The war and its consequences
We’re missing out on revenue from gas exports
The call for gas companies to share their windfall profits with the Australian people is neither “left” or “right”. It’s about paying for what is taken.
“We want a fair return from the export of our gas” is how Senator Pocock puts the case for a new levy on gas exports, in an interview on the ABC’s 730 program.
The argument can’t get much simpler than that. And it should be a reasonably non-contentious argument. Countries with all shades of political ideology use whatever policy levers they can to secure a return from exports of their non-renewable resources. In economic terms it’s about people paying for what they take: you don’t need to have done Eco 1 to understand that. And politically it’s always easier to collect revenue from foreigners than it is to collect tax from the native population.
There is a chorus of voices, pretty well in tune, calling on the government to use the present world energy crisis to levy some form of windfall profits tax on our gas exporters. In a short explainer in The Point, Richard Denniss of the Australia Institute puts the case for a gas export tax. He includes striking examples to illustrate his point that gas exporters are under-taxed: for example teachers and nurses each pay more in income tax than the gas industry pays in company tax and the Petroleum Resource Rent Tax (PRRT), a levy on offshore gas and petroleum specifically designed to capture a share of windfall profits, but which, because of poor design, has largely failed in that role.
His strongest point is that while Australia has advanced to become the world’s fifth largest gas exporter (probably the fourth largest now with Qatar’s capacity damaged), our public revenue from the PRRT has hardly moved. This is shown in the graph below, constructed from Denniss’s data. Note that from the start of this century, revenue from the PRRT has hardly moved (it’s about $2 billion a year), while the value of gas companies’ exports continues to grow.
Denniss draws attention to the spike in the value of gas exports in 2022-23, associated with Russia’s invasion of Ukraine. (This was responsible for that once-off jump in electricity prices which the Coalition and its media supporters deceitfully blamed on renewable energy.) Whatever the immediate outcome of the struggle over the Strait of Hormuz, elevated gas prices are likely to persist for quite a long time.
Denniss is among those calling for an extra 25 percent tax on gas exports. He’s in good company. On the ABC’s PM – Pressure to increase tax on gas exports – you can hear Labor backbencher Ed Husic (Minister for Industry and Science until he was dumped in a grotty Labor factional deal), Greg Bourne of the Climate Council (formerly an oil industry executive) Ken Henry (formerly Secretary of Treasury), Adam Bandt now with the Australian Conservation Foundation (former Parliamentary Greens leader) and energy expert Bruce Mountain arguing for increased tax on gas exporters.
Denniss’s article, linked above, cites opinion polls showing that 58 percent of voters, including 49 percent of Coalition voters, and 60 percent of One Nation voters, favour a 25 percent tax on gas exporters.
Mountain argues for a tax that’s more finely-tuned than a flat 25 percent rate: his preference is closer to the textbook case for resource rent taxes, which should not privilege established producers over newer producers who face the cost of developing new mines and wells. His preference therefore is for an increase in the rate of the PRRT rather than a flat levy.
Unsurprisingly the gas industry is not on board with any increase in tax, and they have Angus Taylor onside, who claims that any new tax would cripple the entire industry. On the 730 program Sarah Ferguson aggressively asks Pocock “do you want there to be a gas industry in Australia?”, echoing Taylor’s suggestion that there is a movement trying to tax the gas industry out of existence.
Newport power station
That’s rubbish. Most energy experts acknowledge that gas has a role as a transitional fuel for some years. A well-designed resource-rent tax is about capturing some of the windfall or above-normal profit, leaving enough profit to provide a strong incentive for companies to develop economically feasible reserves. Of course companies will grizzle at any attempt to increase the tax they pay, but that’s simply about making an ambit claim. The strife in the Persian Gulf in fact illustrates the point that Australia is one of the safer places to invest in energy.
The reason so little revenue is collected by the PRRT is explained in an episode of The Economy, Stupid – Australian gas is booming, but who benefits? In the first half of the program Ben Potter of The Energy and Saul Kavonic of MST Financial take us through a history of attempts to establish a domestic gas reservation scheme: it’s a story of poor policy design, bad forecasting, corporate overconfidence, greed and gaming. The second half is an explanation of how the PRRT works. It’s actually set at a high rate – 40 percent – but it has generous allowances for deduction of exploration and development expenditures, which in theory should be capitalized, but which are allowed to be carried forward. The result is that there is a 10 to 15 year delay before the revenue is realized.
That’s a known feature of the PRRT, which has always been seen as over-generous to the industry. It stems from the government at the time having been more concerned to see investment in the industry than a revenue return from the projects – a classic case of short-termism. But if the PRRT works as Potter and Kavonic explain it, we should see the red bars in that graph pick up 10 to 15 years after the green bars pick up, but they don’t. There is something missing in their explanation.
The Greens-led Senate inquiry into taxation of gas resources, at which people are calling for a gas tax, has put the government in a difficult position as it negotiates soft deals with countries that supply our liquid fuels and depend on our gas supplies. A new tax would have clear implications for existing contracts. But as Denniss points out, much of our gas is sold on the spot market, and with Qatar out of action many companies will be enticed to buy on the spot market, and will probably be amenable to enter long-term contracts with a known higher tax.
Understandably in this pre-budget period the government is coy about its intentions. Most important work on the budget is done by early in the year. The Trump-Netanyahu war has clearly caused the government to revise its fiscal plans, but by the time the Senate committee reports on 7 May, 5 days before the budget, the only remaining work will be a little final proof reading.
Perhaps there will be something in the budget, but if there is not it’s a reminder that this government has been painstakingly slow in doing the sort of tax reform the public expected a social-democratic government would do.
Our grand energy policy failure
Our energy security would be far better if we had not entrusted energy policy to economically indolent Coalition governments.
If we had developed a responsible energy policy 22 years ago our prime minister wouldn’t have to travel around Asia securing diesel and aviation fuel supplies, we wouldn’t be worrying about our loss of refining capacity, and we wouldn’t be anxiously wondering if the Strait of Hormuz is likely to open.
That’s the main message from Alan Kohler’s post on the ABC website With Iran and the Strait of Hormuz still in flux, China's bet on renewable energy is paying off. In 2004 China, recognizing its dependence on imported oil, decided to reduce its reliance on the Strait of Hormuz, and on other marine passageways that could be controlled by powers that didn’t necessarily have China’s interests at heart. That set off a program of massive investment in renewable energy, high-speed rail, and electric vehicles.
At the same time in Australia the Howard government was developing an energy policy, or more correctly a non-policy, deciding to leave our energy future to the market. (In fact that “market” broke the parsimonious rules of market economics, because the full cost of fossil fuels – their environmental cost – was not taken into account.) Subsequent Coalition governments worsened our dependence on the Strait of Hormuz with policies that resulted in Australia becoming the world’s biggest consumer of diesel per-capita. Their contempt for science and short-term thinking set us back decades. Europeans and Chinese don’t have to worry about short- and medium-haul flights being withdrawn, because they have high-speed rail, while Australians have to cope with long drives.
Writing in the Saturday Paper John Hewson demonstrates how the scourge of short-term thinking has dominated our policies towards the related needs for energy security and a transition to renewable energy. Most of his criticism is directed at the Coalition, in government and in opposition, but he also believes the current government could have done better in attending to energy security and in responding to the Trump-Netanyahu war.
He acknowledges that “Australia is well on the way with a green energy plan that should effectively transition us away from fossil fuels”, but he calls on the government to do more in relation to liquid fuel security. In collaboration with industry the government should plan and develop fuel storage facilities, and develop renewable transport fuels, such as E10 and even E50. He calls on the Coalition in opposition to abandon their “ridiculous negativity towards renewables and the dishonesty of their rhetoric” in relation to energy matters.
Now that the government’s A330 is back from Albanese’s oil-for-gas mission, he could offer it to retired prime ministers Howard, Abbott and Morrison for a guided tour of China’s energy and electricity infrastructure, so that they can appreciate what their indolence cost Australia. They shouldn’t be allowed to live their final years believing that they governed in Australia’s interests.