Recession will cut EU carbon costs: Deutsche

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Industrial carbon emissions will fall faster in Europe as result of a coming recession, cutting the demand for and price of emissions permits under the European Union's emissions trading scheme, said Deutsche Bank analysts.

LONDON (Reuters) - Industrial carbon emissions will fall faster in Europe as result of a coming recession, cutting the demand for and price of emissions permits under the European Union's emissions trading scheme, said Deutsche Bank analysts.

Lower carbon prices may hand an unexpected boost for politicians and green groups urging industry and bankers not to back down in the fight against climate change.

Recession will cut industrial carbon dioxide emissions by about 100 million tonnes in 2009 compared to 2007, from current installations, the research note said on Wednesday.

"You've got a very serious contraction in the economy," said Deutsche analyst Mark Lewis.

Europe's biggest business lobby, BusinessEurope, said on Tuesday it wanted the European Union to cut costs under its climate program, given an expected sharp economic slowdown.

Deutsche Bank cut its 2008 EU allowance (EUA) price forecast to 30 euros ($40.98) per tonne of avoided carbon dioxide emissions from 40 euros, compared to an actual price on Wednesday of 23 euros.

EUAs have for a long time traded well below Deutsche and other analyst forecasts, partly as a result of a lack of liquidity whereby many affected companies do not actively trade.

"We think that market inefficiencies could keep EUAs below 30 euros per tonne until 2009," the research note added.

The EU's emissions trading scheme binds the emissions of the 27-nation bloc's biggest polluters, including power generators, refiners, chemical companies, metals and pulp and paper makers.

The cut in forecast carbon prices also followed a cut in assumed, short-term oil prices to $60-65 down from $100, which would make gas more attractive compared to high-carbon coal.

In addition, a more generous import limit on the use of carbon offsets, proposed recently by EU lawmakers, could give industry a cheaper alternative to buying EUAs, paying instead for emissions cuts in developing nations.

The credit crisis would also place some counter-balancing, upward pressure on the carbon price, the note said -- more cautious bank lending would lead to less low carbon, renewable energy generation, extending the use of coal plants.

"EUAs should reflect the price required to make CCGT (gas-fired power generation) the new entrant of choice. On our revised commodity-price forecasts this equates to 30 euros per tonne in 2008 (previously 40 euros), rising to 48 euros per tonne by 2020 (from 67 euros)," the note said.

(Editing by William Hardy)