.
Britain's ETS has a cost capping mechanism, or CCM, that is triggered if average prices stay above a certain level for three consecutive months.
This price level was triggered for December and traders said that expectations that the UK could now interfere with the market are limiting price increases in the British market.
By 14 December, the UK ETS Authority will decide whether to implement any measures to lower prices, which could include granting further sales.
Traders said any action could prompt European states to call for similar action from the EU.
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