Trading in the rain. Rainfall and European power sector emissions. Research note no. 9

Analysts often say that temperature and rainfall have an impact on the price of CO2, as they influence the conditions of electric power supply and demand. Rainfall mainly affects the capacity of hydropower production, the third largest source of electricity in Europe and by far the leading source of renewable energy. The variability of hydroelectric volumes is indeed usually offset by other, higher-emitting sources of electricity, which has repercussions on the European allowances trading market. In 2005, rainfall was unusually low in several European countries: in the Iberian peninsula and in France, drought is believed to have brought about a rise of approximately 15 Mt CO2 in power sector emissions. In contrast, hydrological conditions were particularly good in the Nordic countries, allowing them to reduce CO2 emissions in the region as a whole through hydropower-based exports. The additional allowances demand would therefore have been 'only' about 9 Mt CO2. To make the interaction with the CO2 market easier to understand, an indicator of rainfall in Europe must include this compensating phenomenon resulting from the heterogeneity of the climatic conditions and volumes produced in Europe