April 18 (Bloomberg) -- European Union carbon-dioxide permits for each of the next three years rose to records on concern surging oil prices will lead more power utilities to burn coal, increasing demand for the carbon allowances.

Crude oil prices in Europe and New York rose to records today, and natural gas prices are linked to the price of oil. Gas-burning power utilities are likely to switch to coal if possible, which creates more pollution than gas. That means generators using coal will need to buy more allowances.

``Oil drives German gas, which drives German power, which drives carbon dioxide,'' Louis Redshaw, the London-based head of environmental markets at Barclays Capital, the investment-banking unit of Barclays Plc, said today by telephone.

The EU began a trading system last year that requires factories and power plants to have an allowance for each ton of carbon dioxide they produce. If they emit more, they need to buy extra allowances; if they have spare permits, they can sell.

EU carbon-dioxide allowances for 2008, the first year of the emissions-trading regime's five-year phase, rose 3.05 euros, or 10 percent, to a record 32.30 euros ($40) a metric ton, broker Spectron Group Plc said at about 3 p.m. London time. Permits for 2007 jumped 4.8 percent to a record 31.70 euros. The 2006 contract rose as much as 1.30 euros to a record 30.55 euros. It was at 30.50 euros at about 4 p.m.

Brent crude for next month rose to a record $72.20 a barrel. Brent crude for November surged 0.8 of a percent to a record $73.10. German gas prices are linked to oil prices about six months earlier, so movements in the oil price near the end of this year may affect German gas prices, and emissions prices, even more than front-month oil, Redshaw said.

2008 Surges

The 2008 price for EU carbon allowances surged past the 2007 price after Germany and the U.K., the region's biggest emitters, said in the past three weeks they would reduce their grants of allowances after 2007, especially their allocation to their power industries. For instance, Germany plans to cut its grant to power utilities by 15 percent.

``With the U.K. and Germany looking to severely cut emissions allowances in the second phase of the regime, especially in the power industry, many market participants seem to believe prices need to go up,'' said Kris Voorspools, an analyst at Fortis, said today by e-mail.

The first phase of the EU trading system began last year and ends next year. Governments have granted about 2.2 billion tons of allowances a year for that phase, valued at 67 billion euros at today's record 2006 price. The next phase, starting in 2008, runs through 2012. Government plans for the five-year phase are slated to be drafted by June 30 this year.

``Many people realized these allowances are going to be scarcer in the second phase than the first,'' said Gilles Corre, a London- based broker at Evolution Markets LLC.

Fines Jump

Another force driving 2008 prices higher might be that fines for non-compliance jump to 100 euros a ton after 2007 from 40 euros in the first phase, Keith Tovey, director of low-carbon innovation at the University of East Anglia in Norwich, England, said today in an e-mail. ``I can see that causing the upwards drift,'' he said.

Low rainfall has also curbed hydro-power production, one of the cleanest energies, contributing to demand for earlier-dated allowances.

German power prices for 2007 also rose to a record, breaking the 60 euro mark for the first time.

Electricity for delivery next year traded as high as 60.40 euros a megawatt-hour today, advancing 1.25 euros, or 2.1 percent. The contract traded at 60.30 euros a megawatt hour at about 5 p.m. Berlin time, according to broker Icap Plc. Power prices for 2007 in Europe's largest power market have gained more than 18 percent this year.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net Renee Lawrence in London at rlawrence7@bloomberg.net

Last Updated: April 18, 2006 11:28 EDT