The European Climate exchange is a market for the CO2 allowances issued to European Union (EU) countries under the EU cap-and-trade system. The equilibrium price of an allowance is determined by the interplay of supply and demand. The EU determines the total quantity of allowances issued, and distributes the allowances to organizations in the energy-intensive industries, including iron and steel production, building materials, pulp and paper, electricity generators, and heat generators. The demand for the allowances is determined by a number of factors, including the level of economic activity, fuel prices, and the weather.
The Nordic countries rely heavily on hydroelectric power to generate electricity. In a dry year, the amount of power generated by hydroelectric plants is relatively low, and the Nordic countries shift to coal-fired plants. For example, in the exceptionally dry year of 1996, the emissions from power and heat generation in Denmark were roughly 70 percent higher than the emissions in 1990, a relatively wet year. A dry year will generate a relatively high demand for CO2 emissions and thus increase the equilibrium price of the allowances.