Exchange rate and carbon price assumptions used by the Federal Treasury to forecast a deficit for the Carbon Pollution Reduction Scheme are completely at odds with forecasts by the International Monetary Fund, the International Energy Agency, private sector projections and historical experience, a new report has found.

The report, prepared by BAEconomics for the Minerals Council of Australia, shows the choice of these flawed assumptions substantially under-estimates the revenue that the CPRS will generate over the period to 2020. The Government is reportedly using these flawed revenue estimates to resist proposed amendments by the Coalition parties.

The report shows that based on IEA assumptions and mainstream exchange rate predictions, the CPRS will generate a surplus of at least $46 billion over the period 2012-20 rather than the $1.6 billion cumulative deficit estimated by Treasury.

The Treasury’s CPRS revenue estimates lack credibility and should be treated with deep caution by the Government and Coalition as they seek to finalise the design of the scheme.

Critical design elements of the most important economic reform in Australian history should not be based on assumptions that differ so wildly from mainstream forecasts.

Instead, the negotiations should concentrate on shaping a scheme that provides a measured transition to a low emissions economy.

Exchange rate projections faulty
The BAEconomics analysis shows that exchange rate assumptions differ substantially from IMF and private sector bank forecasts. While the Treasury assumes that the Australian dollar will remain above $US0.90 cents until 2013, most other forecasts suggest the $AUD dollar is likely to trade below $US0.80 cents over this period. Treasury is also anticipating that 25 years of historical experience will be overturned – the $A has traded above $US0.90c for only 3 per cent of trading days since 1983.

Carbon price projections at odds with mainstream projections
The analysis also demonstrates that Treasury’s carbon price projections differ substantially from those contained in the International Energy Agency’s World Energy Outlook released earlier this month. The forecasts are also substantially different from those of respected private sector carbon price analyst, Point Carbon.

While Treasury projects a carbon price of $26, the IEA and Point Carbon expect the global carbon price of more than $37 by 2012-13 using Treasury’s assumed exchange rate ($US0.90). If Treasury had used the IEA carbon price forecast, the projected CPRS revenue surplus would be $32.5 billion, rather than the $1.6 billion deficit forecast by Treasury.

The surplus is even greater if realistic carbon price and exchange rate forecasts are used. The combination of a more realistic exchange rate ($US0.80) and the IEA projected carbon price produces a revenue estimate of $46 billion.

The case for getting the design of the CPRS right – in ensuring it is aligned with global efforts to manage climate change - is stronger than ever in the run-up to the Copenhagen climate talks.

First, it is clear that Copenhagen is unlikely to deliver the clear road map on other nations’ intentions that we had expected.

Second, in a new development, Canada has delayed the consideration of its emissions trading scheme until well into 2010 and the United States’ will have no scheme in place prior to Copenhagen.

And third, it is patently clear from the BAEconomics analysis (attached) that the Government and Coalition parties do not have reliable revenue estimates on which to base their current negotiations.

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