Taxation of natural gas: What is the right tax instrument?

Natural gas and its taxation seems to remain under the spotlight of the media over recent months. Following last month’s post on this blog about the proposal to share part of the tax revenue from CGS with landowners, I continued to be intrigued with the news on couple of reports on the operation of the Petroleum Resource Rent Tax (PRRT). This is the taxation mechanism for offshore petroleum resources administered directly by the federal government (note that taxation of the mineral resources on shore, including petroleum resources, such as CSG are under state government jurisdiction).
First came the news about the report commissioned by the McKell Institute, which found that the PRRT is not adequate and recommended that it should be replaced by a royalty. I was surprised to read this, given that one of the report’s authors is an academic economist. Resource economists have typically held a favorable view of the resource rent taxes (RRT) as they directly target the resource rent, whereas royalties are a much more blunt taxation instrument with many potential distortionary effects. In a published article by Ross Garnaut, an expert on mineral taxation, mixed taxation instruments are suggested, with all of the suggested mixes including the RRT, and none including royalties.
Just over the recent days came the news about another review of the PRRT, this time by a former treasury economist. The views on the report in the media were varied, depending on the outlet. This report also identified serious issues with the PRRT, but did not recommend scrapping it as a key taxation instrument for offshore petroleum resource.
In my own view, the problem is not with the PRRT in principle, but with the various deductions, offsets, and write-offs that are allowed under the current tax accounting practices in Australia. This is evidenced with the recent court case involving Chevron, the largest natural gas miner in Australia. Like the other multinationals (including Apple, Google, etc.) the big energy companies are doing everything they are allowed to do under the current accounting practices to minimize any taxes, including taxes designed to recover the natural resource rent on behalf of its rightful owner: the public. The PRRT offers more opportunities for tax avoidance accounting than do the royalties, but that doesn’t make it an inferior tax instrument. It just means that accounting practices should be tightened up and the various allowances be scaled back. So, if society is willing to fix the tax accounting standards and practices, we would be better off with the PRRT then with the royalty.
Putting the debate about the tax instrument aside, the fact remains that Australian public is not recovering its natural resource rent from the minerals that are extracted on and off its shores. So, something has to change. The change needed is more complex than simply switching from one tax instrument to another. We need a fundamental change of the tax laws and the associated accounting practices. If we get it right, we should still be using the tax instruments that are known to be more efficient.

Author: Tiho Ancev

Tiho Ancev is a Professor of Agricultural and Resource Economics in the School of Economics, University of Sydney. His main research areas are agricultural, environmental, natural resource and energy economics. Tiho’s main contributions have been in water economics and policy, economics of energy, economics of air pollution and climate change policies, and economics of precision agriculture and agricultural input use. He has published widely on these topics in top international peer reviewed journals. Tiho has led and contributed to national and international research projects in these research areas. He is currently the Managing Editor-in-Chief of the Australian Journal of Agricultural and Resource Economics.