Deutsche Bank expects an EUA prices of 20-25 Euros by year-end 2010 or early 2011

In their  Carbon Emissions report “May You Live in Interesting Times …” Deutsche Bank:

– revised estimates for the ETS cap over 2008-20 under both the existing 20% and potential 30% EU-wide emissions-reduction targets,
– updated the base-case pricing analysis for the 20% target and for the first time setting out our base-case pricing analysis for a 30% target, and
– looked at the potential impact on EUA prices of applying the qualitative restrictions on the use of CERs/ERUs in the ETS beyond 2012

From the Executive Summary:

“In short, although our base-case year-end price target for prompt EUAs is €20/t, this could change in response to near-term regulatory news flow. In particular, we are waiting for (i) the outcome of the CDM Executive Board’s requests for review and (ii) the Commission’s Impact Assessment on qualitative restrictions on CERs (and, crucially, the response of EU governments to this), for further clarity on the outlook for the future supply of CERs into the ETS. We expect news on both in the autumn.

If the news flow on these points is more negative than we are currently assuming, then the risk is that our worst-case scenario for the 20% target might actually become our base case within the next few months, implying EUA prices of €25/t or more by year-end 2010 or early 2011.“

… and here comes the worst case scenario:

“As explained in our [Editor: Deutsche Bank] report Hard to Credit (22 June 2010), if all of the potential qualitative restrictions on the use of offsets in the ETS mooted by the European Commission in its Communication of 26 May 2010 were applied already from 1 January 2013, we project that the extra ETS abatement required under the 20% target beyond our base-case number would be 400Mt, and under a 30% target 800Mt. Under the 20% target this would imply a need for 15-20GW of new CCGT capacity by 2020, and an EUA price of €25/t in 2010, rising to €37/t by 2020. Under a 30% target this would imply extra CCGT capacity of 100GW by 2020, and given the increase in EU gas demand implied by this scenario we think this could result in materially higher gas prices, and hence a higher LRMC of carbon. Accordingly, our worst-case analysis for a 30% target implies a 2010 EUA price of €45/t, rising to €67/t by 2020, in turn implying an average EUA price over Phase 3 of €58/t.”

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