The Federal Opposition says a potential multi-billion dollar hit to the budget following a plunge in Europe's carbon price has put future tax cuts and pension rises "at risk".

The Government's carbon package includes compensation for pensioners and low to middle-income households and a second round of tax cuts in 2015-16.

But opposition treasury spokesman Joe Hockey says the slump in the carbon price in Europe, the world's largest carbon market, will have a costly impact on Australia's carbon market.

"If the European price today is to be applied to the budget then there will be a budget hole of at least $7 billion - in just one year," he said.

The price of carbon in Europe has plunged as much as 45 per cent after the European Parliament rejected an emergency plan that would have forced companies to pay more for polluting.

Carbon permits dropped to as little as 2.63 euros ($3.34) a tonne, and German power prices for next year fell to their lowest level since 2007.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Listen Duration: 4 minutes 29 seconds 4 m 29 s European carbon price plunge triggers budget revision ( Sabra Lane ) Download 2.1 MB

Australia's carbon pricing scheme will be linked to the European system from 2015, when the fixed carbon tax will cede to an emissions trading scheme.

Treasury modelling had previously estimated the carbon price for 2015-16 would rise from a fixed rate of $23 a tonne to $29.

Mr Hockey says the budget is in "a mess".

"Over 50 per cent of the money that was meant to come from the carbon tax is meant to go to households in tax cuts and increased compensation - that is not tied to a carbon price of $29 a tonne - and therefore tax cuts and household compensation will clearly be at risk because of the way this government has decided to design the carbon tax package," he said.

The Coalition has previously committed to a "modest" tax cut after winning office but had been less clear on what elements of the compensation package it might dump if it won government.

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'Revised forecast'

Climate Change Minister Greg Combet has revealed that next month's budget will need to take the EU price plunge into account.

"We'll continue with our plans to link with the European Union emissions trading scheme from the July 1, 2015, which is still over two years away, but this year's budget will include a revised forecast for a carbon price in 2015-16 in Australia," he said.

Mr Combet is not saying by how much the revenue forecasts will have to be revised down.

"In the budget in coming weeks there'll be a revised price for the carbon price in 2015-16 and a revised revenue forecast as a result," he said.

"A lot of the expenditure related to the carbon price is ... issued in free permits, and so therefore the expenditure reduces if the price reduces as well.

"Other expenditures are provided in cash."

The cash expenditures linked to the carbon scheme include a multi-million-dollar package, linked to inflation, to compensate pensioners and low and middle-income households for any impact on their cost of living.

There is also a second round of tax cuts due to take effect in 2015-16.

Treasury modelling had previously estimated the carbon price for 2015-16 would end up somewhere between AU$29 and $61 a tonne.

But this morning Treasurer Wayne Swan was asked four times about the potential impact on the budget, but would only say "we'll examine all of that in the context of preparing the budget".

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Listen Duration: 3 minutes 46 seconds 3 m 46 s European carbon price dives Download 1.7 MB

Opposition climate action spokesman Greg Hunt has used the EU situation to bolster the Coalition's case for dumping the carbon scheme.

"Now is the moment to recognise that this tax has been a failure; to abandon the tax and to acknowledge that we are so far out of kilter with the rest of the world that all we're doing is hurting families and sending jobs straight to China, India and Indonesia," he said.

Mr Hunt has pointed to the fact that the price in Australia will increase over the next two years despite the European price dropping dramatically.

"The carbon tax goes up on the first of July this year, it goes up on the first of July next year - that's locked in legislation," he said.

This year the price will rise from $23 per tonne of emissions, to $24.15. Next year it will increase to $25.40 a tonne.

But Mr Combet says the fall in the European market is no reason to change Australia's scheme.

"It is widely recognised that emissions trading schemes are the most effective way of developing a global carbon market that will drive down greenhouse gas emissions," he said.

"I don't think the overnight events in the European Parliament ... should be seen as some way of undermining global action on climate change.

"The determination is there and the commitment to develop global carbon markets is there."

Prime Minister Julia Gillard agrees, and says the Government does not intend to try to lower the Australian carbon price.

"We are doing what we said we would when we legislated for carbon pricing. We are in the fixed price phase of the scheme and we will move to emissions trading on July 1, 2015," she said.