Deutsche ups EU carbon price forecast to 40 euros

Vapors rise from a factory at an industrial complex in Cartagena, southeastern Spain, January 29, 2008. Picture taken January 29, 2008.

LONDON (Reuters) - Deutsche raised its European Union 2008 carbon price forecast to 40 euros ($62.37) on Friday, from 35 euros previously and well above the current price of about 26 euros.

The EU's cap and trade scheme forces energy-intensive companies to buy permits to emit the planet-warming gas carbon dioxide. The scheme covers nearly half the EU's carbon emissions and is its main weapon against climate change.

Power generators which burn fossil fuels add the extra cost to power prices, which means a carbon price hike impacts electricity bills for everyone inside the 27-nation bloc.

Deutsche raised its price forecast for emissions permits called EU allowances (EUAs) because of higher than expected carbon emissions in 2007, plus rising oil prices and the inclusion of aviation carbon emissions in the scheme in 2011 or 2012.

"This is going to be tougher than we thought," said Deutsche carbon analyst Mark Lewis.

Assuming interest rates of 4.5 percent, fundamentals pointed to a long-run carbon price rising from 40 euros this year to 67 euros in 2020, estimated Lewis.

Last week EUAs hit a two-year high above 26 euros on the back of record oil and high gas prices. A high gas price makes it more economic for power generators to burn high carbon-emitting coal instead of gas, driving up demand for EUAs.

EUAs for 2008 delivery were down 50 cents at 26.1 euros in lunchtime trading on the European Climate Exchange on Friday, following oil prices down.

The long-run EUA would rise to 60 euros from 40 euros, in 2008 money, if oil prices stayed above $100, estimated Lewis.

"It gets very scary if you play around with these numbers," he said, adding that his 40 euro estimate assumed an oil price of $85. Oil was trading above $127 a barrel on Friday.

Previously Deutsche had assumed that businesses would have to cut carbon dioxide emissions by an average 75 million tonnes a year from 2008-20, but has raised that to 125 million tonnes.

That would raise demand for EUAs, especially in the second phase of the scheme from 2008-12, as power generators built gas-fired capacity to replace higher carbon-emitting coal.

There would be too few EUAs to go round, said Lewis, which would force companies to buy carbon offsets as an alternative way to meet their EU targets, under a linked, UN-run scheme under the Kyoto Protocol.

Other analysts have also raised their EU carbon price forecasts in the past month. New Carbon Finance says EUA prices could rise above 38 euros at some point in the second phase of the EU emissions trading scheme, compared to an earlier forecast average of 28 euros.

(Reporting by Gerard Wynn; editing by James Jukwey)