Why Gillard can’t afford to drop the floor price

If the government was to yield to pressure from industry lobbyists and Rob Oakeshott to drop the floor price on carbon, it could leave them teetering on the edge of another budget deficit in 2015-16.

Treasury is continuing to assume in their financial projections that the Australian carbon price in 2015-16 will be $29 per tonne of CO2 , when most market forecasters expect it to fall to the floor price of $15. According to The Australian this equates to a $3.2 billion dollar budget black hole.

But imagine what it would be if there was no carbon floor price.

The Australian reports that Bloomberg New Energy Finance is forecasting a price of $4 per tonne of CO2. This low price forecast is supported by a today's finding by Point Carbon that there is an oversupply of 632 million UN carbon credits (CERs).

Based on backward engineering Treasury’s numbers, they will be auctioning 231.7 million permits in 2015-16. If these only fetched $4, then carbon pricing would only raise $927 million versus current Treasury projections of $6,720m – a black hole of $5.7 billion. This converts a healthy surplus of $7.5 billion in 2015-16 back into a wafer thin surplus of $1.8 billion, only a smidgin higher than what they’re expecting for this coming financial year.

These very simple calculations suggest the government will be very focussed on ensuring Rob Oakeshott honours the deal agreed last year, and does not play games when the carbon price regulations reach the floor of the Parliament.

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