LONDON (Reuters) - The deepening European recession prompted Deutsche Bank to cut its 2009 carbon emissions estimates on Tuesday, but emissions permit prices should rise over the next year, the German bank said in a note on Tuesday.
Deutsche Bank analyst Mark C. Lewis revised his 2009 European Union industrial emissions forecast to 1.97 billion tonnes of carbon dioxide, down 50 million from a previous estimate of 2.02 billion and 150 million below 2008 estimates of 2.12 billion.
“We think that the steel and cement sectors will suffer an especially difficult year in 2009, and their emissions ... will fall significantly,” Lewis said.
“With all other sectors also likely to suffer varying degrees of declining output, an overall reduction of 150 million tonnes is more consistent with the 3-4 percent decline in EU and UK GDP now widely forecast.”
He added that prices for permits in the EU’s Emissions Trading Scheme, called EU Allowances (EUAs), could rise in the next 12 months as German generators, many of which burn coal and thus require more permits than other types of power generators, start forward-selling power for 2013 in mid-2010.
Under the latest EU climate deal agreed in December, utilities have to buy all their permits at auction in the scheme’s third phase (2013-2020).
In Phase-2 (2008-2012), scheme participants are allocated a majority of their permits for free.
But Lewis does not expect auctioning of Phase-3 EUAs to begin until late 2011 at the earliest, adding “this could create significant demand for Phase-3 EUAs by mid-to-late 2010 that would have to be met from the Phase-2 allocations.”
“We think that generators and/or speculators could start to buy EUAs opportunistically ahead of mid-2010 in anticipation of a tighter market ... The Dec-09 EUA price is likely gradually to trend up into the 16-18 euro range over the next 12 months.”
Benchmark EUAs for 2009 delivery closed at 14.17 euros ($18.98) a tonne on Tuesday.
PHASE-2 WINNERS & LOSERS
Lewis expects the nearly 12,000 installations participating in the EU scheme to get a surplus of 108 million EUAs this year (compared to the group’s total emissions).
This figure drops to 48 million in 2010 and 7 million in 2011, he said, adding that Phase-2 will see an overall annual surplus of 18 million tonnes.
But tighter emissions caps agreed by the EU for Phase-3 mean the surplus swings to a deficit, averaging 239 million tonnes a year from 2013, Lewis said.
The bulk of EUA buying is expected to be done by utilities, as Lewis said governments were less generous in giving Phase-2 EUAs to them compared to other sectors due to the lack of international competition in the power market and the fact that they are more easily able to pass on costs to customers.
Preliminary data published by the European Commission last month showed that although industrial production slowed in the second half of 2008, companies still pumped out more greenhouse gases last year than they were issued EUAs.
Reporting by Michael Szabo; editing by Jim Marshall