Deutsche Bank slashed its year-end price forecast for European Union carbon permits to 6 euros a tonne from 9 euros due to a worsening economic outlook and an oversupply of permits in the period 2013 to 2020, it said in a note on Tuesday. The bank expects EU Allowances (EUAs) to trade in a range of 5 to 7 euros in the first half of 2012 as the impact of recession is felt and the first 200 million EUAs are sold to raise money for renewable energy technologies from a special reserve called the NER300.

      "If there is a repeat of the distress in inter-bank lending markets that we saw in Q1 2009, which at that time precipitated large-scale selling of EUAs by industrial players, we think prices could break below 5 euros tonne for a time," the bank added.

      The EU emissions trading scheme (ETS) caps carbon dioxide (CO2) emissions from around 11,000 power generators and industrial plants in 30 European nations, covering around half of the region's carbon footprint.

      Benchmark European carbon prices have shed more than half their value since June, hitting a record low 6.90 euros last Friday, as the euro zone's worsening debt crisis choked demand for emissions permits. They were trading at 7.85 euros by 1420 GMT on Tuesday.

      Recent price falls have prompted five sets of carbon analysts to reduce their price forecasts in the past two weeks, including Deutsche Bank.

      The growing prospect of an EU-wide recession next year has prompted the bank's analysts to cut their emissions forecasts in 2011 and 2012 by 1.5 percent and 5.6 percent to 1.97 billion tonnes and 1.92 billion tonnes of CO2, respectively.

      Given the ebbing demand for CO2 permits, the bank has revised its cumulative supply forecast to a net surplus of 566 million EUAs to 2020 from a net deficit of 395 million.

      "Under current EU-ETS legislation and targets, we do not think that there will be a deficit at any time beyond 2020 either," the statement said.

      The EU has a collective target to cut the bloc's emissions 20 percent below 1990 levels by the end of the decade. This can be deepened to 30 percent if other major emitting nations agree to similar cuts under a new international climate change pact.

      Deutsche Bank said EUA prices could recover to 10 euros a tonne by the end of next year if the EU's economy were to revert back to modest growth and the bloc agreed to tighten EUA supply for the trading period 2013-2020, known as the third phase.

      And a tighter phase three emissions cap set in 2013 could propel EUA prices toward 20-25 euros a tonne by 2020, it said.

      "Absent a credible political narrative developing over the next 6-23 months, however, we think EUA prices will remain below 10 euros/tonne into 2013 and beyond."