LONDON A double dip recession in Europe could drive European Union carbon permit prices below 10 euros (8.80 pounds) for a prolonged period, Barclays Capital analysts said in a research note on Thursday.
"A deep second recession in Europe would cause EUA prices to fall further, certainly below 10 euros a tonne, and stay lower for longer, in our view," the analysts said.
Prices for benchmark 2011 EU Allowances (EUAs) were trading at just under 13 euros a tonne on Thursday and have been in a 12 to 13 euro range for the past six weeks due to economic and oversupply concerns.
Since the start of July, EUA prices have lost around 6 percent of their value, while U.N.-backed certified emissions reductions (CERs) have lost 21 percent due to heavy issuance this year.
BarCap expects prices to stay in their current range as long as there are few new developments on financial and energy markets.
Support could come from improved hedging by utilities in the second half of the year as German 2012 dark spreads have improved, but downside could come from a sale of EUAs from the fourth quarter and into 2012 and economic risk, the note said.
"A significant blow to the market would be another European recession that sees industrial production start to fall in year-on-year terms," analysts said.
The bank sees some evidence of slowing production in a number of sub-sectors covered by the EU's emissions trading scheme, prompting it to lower its 2012 industrial production forecast in Europe to a -0.6 percent change year-on-year.
LOWER PRICE FORECASTS
Due to this, BarCap lowered its average EUA price forecasts for the second half of 2011 to 13.5 euros a tonne from 14.5 euros and its full-year 2011 forecast to 15 euros from 15.25.
The changes also reflect increasing but somewhat limited hedging by utilities for the rest of the year and the effect of the sale of 300 million EUAs in the fourth quarter.
The bank also reduced its average 2012 EUA forecast to 15 euros a tonne from 17 euros, reflecting lower forecasts of emission, early auction sales and a greater issuance of Kyoto carbon credits.
The average forecast for 2013 EUAs was also brought down to 20 euros from 23 euros and for Phase 3 to 27 euros from 30 euros, reflecting lower expected prices by the end of 2012 and into 2013, the bank said.
In addition, the bank downgraded its price outlook for U.N.-backed CERs in line with the reduction in EUA forecasts.
Its cut its average CER forecast for the second half of this year to 9.5 euros from 11 euros, for 2012 to 10 euros from 12 euros, and for 2013 to 14 euros from 17 euros.
BarCap's average CER forecast for the period 2013 to 2020 remained the same at 17 euros.
The bank also sees EUA-CER spreads likely to stay at current levels (of around 4 euros) or widen.
(Editing by Jane Baird)