* Front year EUAs now forecast to end year around 10 euros
* Previous forecast 13 euros
By Michael Szabo
LONDON, May 20 (Reuters) - Swiss investment bank UBS slashed its year-end EU carbon price forecast by 23 percent due to the weaker-than-expected market impact of the bloc’s plan to cut the supply of carbon permits.
Analysts at the bank now predict front-year EU Allowance (EUA) prices will end the year at around 10 euros per tonne, down from a previous forecast of 13 euros.
With prices at around 4.70 euros on Tuesday, the updated view still represents a more-than 100 percent premium on current levels.
The bank said in a report published on Monday that it expected prices to average 7 euros this year before rising to 13 euros by the end of 2015, below its former estimate of 15 euros.
Under the EU plan, dubbed ‘backloading’, the bloc will this year withdraw 400 million carbon permits from its market in a bid to lift prices back towards double digits.
A total 900 million units are scheduled to be withheld from government sales in 2014-2016 and released at the end of the decade.
UBS said EUA prices remain subdued due to several factors including a mild European winter, lower-than-expected emissions under the scheme in 2013, and reduced hedging of forward power sales by utilities.
Power generators typically buy carbon permits when they sell power for future delivery, but many have already sold more forward electricity than normal, causing EUA demand to fade this year.
UBS said that the crisis in Ukraine has also shifted EU politicians’ focus away from reforming the European carbon market.
“We are still positive on the carbon prices because of the proposed crucial structural reforms that should remove oversupply long-term,” added UBS analyst Patrick Hummel.
Following years of oversupply in the EU Emissions Trading System, which has pushed prices down to below 5 euros from more than 30 euros in 2008, the European Commission has proposed a mechanism to regulate the flow of new permits into the market.
Hummel said the key uncertainty is whether this market stability reserve will be introduced in 2017, a German proposal that he considers the bullish case, or after 2020 as set out in the Commission’s plan.
He added that success by Eurosceptic parties at this week’s European Parliament elections was unlikely to cause delays to proposed reforms.
“The likely rise of the ‘tea parties’ is not a significant threat to EU carbon policy in our view, thanks to a solid majority of established parties close to the political centre,” he said, referring to the politically conservative Tea Party movement in the United States. (Editing by Keiron Henderson)