Taxing gas exports

Sit-down money is addictive

Australia’s Liquified Natural Gas (LNG) exports are a big deal at the moment, with the Select Committee on the taxation of gas resources delivering a report on the 7th of May, having received 176 submissions and convened 3 days of hearings.

What did the report recommend? Nothing.

They couldn’t find an agreed level or mode of taxation.

This shouldn’t be surprising. The way big projects are treated with regard to land and other taxes varies wildly around Australia. Ask a professional-level AI to summarise the situation, and it’s pretty clear that governments and companies just haggle and make it up as they go. There is no consistent rationale.

The one unsurprising area of committee agreement was about inadequate data:

“The committee finds that lack of timely, transparent entity-level data continues to make it difficult for industry, government and the community to have a shared understanding of revenue, profits, and Petroleum Resource Rent Tax (PRRT) liabilities.”

The normalisation of bludging

The committee also agreed, based on the submissions received, that Australians want a fair share of the LNG pie; despite not growing the wheat, milling the flour, kneading the dough, picking the fruit, or even turning on the oven.

“The committee received substantial evidence that Australians want to receive a fair return for Australia’s gas resources, and a range of proposals were put forward. The committee received evidence from gas industry representatives that the current tax settings are sufficient.”

Normally, when I haven’t done any of the work, I expect my fair share to be zero.

But Australians have developed a powerful sense of entitlement to a share of the profits of specific industries. What about Pigouvian taxation?

A better way to justify a hefty gas tax is as a “Pigouvian” tax. The name comes from a long-dead luminary, Arthur Pigou. Pigou may have got his name attached to the idea, but it’s not particularly profound.

When something has bad impacts that are not properly reflected in the price, then a tax provides either the money to ameliorate those impacts and/or the incentive to reduce the activity. For example, cigarette taxes reduce smoking; a carbon tax is designed to reduce carbon dioxide-producing activities; a meat tax, if we had one, would pay for the hospitals and oncologists required to treat bowel cancer and other adverse health impacts, possibly also reducing meat consumption. It would also contribute to reducing climate impacts by paying to reforest the land deforested for grazing.

That’s a much clearer and more rational justification for a tax on LNG than simply feeling entitled to the fruits of somebody else’s labour. Indigenous people call it “Sit-down money”. It’s a terrific description.

The current PRRT is the opposite of a Pigouvian tax.

It was designed decades ago to encourage the growth of the gas industry. If you are investing billions to build a gas liquefaction train, for example, it takes some years before you are making money, and even more years before you break even and are making a profit. The PRRT doesn’t kick in until you are making serious money. That’s what you do when you want to grow an industry.

Delhi has around 33 million people and an average daytime summer high of about 40 degrees. Riyadh and Baghdad are even hotter. As the climate gets hotter, we can perhaps argue about when we need to stop leaving gas in the ground, but not if.

Unfortunately, our anti-nuclear movement (of which I was once a member) has left us no chance of phasing out gas. More on that later.

Is “Tax resources not work” sense or nonsense?

Dig a little deeper behind the call for us to get a fair share of gas profits and you find a fairly fashionable theory that says we should “Tax resources, not work” (TRNW). It’s usually big companies that are the primary exploiters of resources, so the theory is basically an argument for slugging them (big companies) rather than us.

The concept goes back to another long-dead economist/philosopher, Henry George, 1839-1897, with land being the resource of most interest. He reckoned you should tax land rather than the improvements made to it by work.

Apply this land taxation principle to LNG, and the yield would be next to nothing, because the land footprint is tiny while the work done to produce the gas is of a scale and complexity that is hard to comprehend. The cost of an LNG hub, typically in the billions, or even the tens of billions, should be a clue that this isn’t like sticking a sieve in a stream and collecting gold.

Gold, as a resource, was always a terrific example of the theory that resources should be taxed heavily. All you needed to collect it was a pick, shovel and perhaps a pan. Wood is similarly simple. All you needed for most of history was an axe.

Consider such examples, and it does indeed seem quite reasonable to tax the hell out of resources with a high value which are simple to exploit. Our intrinsic human instinct for fairness judges big rewards for little effort as wrong.

A recent Australian Financial Review (AFR) article “Inside the online army fighting the gas tax war (and it’s not over)” quotes an online site “Punter’s Politics” asserting:

“Australia has a lot of gas, and we’re giving it away for free and corporations are making billions of dollars from it and not paying any tax.”

This kind of clickbait disinformation appeals to precisely this instinct for fairness; while relying on people being too lazy to check the facts. But more annoying than the blatant dishonesty of the “not paying any tax” claim is the omission of any mention of the skills and effort required to produce and export the gas.

If your idea of hard work is making a podcast, then you’ll have a hard time appreciating the work required to produce natural gas or many other resources.

Consider rare earths. This is a set of fairly common elements which are used for all sorts of advanced products. Surgeons with a Thulium fibre laser can cut with extreme precision and almost no bleeding. These lasers are also used to detect wind turbulence around airports. The particular wavelength of these lasers makes them incredibly “eye-safe”. The complexity of the processing to make Thulium means the price is up to US$6,000 per kilogram.

The path from the ore you dig out of the ground to the pure material that you need is long and non-trivial. That’s what makes rare earths rare. It is this complexity that has allowed the Chinese to wield their processing supremacy in rare earth production as a potent geopolitical weapon. And it isn’t just the money. The rare earth market is tiny; the power of their actions is that there are (in many cases) no alternative suppliers; regardless of how much you are willing to pay.

Similarly, gas extraction is rarely simple these days. You don’t just need billions of dollars; you need to build the teams to do the jobs. And the processes are heavily dependent on a vast range of skills and advanced materials. TV broadcasts love to picture offshore drilling rigs, but it’s tough to capture the complexity of what is happening on those rigs.

They aren’t just drilling a hole. The “hole” can go sideways for 5 or more kilometres. The basic problem is to spin a cutter that is 5 kilometres away from its power source. While all the while feeding back information about exactly what is happening at the drill head.

Where does the information come from? Pretty much all geology is radioactive and produces gamma rays. Measure these accurately, and you can build a picture of the nature of the geology. A detector mounted just behind the drill bit measures the radiation, amplifies the signal and transmits it back to the surface where computers analyse it and direct the drilling. How is the information transmitted? That in itself is a dazzlingly complex story. And no, there isn’t a fibre optic or electrical cable sending back information. That’s enough. The podcaster’s image of gas being “given away” makes it sound like somebody on a truck handing out free beer.

TRNW just doesn’t seem appropriate when resource extraction takes so much work. The term “windfall profits” in such cases is profoundly misleading.

Gambling and gas taxes

But the downside of any heavy tax on LNG is, surprisingly, the income itself. Income without work is addictive. Which wouldn’t be a problem except that we know we have to get rid of fossil fuels. Getting rid of something is far easier if you don’t depend on it to build your schools and hospitals, and to fund your Pharmaceutical Benefits Scheme (PBS).

Consider gambling. The greyhound industry is a frequent subject of media exposure, typically, people kicking dogs or blooding dogs with live animals and so on. In South Australia in 2025, this dismal and cruel industry managed, during racing, to kill 5 dogs, cause serious injuries to 316 among the 1,064 injuries considered serious enough to report to racing stewards. Pretty much every dog in the industry will be seriously injured during racing. Why doesn’t the Government ban it? I’d reckon it’s because the tax income from gambling on greyhounds delivers $43.8 million into SA Government coffers annually. The problem is even bigger in the bigger states.

It isn’t only gamblers that can become addicted to gambling; Governments can get hooked too, on the revenue.

Consider Woodside, a fossil fuel producer. It has a large LNG project, Browse, fighting for approval at the moment off the northern WA coast. It has been in the pipeline for half a century in various forms. The current plans involve a $30 billion project which will pay an estimated $56 billion in taxes over its lifetime while adding $140 billion in Gross Domestic Product (GDP). For a politician, and for those on the receiving end of the services that $56 billion can deliver, these numbers are like a whale carcase to a shark.

Gas is a transition fuel, to more gas

The ace in the hole for the gas industry is the necessity of backing up (aka firming) renewable energy technologies.

Woodside as you might predict, is spruiking the renewable firming ability of gas in ads running in many places. They paraphrase this quote from Meg O’Neill, until recently the Woodside CEO:

“Gas is needed to enable Australian industry, including the critical minerals required for electrification, and as backup to renewables when the wind doesn’t blow and the sun doesn’t shine,”

But, surely this is just gas industry propaganda?

Unfortunately not.

Below is a graph of South Australia’s electricity use over the week ending on May 11th, when I started writing this piece. Yes, I know, I’m slow.

You can see that the demand (look at the left axis) for most of the week was a little under or over 1,500 megawatt (MW); peaking at about 2,000 MW.

Surely we have enough renewable capacity to satisfy such a paltry demand? After all, we have 2,800 MW of rooftop solar, 600 MW of utility solar, 2,700 MW of wind power and 1,100 MW of (mostly) 2 hour batteries. But that 7,200 MW of capacity failed to deliver adequate electricity for almost the entire week. All that purple and orange on the graph shows exactly how much of the time the wind wasn’t blowing and the sun was either behind clouds or totally absent. In summary, 7,200 MW got us about half of what we needed when we needed it.

At this time of the year, a week like that isn’t particularly surprising. Instead of 2 hours worth of 1,100 MW batteries, we’d have needed about 100+ hours worth of such batteries.

Keep in mind that the prospective owners of such a fleet of batteries would have trouble meeting the loan repayments to buy and install said batteries for about 6-8 months of the year, when almost all these batteries would be doing nothing. Despite astonishing price falls, batteries are still extremely expensive and don’t last very long.

All of which makes gas the obvious second-best solution for firming.

The implication is obvious. While any Government is free to spruik renewables as loudly as they like, they also have to do whatever it takes to keep vast amounts of gas flowing. Hence the two faces of Chris Bowen: climate advocate and fossil fuel aficionado. Being anti-nuclear, he has no choice but to love gas, coal, or both.

[Edit: On May 23 I downloaded the SA data starting from the same date as the first graph, but continuing on until 23rd of May. i.e., 18 days worth of data. Here’s the result.

The OpenElectricity website supplied the data, and I plotted it with my own R code. It looks a little different, but the bottom line is the same; the orange shows the shortfall. The top brown line is the demand and the green line is the wind+solar supply. Nothing much has changed, our 7.2 gigawatts of wind+solar+batteries leaves us short, on average, about 16 gigawatt-hours per day.

What would happen if we built twice as much wind+solar collection as we have now?

We’d still need gas, and the electricity we’d curtail (dump) would be enormous. And yes, I did check this claim numerically against those 18 days of data. ]

So now you probably understand why SA Premier Malinauskas is wanting to overturn a decade long moratorium on gas fracking the South East of SA. It’s quite obvious that as Victoria and NSW phase out coal (eventually), they won’t be able to bail us out on still nights; so we will need more gas. And, obviously, gas in your backyard is far more useful than gas in far north WA or Queensland. Ironically, the move to lift the fracking moratorium is being opposed, not just by the Greens, but by the party with the most climate deniers: One Nation.

[Aside: Most of “our” gas is exported as LNG and is incredibly valuable as an earner of US dollars to keep our dollar strong enough to buy what we need. I’ve written about this recently.]

Beyond slogans and knee jerk populism

There is plenty of public momentum behind a 25% LNG export tax, despite it not having the support of people who actually understand the industry deeply. The AFR interviewed a few such people in the article I just linked. The article’s headline in the paper edition says it all: “Online army is winning the gas tax war”. The web, coupled with AI and the power of angry podcasters playing nationalist lines about “our gas”, is potent.

The online army wants to solve a simple problem: How to stick it to big greedy businesses stealing our resources.

But that’s not the real problem. We actually have three problems, and none of them is trivial.

1. How do we find a replacement for gas?

2. How do we replace the billions of dollars in company and personal income tax revenue which gas companies currently deliver?

3. How do we find jobs for the thousands of people that the gas industry employs?

Let’s think about them in order. Australian Energy Statistics (Table A) shows that of the gas used domestically, only about 1/3 is used for electricity. But that third is expected to grow. Australian Energy Market Operator (AEMO)’s 2024 Integrated System Plan (ISP) has it tripling by 2044 (CDP3). I haven’t checked the most recent ISP. The rest of the gas is used for a bunch of things that are pretty hard to eliminate, with one exception. About 20% of our gas used domestically is used during the process of cooling the LNG for export. There’s some gas used domestically for heating, for mining, the chemical industries, plus paper production. Decarbonisation means tackling a bunch of hard problems. Among the skills that are totally useless in solving any of these problems are producing podcasts, blogs, PR campaigns, YouTube/Instagram clips and everything else that is currently being used to sell the 25% tax.

The money problem is as hard as we make it. The more we tax, the more replacement industries we need to create. Keep in mind that not every kind of wealth generation will work as a replacement. It is export industries that prop up the Australian dollar, and as, or if, the dollar loses value, it gets harder to buy the stuff we need from elsewhere; be it solar panels, wind turbines, iPhones or podcast cameras and microphones, not to mention EVs. This is a tough problem because we have run down many of our manufacturing skills, and it’s much easier to dismantle such things than to rebuild them. The skills of other countries have advanced, and Australia has gone backwards. The Harvard index of Economic Complexity ranks us at 74; behind India, Turkiye, Vietnam and Mexico, for example. This reflects the sparse nature of our industrial base. We have world-class medical and pharmaceutical scientists, but most of the companies involved, other than CSL, are million-dollar rather than billion-dollar companies. They won’t help us fill a multibillion-dollar hole that a gas phase-out would bring.

As for the employment issues. We don’t typically, and shouldn’t, let these dictate policy too much. Some gas industry people are highly specialised, others have trade skills that will be in high demand for AI data centres, or, perhaps, those replacement industries.

A tough path forward

So how should we tax gas?

That will depend on when we have a strategy for replacing it.

Once we have that, then we can tax it according to a phaseout timetable, keeping in mind that any additional tax will mostly result in a rise in the price, and our gas-buying customers will definitely not be happy. The decision to get rid of gas would be far easier if it were internationally agreed. But the prospects of this look dim for now.

So our best path forward will be to ramp up our uranium production and start building nuclear plants. All our trading partners already have nuclear plants, but the prospects for a gas phase-out will only become realistic when we all have enough reactors to remove the need for gas to firm any renewables in the grid.

We also need to prioritise reactors that can deliver industrial process heat as well as electricity. If that all sounds hard, that’s because it is. Of course, we can always rely on a podcaster/social media lead industrial revolution with their simplistic slogans and Clayton’s solutions. There’s a saying in mathematics that for every hard problem, there’s a simple and elegant solution which will fail dismally.

This article was contributed by Geoff Russell, one of our members.

Geoff Russell has qualifications in mathematics and is a published author, as well as a lifelong environmental and animal justice advocate. The original article can be found here.