EUAs could crash to 3 euros next year, says UBS

By Michael Szabo and Jeff Coelho (published in

EU carbon prices could crash to as low as 3 euros as the 27-nation bloc struggles with a mounting debt crisis and the market remains oversupplied with permits until 2025, analysts at UBS said late on Thursday.

The Swiss investment bank also said the EU Emissions Trading Scheme (ETS) “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,” the analysts wrote in a note to clients.

“We forecast the price to halve to 5 euros for 2012, with 3 euros … as the floor,” they said, adding the CO2 price outlook is also negative for European low-carbon utilities’ earnings including Finnish utility Fortum and Austria’s Verbund.

A fall to 3 euros would represent a 67-percent plunge from a fresh 33-month low of 9.23 euros that EUAs hit on Friday.

UBS said: “With limited benefits and embarrassing consequences, including billions of euros in windfall profits and fraud, we see fading political support. We don’t expect the ETS to disappear, but politicians are unlikely to tighten the rules to revitalise it.”

Demand for CO2 permits and international carbon credits will not likely outstrip overall supply in the embattled carbon market until 2025, the UBS analysts added.

“By 2025, the ETS will have cost consumers 210 billion euros. Had this amount been used in a targeted approach to replace EU’s dirtiest plants, emissions could have dropped by 43 percent, instead of almost zero impact on the back of emissions trading.”

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

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

Trevor Sikorski of Barclays Capital said “2012 will the longest point of the ETS and one we will all just have to grin and bear.”

Ingo Tschach of Tschach Solutions critiqued the UBS report itself, adding: “UBS is concentrating on issues that support its thesis while giving a low weight to issues that would weaken the stated opinions.”

He said UBS ignores the fact that utilities will next year hedge the power they sell forward for the years 2013 to 2015.

“All investment decisions now take into account costs for emitting CO2. This alone has forced decision makers to select less carbon intensive investments based on economical reasons … one of the biggest achievements of the EU ETS.”

Meanwhile, Deutsche Bank late on Thursday also lowered its EUA price forecasts, dropping its 2011 view to 9 euros from a prior estimate of 12, and permits for 2012 delivery to 12 euros from 15.

Analysts at the German bank 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,” they said.


Apart from broader economic concerns, analysts at both UBS and Deutsche Bank also attributed their bearish outlooks to an abundance of new EUAs expected to start hitting the oversupplied carbon market before the end of the month.

The EU carbon market is gearing up for the start of sales by the European Investment Bank of 300 million 2013-vintage carbon permits from the bloc’s post-2012 new entrants reserve.

“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 NER300 sales has been earmarked to fund renewable energy and carbon capture and storage projects across the EU.

Additional permit supply is expected in the form of 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,” Deutsche Bank added.

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