The usual trade-off between maximising revenue while protecting industry’s long-term future no longer applies
That’s the headline and standfirst for my latest piece in The Guardian, looking at revenue options for the coming Queensland Budget. It’s over the fold
After dealing with multiple natural disasters, and facing the need for huge investment in an overloaded electricity system, it’s not surprising the Queensland government is in search of extra revenue ahead of next week’s budget. The obvious source, already flagged by the treasurer, Cameron Dick, is an increase in royalty rates for coal.
These rates, set on a sliding scale according to the price of coal, have been frozen for the last 10 years, as promised by the Newman LNP government after a small increase in 2012. With the 10-year freeze now expired, resources groups are lobbying intensely for no changes to the existing regime. But there is a logical case for increasing royalties on coal, which is currently trading at spectacularly high prices.
For most commodities, the high prices we are now observing would be a signal of favourable prospects. For coal, it’s the opposite. World coal consumption peaked in 2014, and is predicted to decline steadily over the next decade. Many countries have already ended the use of coal to generate electricity, or will do so in the next few years. Metallurgical coal, used in making steel, will last a bit longer. But the coal-based blast furnace technology is already facing the prospect of replacement by coal-free techniques using renewable hydrogen.
While coal demand has flattened out, new investment in coalmines has dropped far more rapidly. Investors can see that there is no long-term future in coal. Witness BHP’s inability to sell its Mt Arthur coal mine, which it announced on Thursday would close in 2030. Meanwhile, global financial institutions have abandoned the industry, pledging not to finance or support new coalmine projects.
In these circumstances, there is only limited supply response available to meet temporary increases in demand, like those arising from the strong economic recovery after Covid, followed by sanctions imposed on Russia. The result is the sharp increase in prices we have seen recently.
Coal is on the way out, but a good deal of money can be made in the meantime, while high prices last. Most major corporations, with a long-term future in mind, have abandoned the industry. Those that remain need to reap profits fast, which is why they are more determined than ever to resist any increase in taxation.
But the same analysis applies to royalties, the price paid by miners to the public as owners of the coal resource. Usually there is a trade-off in setting royalty rates, between maximising revenue while protecting the long-term future of the industry. However, this no longer applies. Investment in new coalmines is in long-term decline, whether or not royalty rates are increased.
Queensland’s focus must be on gaining additional revenue while export demand remains strong and using it to transform our energy system. The transition to a carbon-free energy system will require big capital expenditures. In particular, public investment in carbon-free energy through CleanCo needs to be greatly expanded.
As well as decarbonising our own electricity grid, the government needs to plan for the future of regions which currently rely on coal exports as a major source of employment. Many of these are well suited to produce solar, wind and hydrogen.
From the government’s viewpoint, the impending decline of coal is both a challenge and an opportunity. The challenge is the need for a transition to a future beyond coal, both as a source of energy in Australia and as a major export commodity. The opportunity is to use the current period of high coal prices to finance the transition to a decarbonised economy
John Quiggin 
It is very difficult to think of an argument against your policy proposal, I should think.
A few days ago I read an article in der spiegel online about Algeria’s plan to increase natural and LNG gas production now to make hey from the high gas prices due to the EU countries’ enormous demand for gas supplies other than from Russia. Their plan is none other than using the increased revenue to construct solar farms, with the financial and technological involvement of EU countries, to participate in the decarbonisation of economic activity. That is, they want their own economy to become as close to independence of fossil fuel exports as possible and instead export clean energy – electricity and hydrogen to EU countries. .
The royalty rate could be steeply progressive (in relation to the market price), turning it into a windfall profits tax. Conversely the rate on low prices could be below the current rate, providing a cushion for producers to soften the inevitable future decline.
It all happened yesterday.
Whats the latest on Adani?
“While coal demand has flattened out, new investment in coalmines has dropped far more rapidly. Investors can see that there is no long-term future in coal.”
And yet NSW government entities keep accepting to assess and approve more coal mine extensions, like for example:
* Ashton South East Open Cut – Mod 1, L&EC Approved 27 Aug 2018, 3.6 Mt/y ROM;
* Maxwell Underground Coal Mine, IPCN Approved 22 Dec 2020, 8.0 Mt/y ROM, to 30 Jun 2047;
* Glendell Continued Operations, IPCN Assessing, 10.0 Mt/y ROM, to 2044;
* Mangoola Coal Continued Operations, IPCN Approved 26 Apr 2021, 13.5 Mt/y ROM, to 31 Dec 2030;
* Mt Pleasant Optimisation, IPCN Assessing, 21.0 Mt/y ROM, +26 years;
* Mount Owen Continued Operations – Mod 5, DPIE Approved 15 Jan 2021, 10.0 Mt/y ROM, to 31 Dec 2037;
* United Wambo Open Cut Coal Mine, IPCN Approved 29 Aug 2019, 10.0 Mt/y ROM, to 31 Aug 2042;
* Bulga Optimisation Project – Mod 3, DPIE Approved 17 Jul 2020, 12.2 Mt/y ROM, to 31 Dec 2039;
* Bulga Underground – Mod 7, DPIE Approved 17 Jul 2020, 14.0 Mt/y ROM, to 23 Feb 2031;
* Vickery Mine Extension, IPCN Approved 12 Aug 2020, 10.0 Mt/y ROM, to 12 Aug 2045;
* Wallarah 2 Coal Mine, IPCN Approved 16 Jan 2018, 5.0 Mt/y ROM, to 16 Jan 2046;
* Dendrobium Extension, NSW Gov declares it an SSI after IPCN Refusal, 5.2 Mt/y ROM;
* Tahmoor South Coal, IPCN Approved 23 Apr 2021, 3.0-4.0 Mt/y ROM, to 31 Dec 2033;
* Angus Place West, Prep EIS, 2.0 Mt/y ROM, to 31 Dec 2042;
* Narrabri Underground Mine Stage 3 Extension, IPCN Approved 1 Apr 2022, 11.0 Mt/y ROM, 31 Dec 2044;
* Wilpinjong Extension, IPCN Approved 24 Apr 2017, 16.0 Mt/y ROM, 31 Dec 2033.
These are just some examples for NSW. Is it any different in Queensland?
The Australia Institute’s report One Step Forward, Two Steps Back, published Mar 2021, includes on pages 6-7:
I completely agree with regard to coal, but would like to point out that situation with regard to gas royalties are even more outrageous. Gas companies routinely don’t pay royalties at all on some projects, and use a variety of tax evasion techniques like transfer pricing, deduction trolling and so on to evade paying a fair rate for others. Australia gets about 1bn in royalties from the gas sector, compared to Qatar’s $20bn – even though we produce more of the stuff.
In short, the export gas sector doesn’t really employ any more people than the old domestic-only industry, pays less tax, imposes all sorts of additional environmental and social and land use costs, charges locals far, far more to buy back their own product, which they often didn’t pay for in the first place and can’t guarantee a consistent supply of since the foreign market comes first.
The best solution to the gas crisis is for the federal government to buy back all the export ports and then blow them up with dynamite.
At the very, very least we should adopt an old – 500 years old or so – Danish tax approach to eliminate transfer pricing. At the moment gas companies estimate their own product value “at the well head”. So they might say – our gas is worth $5 a petajoule when it comes out of the ground. We’ll pay our 10% royalty; you get 50 cents. Then they sell the product to a shell company in the Netherlands and another in the Caymans before selling it to the final user in Japan for $500 a petajoule.
The solution to this is to simply give ourselves the right of first refusal. If a gas company says their gas is worth $5 a petajoule, the government should be able to just buy it at that price, on the spot, no negotiation, no ifs, no buts, hand it over right now. We’ll have it.
(This applies only to state royalties; there’s a different rule for federal ones).
JQ, I preferred today’s piece; “The national electricity market is a failed 1990s experiment. It’s time the grid returned to public hands”
Heresy for Milton the Monster who is used to illustrate the ‘correct’ mix of market incentives at ‘our’ privatized transmission group “Energy Networks Australia”. As JQ said “At the same time, the Australian electricity grid should be returned to government ownership and operation.” (^1.JQ)
And seriously, you couldn’t make this up… “Six drops of the essence of terror. Five drops of sinister sauce …”. Zombie Transmission Monopoly Mascot “Milton the Monster”, also has associated zombies “Zelda the Zombie” and “Abercrombie the Zombie”.
AEMO market failure is a Zombie due to “natural profit tendencies” as shown here by what ‘our’ privatized transmission group “Energy Networks Australia” has to say; …”To date, getting prospective generators, which are driven by natural profit tendencies, to cooperate within confidentiality constraints has been a fraught process.”
The above is from “Energy Networks Australia” ENA (“the national industry body representing Australia’s electricity transmission and distribution and gas distribution networks”)
ENA have used the ironically appropriate cartoon “Milton the Monster” …”a Frankenstein-looking monster with a flat-topped, seemingly hollow head which emitted various quantities of white steam or smoke based on his mood or situation.” Wikipedia below.
Milton the Monster is used to illustrate the ‘correct’ mix of market incentives.
…
“…and profit driven imperatives.”
“Will the Plan’s balance be right?
” “Six drops of the essence of terror. Five drops of sinister sauce …”
*
Above from;
“They said what? AEMO’s Integrated System Plan submissions
5 APR 2018
….
“The free-market versus centralised planning ‘balance’
“Since its inception in 1998, the NEM’s most important features are the basic tenets of competition, de-centralised decision-making and network monopoly regulation.
“Fans of Milton the Monster will recall the importance of proportion to getting a formula exactly right; too much of one thing and not enough of the other makes for a rather ineffective, imbalanced beast.
“The challenge for the Plan is to get a practical and optimal balance between collaborative and coordinated approaches among NEM participants and profit driven imperatives.
“Will the Plan’s balance be right?
” “Six drops of the essence of terror. Five drops of sinister sauce …
“Now for the tincture of tenderness,
“But I must use only a touch …”
“Getting generators to co-operate … crucial to the Plan’s success?
“To date, getting prospective generators, which are driven by natural profit tendencies, to cooperate within confidentiality constraints has been a fraught process.”…
…
https://www.energynetworks.com.au/news/energy-insider/they-said-what-aemos-integrated-system-plan-submissions/
*
^1. JQ today:
“The national electricity market is a failed 1990s experiment. It’s time the grid returned to public hands”
https://theconversation.com/the-national-electricity-market-is-a-failed-1990s-experiment-its-time-the-grid-returned-to-public-hands-185418
*
JQ re transmission & distribution cost to market, equities, bonds vs public rates.
15 March 2001
“Market-oriented reform in the Australian electricity industry ”
John Quiggin
…
…”Large capital-intensive enterprises operating in highly regulated markets with considerable monopoly power are least suitable.
“In the context of the National Electricity Market, the breakup of integrated monopoly suppliers has produced enterprises with radically different characteristics. … On the other hand, transmission and distribution activities are natural monopolies requiring continuing regulation. …. A major source of difficulty is the fact that transmission and distribution assets account for the majority of the capital value of the industry, while the market value of publicly-owned retail assets is negligible.”
Concluding Comments
…” Some problems, however, are likely to become more rather than less acute. The
Australian National Electricity Market … It remains unclear whether an electricity auction market can produce adequate incentives
for investment while generating appropriate prices for consumers. Similar problems are emerging in relation to the regulated monopoly component of the industry, the transmission and distribution sector. Regulators must set prices that do not reward inefficiency or allow monopoly profits, but nevertheless provide appropriate incentives for new investment. This is a delicate balance.”
…
https://www.researchgate.net/publication/37616206_Market-Oriented_Reform_in_the_Australian_Electricity_Industry
*
JQ in Zombie Economics / Privatization; “Bookblogging: Privatization (Part 2)
JANUARY 15, 2010
JOHN QUIGGIN4
8 COMMENTS
From: …”draft MS of my Zombie Economics book”…
…
“When this sum is used to repay debt, bearing an interest rate of 4 per cent, the resulting saving in interest will be 40 million pounds per year. In net terms, the public is worse off by 60 million pounds per year.
“Exactly the opposite calculation applies in relation to nationalization. If nationalized and privatized firms are equally profitable, governments can issue debt to finance nationalization, and receive profits more than sufficient to service the debt.
“This argument does not depend on the relative size of governments and capital markets. The greater capacity of government to spread risk arises from the taxation power, which also facilitates borrowing and lending to smooth consumption over time.”
…
https://johnquiggin.com/2010/01/15/bookblogging-privatization-part-2/
*
JQ’s 2017 crystal ball:
…
“(a) The National Electricity Market has failed, and requires radical restructuring”
https://johnquiggin.com/2017/09/12/how-to-replace-the-national-electricity-market/
*
Milton the Monster
. ..”The series starred Milton the Monster, a Frankenstein-looking monster with a flat-topped, seemingly hollow head which emitted various quantities of white steam or smoke based on his mood or situation.[3]
wikipedia.org/wiki/Milton_the_Monster
*
“Asked on the 2020 campaign trail in Cairns if he was “ruling out new or increased business taxes”, Mr Dick said: “There will not be any increased taxes, we have said that very clearly from the start, no new taxes from the Labor government if we are re-elected.”
In fact, the unconditional promise was no new taxes for 4 years. Of course there are promises and there are “core promises”. And given the rise in coal prices a promise it isn’t really reasonable (is it?) to call it a promise (is it?). Mr Dick claimed the “promise” was not intended to include business taxes so there are also new gaming taxes and a levy on business to support mental health.
A difficulty of course is that no business in their right mind will now trust the undertakings of the Queensland Government. But that probably isn’t much of a problem since they presumably never trusted them at all. In addition, firms like Pembroke Resources who are not looking at the phasing out of coal as John suggests. They had a sod-breaking ceremony for their coking coal deposit only two months ago at Olive Downs and have invested $450m without, so far, earning a cent.
If you want higher taxes I would prefer a resource rent tax announced in advance so that in a cyclical industry such as coal firms can compute the expected effects of taxes on their bottom line in good times and in bad times. Coal prices vary cyclically and it is wrong to assume the current strong prices will last forever. Of course if you want the coal industry to be closed down tomorrow and for coal that we currently export to be supplied to developing countries from other countries then the Queensland tax is no problem at all – if anything it should be higher.
Harry,
You are out of step with reality. Climate change is an emergency right now. Most people recognize this. However, the elites with whom you make cause continue to deny this and continue to wreck the planet. I hope we don’t delay action further. The consequences will be nightmarish.
A royalty is not a tax. A royalty is the price a company pays to purchase a mineral off the people who own it. In my view we should have set them at the maximum possible rate they could possibly be set at, 50 years ago. But at least if we do that today, we can stop the bleeding tomorrow, a bit.