People concerned about global warming tend to cheer surging oil prices, figuring that will spur less-polluting alternatives. Perhaps those people should think again.

In Europe, natural gas prices track crude oil. Recent crude price spikes have driven natural gas prices higher, too. That has made natural gas even less-competitive against traditional fuels like coal.

So, say carbon-market analysts Point Carbon, the oil price spike is leading some European power companies to switch from burning pricey gas to relatively cheaper coal, then covering their pollution by buying carbon credits in Europe’s carbon trading scheme.

European utilities have been flirting with coal since oil prices started rising, but until recently, buying the emissions permits and burning coal was still more expensive than biting the bullet on oil and gas. European utilities have actually trimmed emissions so far this year, Point Carbon estimates.

Now, though, the cost gap between natural gas and coal is getting even wider—making it an economic no-brainer in many cases to switch to coal and pay the carbon-credit penalty.

Of course, greater demand for carbon credits—combined with a gradually-tightening market as fewer emissions-reductions schemes come into the system—will drive up carbon prices. Point Carbon analysts figure the price will rise from about 27 euros per ton today to about 39 euros in 2012.

There are a couple lessons worth remembering here for the U.S., as it staggers toward drafting some sort of climate-change program. If policymakers try to micro-manage the price of carbon permits so they aren’t scarily expensive, it will often make more sense for companies to add more GHG emissions than curb them. That’s why many environmentalists are so leery of “safety valves” and “off-ramps” in cap-and-trade schemes. And it’s another reason why lower carbon prices aren’t necessarily a sign of success.

“You can’t legislate the carbon price—with escape mechanisms, you are not creating a market, but creating a hybrid sort of carbon tax,” Point Carbon’s Director of the European Emissions Trading Scheme Henrik Hasselknippe told us.

But if the price of carbon rises in tandem with oil, as it tends to, the economy will have to pay in the end—both the cost of fossil fuels and the cost of compliance will be greater.

Yet another reminder that tackling climate change is a mind-bender. And that there’s no free lunch.  Source

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