Electricity prices could double in Europe if power firms are to meet emissions reduction targets under the Kyoto protocol, says a report.
Switching from high to low carbon energy is a challenge
Carbon prices are set to surge, and firms might pass this rise on to the wholesale market, says a report by consultancy Global Energy Decisions.
The report said European nations, such as France and Germany, will find it ever harder to meet emissions targets.
The carbon market is deemed a key tool under Kyoto to reduce emissions.
The report, entitled Countdown to Kyoto 2008-2012: The Carbon Challenge for Europe's Electric Power Sector, examined Northwest Europe including France, Germany, Benelux, Austria and Switzerland.
The report argues that forward carbon prices will be between 40 and 80 euros per metric ton - more than double current levels.
However the report also says it is unlikely "that costs will be permitted to be passed on to electricity consumers for long durations".
As the deadline looms to meet Kyoto's phase one targets, firms will be trying to buy additional carbon allowances.
But allowances expected to be provided on a national basis "will fall far short of meeting industry requirements alone", which will further push up carbon prices.
"Utilities will need to make substantial purchases from the Kyoto mechanisms," to meet its targets, says the report.
These mechanisms refer to carbon reduction schemes in developing countries, which allow firms to reduce their carbon emissions at the lowest possible price.
One obvious way for firms in the power sector to reduce their emissions is to switch the type of energy they use, for example from inefficient coal-fired power stations to efficient gas stations.
But some European nations lack the flexibility in their power sectors to change from high to low carbon fuels.
And it would be impossible to completely cease using coal-fired power stations - especially in Germany - because of a lack of alternative capacity.
Moreover, industry "does not have the power sector's flexibility to respond to changes in carbon price by reducing their emissions".
"The fundamentals of this new reality must be more carefully assessed and understood by government, industry and especially the electric power sector," said Ron Mahan, chairman of Global Energy.