Fossil fuel producers — and the state governments that are addicted to fossil fuel revenues — have spent recent days telling anyone who will listen that price caps on gas will be a disaster for Australia’s reputation as a safe investment destination, and will reduce investment incentives.
From the perspective of the urgent need to end our reliance on fossil fuels, that would be an excellent outcome. Choking off the development of gas projects is crucial to maximising our chances of keeping global heating below 2C. The insistence by big gas producers such as Woodside that they’re already reconsidering investment in new gas projects is great news.
Except it’s not true. It’s simply a rerun of the same “sovereign risk” hysteria that marked the industry’s response to a mining super profits tax 12 years ago. That’s when we were told mining investors would flee to the likes of Ghana, Zambia and Tanzania.
Pro-business outlets ran those claims uncritically back then and The Australian Financial Review is doing the same now.
Far less coverage was given to the point made by Treasury secretary Steven Kennedy last month when he (or, actually, his deputy, because he couldn’t be there) made the point to Senate estimates that high gas and coal prices “are leading to a reduction in the real incomes of many people, with the most severely affected being lower-income working households. The energy price increases are also significantly reducing the profits of many businesses and raising questions about their viability. In summary, the effects of the Ukraine war are leading to a redistribution of income and wealth and disrupting markets.”
The transfer of wealth from lower-income working households to fossil fuel company shareholders — most of them foreign — oddly failed to ignite much media concern (only Phil Coorey understood the importance of Kennedy’s remarks at the AFR). The threat to fossil fuel company profits gets far more attention.
The plight of smaller manufacturers forced to pay radically higher gas prices elicits more attention, but still comes a distant second to the hyping of sovereign risk.
Governments can respond to this external shock in a number of ways, Kennedy noted, but need to be careful they don’t add to inflation — which is energy price subsidies to consumers are a bad idea; whatever the intent of the subsidy, the result is more cash in hand for consumers, thus contributing to inflation via increased demand.
And that doesn’t change if the subsidies are sourced from a super profits tax on resource companies (which would be a reversal of the redistribution currently occurring), because subsidies are far more likely to be spent in Australia by low-income working households than investors either here or overseas, especially big institutional investors running retirement funds.
A gas price cap set at $12 a gigajoule would be above the price in place since 2011. It would be twice as high, or more, than the price that applied until 2015.
Strangely, prices at well below $12 didn’t act as a deterrent on investment at any point during the past decade. Nor did they prevent gas companies making solid profits, on which they paid little tax and no petroleum rent resource tax.
That’s why claims that Woodside, Santos and their international counterparts such as Chevron will stop investing are self-serving nonsense. They’ll continue to make ample profits, and continue to pay little tax, even under a price cap. Fossil fuel production will continue to expand, when it should be shutting down.
If anything, price caps will lock in fossil fuel production for longer than necessary. Allowing gas and coal prices to soar will accelerate decarbonisation, providing a greater incentive for investment in much lower-cost renewables. Capping those prices is an artificial leg-up to fossil fuels in the competition they are losing to renewables; in effect, it’s a case of governments saving fossil fuel companies from their own greed. No chance of them seeing that, though.
