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An ill wind for Labor power

The net present value of the carbon price that was legislated last week is about $87 per tonne.

That’s based on three years of fixed price starting at $23, rising 2.5 per cent a year, and then three years of an emissions trading scheme at the floor price, starting at $15 and rising by 4 per cent a year.

Assuming a weighted average cost of capital, the present value of those six payments is $87 per tonne. Therefore any reduction in emissions that costs less than that is a worthwhile investment.

In a sense, this is potentially the central miscalculation of the whole scheme: revenue is based on current emissions, but companies will invest in reducing greenhouse gas emissions to arbitrage the scheme and avoid paying the tax. And there are plenty of emissions reductions you can get for less than $87 a tonne.

This will mean the government’s revenue from the carbon tax will fall well short of the forecasts in the budget, exacerbated by the state government schemes to lower carbon emissions.

But there’s nothing new about governments getting their forecasts wrong, especially when it comes to climate change. A collapse in the price of renewable energy certificates caused by completely incorrect forecasts about solar energy usage has meant that wind power is now uneconomic in Australia.

Government forecasts predicted that most RECs would be created by wind power and that the price would settle at about $55 per REC.

In fact, according to a study last year by Grattan Institute, solar hot water heaters and rooftop solar PV panels generated more than 50 per cent of the RECs in 2010, and government forecasts drastically underestimated the supply of them.

As a result the REC price is now about $35, which is well short of what’s required to make wind power economic.

Meanwhile, the forecasts for gas base-load power also look wildly optimistic. In fact, on Inside Business yesterday, AGL managing director Michael Fraser said that New South Wales is in danger of running out of gas altogether, let alone having enough to generate electricity with it as well.

He told me that it is not possible at the moment to sign long-term contracts for the supply of gas in New South Wales: “If you look at all of the commitments that have been made for gas to supply the LNG projects, those projects are all still around looking for reserves for their LNG projects. There is surplus gas or available gas in the Victorian market. But the traditional source for New South Wales, out of the Cooper Basin, that gas has been committed elsewhere.”

How all this comes together in three to five years’ time is anyone’s guess, but we can be sure that the government’s guess will be wrong.