By a staff reporter with Reuters

The cost to Australian households of pricing carbon is likely to be lower than Treasury estimates, according to new research which predicts a $9 drop in the carbon price with the start of the traded market.

The research, from Bloomberg New Energy Finance, is forecasting that the Australian carbon price will fall by nearly 30 per cent, from $25/t to $16/t in 2015-16, as scheme participants seek least-cost abatement from the international carbon market.

From this point, the research predicts it will likely to track the system’s price floor, which rises gradually to $17.50 in 2020.

“The way the system has been designed means that from 2015-16 the Australian carbon price is likely to be driven by the cost of buying credits from the international market. As demand from the EU ETS slows however we expect the international carbon price to fall below the Australian price floor,” says Seb Henbest, manager of carbon research in Australia for Bloomberg New Energy Finance.

The findings contrast with federal Treasury's modelling, which suggests the carbon price will rise to $29 in 2015 and further to $38 by 2020, and suggest that the effect of the carbon price on electricity prices, businesses and households is likely to be weaker than expected.

BNEF says this lower carbon price trajectory would mean the scheme would cost households and businesses less than the 0.7 per cent of GDP estimated by Treasury.

It would also mean the government would collect less revenue from the auction of allowances to fund its clean energy programmes and assistance measures.

The research also find that the lower the international carbon price, the more international offset credits would be imported for compliance in Australia.

"Our initial estimates suggest this could be up to 75 per cent of Australia’s abatement effort – 15 points higher than Treasury’s estimate of 60 per cent. Additional demand from Australia will only have a relatively small influence on the prevailing international price," the report says.

“There remains a large amount of uncertainty about how the international market will evolve post-2012 and the modelling we do at Bloomberg New Energy Finance aims to capture this full complexity,” says Matt Cowie, head of carbon market research at Bloomberg New Energy Finance.

Draft legislation of the government's carbon pricing package is currently undergoing public consultation before being introduced to Parliament in September.

And while Bloomberg New Energy Finance says it believes the legislation will pass through both houses of parliament before the end of 2011, Prime Minister Julia Gillard is struggling in opinion polls, which predict her government would be swept from office if elections were held in part because of an Opposition campaign that has whipped up fears of a carbon tax.

The scheme will cover emissions from the country's top 500 polluters and will compensate households and small businesses for expected higher costs.

The government, backed by the powerful Greens party, has agreed on a programme that will launch a three-year fixed price for carbon starting July next year at A$23 a tonne and rising to A$25.40 in 2014-15.

Carbon trading would begin in 2015-16, subject to a three-year price ceiling of A$20 above the expected international price for 2015-16, rising by 5 percent in real terms for the next two years. There will be a price floor of A$15, rising by 4 percent per annum.

Polluters could buy up to 50 per cent of the offsets they need to meet their emissions reduction targets from mid-2015 if that works out cheaper than other ways of cutting carbon.

Europe's emissions trading scheme (EU ETS), by far the world's largest carbon market, is the main buyer for international carbon offsets called Certified Emissions Reductions sourced from U.N.-backed clean-energy projects.

"Certified Emission Reduction credits are forecast to fall in price from around A$19 in 2014 to A$7 in 2020, as buyers from the EU ETS reach their import limit," says the study.

The Australian Treasury has estimated Australian carbon prices would rise to A$29 in 2015 and A$38 by 2020.

In July, Barclays Capital analysts forecast the average price of Australian carbon credits could be around A$30 a tonne from 2015 to 2017 but then ease to the mid-A$20 level from 2018 to 2020, as prices converge with U.N. carbon offsets. (A$ = $1.045) (Reporting by David Fogarty; Editing by Michael Urquhart)