There are some days when an economist can only shake his head in appalled wonder.
After the shock jump in monthly inflation on Wednesday, Treasurer Jim Chalmers said the government was still weighing up whether to extend the federal subsidy that is due to expire next month.
…National Australia Bank chief economist Sally Auld said there was a time and a place for rebates, but the money could now be better spent on the energy transition.
…Liberal senator and opposition spokesman on finance, James Paterson, said “The government can’t subsidise and pay people’s energy bills in perpetuity,” Paterson said. “So at some point he’s going to turn off the tap, and Australians are going to feel the full extent of the energy policy failures on this government’s watch.”
Finance Minister Katy Gallagher downplayed the prospect of the federal energy subsidies being extended beyond their December expiry.
Economist and ex-RBA board member Warwick McKibbin said incoherent climate and energy policy over the past 20 years caused a jump in energy inflation, due to a lack of planning to replace ageing coal-fired power stations.
“The cost of energy is showing up in the inflation data and no matter how many energy subsidies you throw at it, it won’t take away the underlying inflation in the economy.”
Err, yes, it will. The issue at hand is not the rebates. It is $10bn in gas cartel war profiteering on the East Coast. That is what is driving power prices higher and why rebates were neeed in the first place.
Moreover, the rebates do curb inflation if they are permanent, and they can be.
The Albanese government briefly considered imposing a levy on east coast LNG exporters as part of its sweeping review of the domestic gas market, stoking fears about its appetite for intervention.
According to senior industry figures familiar with confidential discussions, departmental officials floated the idea earlier this year during private consultations with gas executives, with the concept initially pushed by the Australian Council of Trade Unions.
While the levy option was short-lived and now appears to have been shelved, its appearance in the policy mix has deepened industry fears that the government’s appetite for intervention is broader than it has signalled publicly.
“Everything we have been told suggests a reservation policy is the one that will be announced, but you can never rule out a surprise,” one industry figure said.
“There are plenty of examples of policy rushed out. But I think the government understands a levy would have the opposite impact of what they say they want, which is more supply.”
Apply a levy large enough to cover the cost of the rebates, and you have, in effect, delivered yourself a gas reservation policy.
Economists’ unwillingness to acknowledge this indicts their personal motives.
Nor will an export levy reduce supply. If the government applies a 100% export levy above a certain price, the local price will fall to that level, and gas producers will increase supply to offset the reduced margins.
This will occur as long as the government remains steadfast in its determination.
An alternative is a super-profits levy based on a sliding scale linked to domestic gas sales. The less you produce for local sale, the more you pay in levies on exports.
This is what Peter Dutton had in mind.
The argument against this is efficiency. Which approach is most efficient and least susceptible to gaming?
I would say a 100% export levy imposed on every export dollar above $7Gj is the best approach, owing to its simplicity, the impossibility of gaming, and the fact that rebates can just be scrapped.
Most East Coast gas is produced much more cheaply than this. All-in costs and sunk capital have long since been written off, so the table below significantly exaggerates cash price breakevens.
If you are worried about a supply strike, which is unreasonable since the local price is effectively set at $7Gj by the export levy, then lower the 100% export levy threshold to $6Gj for anyone who decreases production as a “use it or lose it” provision.
Let’s not forget that $7Gj before COVID, $7Gj was considered extortionate and is well over double the long-term local gas price. It is now $14Gj and $18Gj for industry. These prices represent extreme economic rent-seeking and war-profiteering.
To repeat, implementing a 100% export levy set at $7Gj would provide a $10bn boost to the budget, eliminate East Coast inflation and electricity rebates, significantly benefit industry without requiring bailouts for metal processors, greatly improve household budgets, enhance productivity, and realign the energy transition with its goals. It is the no-brainer reform.
The gas market has failed. The LNG producers lied that they had enough gas. Everybody else is paying for it.
Only a solution as large, simple, and forceful as the cartel will resolve this issue.
