EU CO2 to drop 10 pct below 2007 levels: Deutsche

Michael Szabo, Reuters 5 Dec 08;

LONDON (Reuters) - European Union industrial emissions could fall by 10 percent below 2007 levels next year, Deutsche Bank said on Thursday, unnerving traders on the possibility of another price collapse in carbon permits.

The German bank cut its previous forecasts, saying lower productivity from companies participating in the EU's Emissions Trading Scheme (ETS) coupled with corporate efforts to meet EU renewable energy targets could lead to a surplus in emissions permits over the next three years.

This will depress prices for permits (EUAs) traded in the scheme's second phase (2008-12), possibly forcing a retest of the all-time low of 11.80 euros a tonne, the bank said, prompting trader worries over a possible repeat of the scheme's first phase when EUA prices fell to zero.

"The price is going to be under pressure, not necessarily because the market thinks Phase 2 is going to be long but also because companies need cash so they'll sell the allowances they won't need for next year when they anticipate lower production," Lewis told Reuters.

EUA prices would not collapse as unused permits would be carried over to the scheme's third phase (2013-2020), he added, reiterating his previous price targets of over 30 euros a tonne.

Benchmark EUAs traded down to 14.45 euros a tonne on Friday, the lowest level since March 2007 and 50 percent below a 2-year high of 29.69 euros hit last July.

HORROR

"It looks like a sequel to the Phase 1 horror movie," said one emissions trader.

In the scheme's first phase (2005-07), an over allocation of permits caused the EUA price to crash, prompting critics to question the effectiveness of emissions trading as a weapon in the fight against climate change.

The difference in the scheme's second phase (2008-12), Lewis said, is that companies can carry over unused permits to the third phase, which begins in 2013, thereby avoiding the mass sell-off that pushed prices down to zero in phase I.

"It's meaningless to say Phase 2 will be long, since allowances will be banked to make Phase 3 less short," he said.

"Looking at Phase 2 separately from Phase 3 is wrong; It's an academic distinction."

Lewis did not change his EUA price forecast, estimating prices of 30 euros a tonne this year, rising by four percent annually to 48 euros in 2020.

RENEWABLES

Next week, EU leaders will hold a summit to agree proposals to cut EU emissions by 20 percent below 1990 levels by 2020, and source 20 percent its electricity from renewable energy sources.

Based on the targets being agreed, Lewis said Phase 2 emissions will average 2.076 billion metric tons annually, 7 million metric tons below the cap of 2.083 billion metric tons per year.

But Phase 3 will see annual emissions of around 2.08 billion metric tons, 238 million more than an average cap of 1.85 billion.

"On our revised estimates the ETS is still short by an average of 50 million tons per year over 2008-20 even after allowing for the use of (Kyoto) credits," Lewis said, cutting his previous estimate of 86 million.

Lewis predicted EU member states would meet 45 percent of its renewables target, down from a previous estimate of 50 percent.

He said EU emissions will start to rise again after 2009, growing by 1 percent in 2010, 2 percent in 2011 and 2012, and 0.5 percent in the years following.

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(editing by William Hardy)