The bank's analysts now estimate that EU industrial installations will emit 1.97million tonnes (Mt) of CO2 this year, revising its previous figures down by 50 Mt. This would be a 150 Mt fall from 2008 levels.
The analysts said that the steel and cement sectors would be particularly affected by the difficult financial conditions in 2009, and would see their emissions fall "significantly".
"With all the other industrial sectors also likely to suffer varying degrees of declining output, we think that an overall reduction of 150Mt is more consistent with the 3%-4% decline in 2009 eurozone and UK GDP now widely forecast," the bank's researchers said.
Deutsche Bank predicts that there will be a 92Mt surplus of EU allowances (EUAs) over the second trading period, between 2008 and 2012.
Despite this, the analysts expect the prices of EU allocations (EUAs) to rise over the course of the year, as power utilities start buying allowances ahead of 2013, when the revised EU emissions trading scheme enters into force. In the third trading period, power plants in the EU 15 are expected to buy all their emissions allowances at auctions.
"We think that generators and/or speculators could start to buy EUAs opportunistically ahead of mid-2010 in anticipation of a tighter market by the middle to end of next year," the analysts said. This should create more demand for allowances towards the end of the second trading phase (2008-2012), as it is unlikely that auctioning for post-2013 allowances will start before late 2011, they argued.
As Germany's RWE and other Western European energy giants start to "forward sell electricity into 2013," Deutsche Bank predicts that the price of EUAs will climb to €16-18 per tonne over the next 12 months.
Power sector driving demand
The EU's preliminary emissions data for 2008 shows that Germany, the UK, Italy and Spain had the biggest shortages of emissions allowances. According to Deutsche Bank, these countries had taken on tough emissions reduction targets under the Kyoto Protocol, and their industrial sector had to shoulder a "disproportionate share of the burden" to meet the targets.
The data shows that despite the economic downturn, EU companies still pumped more tonnes of CO2 into atmosphere than the number of issued allowances (EurActiv 07/04/09) The bank said the deficit was driven heavily by the power sector, while other industrial installations still had allowances to sell by the end of the year.
Power generators are in a markedly different position from other industries, as they are free from international competition and can thus easily pass on the price of carbon to customers, the analysts argued. Allocations were cut "dramatically" in phase two, they said.
Moreover, Germany and the UK reduced the power sector's free allocations by choosing to auction some of their EUAs, the report revealed.
Power utilities are expected to do most of the allowance buying in the years to come, it further concludes.