3-UBS analysts predict 70 pct collapse in EU CO2 prices

By Jeff Coelho

LONDON, Nov 18 (Reuters) – European Union carbon prices could shed some 70 percent from current levels, as the bloc struggles with a mounting debt crisis and a glut of supply in the carbon market is unlikely to disappear until 2025, analysts at UBS said.

The investment bank also said the EU emissions trading scheme (ETS), the 27-nation bloc’s main policy tool to fight global warming, “isn’t working” because carbon prices are “already too low to have any significant environmental impact.”

“We expect the recent carbon-price decline to escalate into a ‘crash’ as carbon market supply should double over the coming months,” UBS analysts wrote in a Thursday statement to clients.

“We forecast the price to halve to 5 euros/t for 2012, with 3 euros/t … as the floor,” it said, adding the carbon price outlook is negative for European utilities’ earnings, such as Finnish utility Fortum and Austria’s Verbund .

A price of 3 euros would be nearly 70 percent lower than the current benchmark price of around 9.40 euros. Early on Friday, it hit a fresh 33-month low of 9.23 euros.

The bank’s bearish outlook triggered a rare response from Climate Markets & Investment Association (CMIA), an international trade association.

“The CMIA normally refrains from commenting on price projections and research from other institutions, however the report from UBS has materially affected the carbon price today,” the group said in a statement.

“Given this we believe it is important to highlight the fact that a number of analysts that CMIA has been in contact with feel that the headline 3 euros price may have overlooked a number of key issues,” it said, adding an imminent onslaught of new supply in 2012 “will not be present in subsequent years.”

Meanwhile, Deutsche Bank lowered its price forecasts for 2011 EU Allowances to 9 euros a tonne from a prior estimate of 12 euros, and permits for 2012 delivery to 12 euros a tonne from 15 euros, analysts at the bank said in a statement late on Thursday.

They cautioned further price outlook cuts could be made.

“Should EU policymakers prove unable to prevent the crisis engulfing Greece and, increasingly, Italy and Spain from tipping the EU into a full-blown double-dip recession, we would be forced to downgrade … our EUA price forecasts, perhaps aggressively so,” the statement said.


Apart from broader economic concerns, analysts at both UBS and Deutsche Bank attributed their bearish outlooks to an abundance of CO2 permits expected to start hitting the over supplied carbon market next month.

Demand for CO2 permits and international carbon credits will unlikely outstrip overall supply in the embattled carbon market until 2025, according to UBS analysts.

The EU carbon market is gearing up for the start of sales of 300 million carbon permits from the bloc’s post-2012 new entrants’ reserve by the end of November.

“With EUAs already pressured by growing concerns over the EU macro outlook, we think this will weaken prices further in the short term, even if the market was probably already expecting the first NER300 sales in December,” Deutsche Bank said.

Revenue raised from the so-called NER300 sales has been earmarked to fund renewable energy and carbon capture and storage projects across the EU.

Additional supply will be fuelled by European government carbon permit auctions and the issuance of U.N.-backed carbon credits over the next several years.

“We believe that it is very unlikely that such a large additional supply volume will get picked up by the market unless there has first been a real crash where compliance buyers, mainly large polluting utilities, will step in,” the Deutsche Bank analysts said. ($1 = 0.740 Euros)

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