Carbon price of $29 'not implausible', says Blair Comley

THE head of the federal climate change department says it is "not implausible" the European carbon price could rise to $29 a tonne by mid-2015, when Australia's emissions trading scheme begins.

Department secretary Blair Comley was today grilled by senators about Treasury modelling based on a world price of $29 in three years.

The Gillard government is standing by that prediction even though it's in the process of scrapping a proposed $15-a-tonne floor price. European credits are trading at just $10.

Australia's ETS will be linked to the European market from July 2015 with the overseas price effectively setting the cost of domestic units.

"It is not my position or accountability to stand by a particular estimate or to revise that ($29) estimate between major updates," Mr Comley told a budget estimates hearing in Canberra.

"But ... I think there are quite reasonable arguments that that is not an implausible estimate of the price in 2015-16.

"When you look at what the Treasury modelling was trying to do it is still the best information that we have available."

Labor announced in late August it was scrapping the $15 floor price.

At the same time it revealed a 12.5 per cent limit on the use of cheap Kyoto carbon units, which can sell for a third of the cost of European credits.

Mr Comley said this made Treasury's estimate more likely to be accurate by ensuring Australia's price mirrors the higher European credits.

"If anything, I would describe the 12.5 per cent cap (as) meaning the likely price path forecast by the Treasury modelling is actually more likely than it otherwise would be," he said.

Assistant secretary James White later pointed out the Europeans were looking to limit credits in the next few years as a way of forcing up the ETS price.

"It's intended to provide a degree of price support," he told the committee hearing.

The European Commission doesn't make price forecasts but analysts have suggested delaying the auction of some permits could force up the price by $7.50 a tonne.

Mr White however said the futures market predicts permits would cost $11.40 at the end of 2015.

He admitted that if people firmly believed the 2015-16 price was going to be $29 they'd be prepared to pay more on the futures market today.

Australia's $23-a-tonne carbon tax started in July. The fixed price will rise to $25 before the flexible market-based price kicks in mid-2015.