Gas, taxes, and wishful thinking

I've been away from Australia for a week and it seems in that time, the chorus of special interests seeking a 25% export tax on gas is at a crescendo. Perhaps that's just because the Senate Select Committee on the Taxation of Gas Resources (the Committee) is now in full-swing; or perhaps it's because the war in Iran has sent oil and gas prices close to all-time highs.

Whatever the reason, many people are out for blood and the campaign against Australia's gas exporters seems to have support all the way down to the bottom, as evidenced by this bumper sticker I saw almost as soon as I got back.

This sticker is a great example of a false equivalence: comparing apples with oranges. It ignores the fact that Norway exports twice as much oil and gas as Australia, and that most tax from oil and gas in Australia is collected via the company tax, which is omitted from the sticker. Norway's headline gas tax is also on profits, not revenue, and is paired with significant direct state equity via a joint-venture structure that shares the massive up-front capital risk.

Basically, Norway's oil and gas tax regime – which was transparently communicated up-front – was designed to capture rent from projects that make money and leave marginal ones alone. Australia does the same, at least at the federal level (Western Australia and Queensland collect some revenue-based royalties from onshore projects), with oil and gas tax primarily collected through company taxes and the Petroleum Resource Rent Tax (PRRT, a much weaker profits tax than Norway's).

But the person proudly displaying such a prominent bumper sticker probably gives as much thought to tax policy as they do their rear view mirror when backing up, or parking between the lines. But they still vote, and the rhetoric spewed by the guy on the bumper sticker and his backers from the Australia Institute (whose points he's simply re-branding for a younger audience) deserve scrutiny.

So, let's go straight to the source: Richard Denniss, co-CEO of the Australia Institute. Earlier this week he told the Committee that a 25% tax on Australian gas exports would deliver cheaper gas, more gas, and $17 billion in new Commonwealth revenue:

"My prediction is the [wholesale] price of gas would fall by 24.99%... because all of the gas companies will be competing to sell a molecule to anyone they can that's tax free… Economics never got better for Parliament than an export tax."

Let's start with the basic arithmetic. If the domestic wholesale price really falls 24.99% because every exporter redirects to the domestic market to dodge the tax, then export volume also collapses. Either the gas keeps being exported (revenue up, domestic prices unchanged), or it redirects (revenue down, domestic prices fall). It's just not possible to collect $17 billion from a tax that succeeds in making exports disappear.

Then there's the geography. Most of Australia's LNG exports come from Western Australia, which is also home to 90% of its conventional gas reserves. Yet most of the domestic demand lives in the South East; the "molecule" Denniss mentions can't physically reach a Sydney manufacturer without thousands of kilometres of expensive new pipelines, or a huge investment in LNG import terminals. Queensland's Gladstone projects can supply that market, but the domestic pipeline is already at capacity during winter and the projects are over-contracted relative to their own reserves. Claiming that "they'll just sell to Australians instead" assumes a flexibility that the pipelines and the long-term offtake contracts do not allow.

As for the consequences of the tax, existing projects might keep going through the pain in the short run because their significant capital costs are sunk, so they'd push on until revenue net of tax falls below variable costs (what economists call the shutdown point). But the damage to future investment would be severe. A retrospective tax grab on capital-intensive, highly specific (i.e. immobile) assets signals to every potential investor that Australia's fiscal terms are up for renegotiation once the money is committed.

But that's not a secret. In fact, at the September 2025 Senate inquiry into climate risk, Denniss was candid about what he actually wants:

"I would argue we don't [need more gas]... according to the UN secretary-general and according to the International Energy Agency, to have any chance of keeping the world at 1.5 degrees we need no new gas and coal developments anywhere in the world."

Denniss is entitled to that opinion, even though it sits uneasily alongside his support for a renewables-heavy grid, which needs gas peaking for firming.

It's also incompatible with a tax that's supposed to expand domestic supply while raising $17 billion in new revenue. But that's the whole point. A 25% tax on gross export gas revenue will hit whether a project is profitable or not, kill marginal projects first, deter future ones from ever reaching a boardroom, and undermine Australia's ability to attract foreign capital, whether for energy or manufacturing or anything else.

This isn't just a gas problem. A retrospective 25% export gas tax raises the sovereign-risk premium on every long-lived, capital-intensive Australian project, whether that's critical minerals, hydrogen, pumped hydro, or manufacturing (all part of the government's "Future Made in Australia"). That raises hurdle rates, reduces investment, and erodes the capital base on which productivity growth depends.

Regardless of what you think about gas companies and the "deal" they got from the government back when these projects were committed (amidst considerable uncertainty), a 25% export tax on them now would carry consequences that damage living standards for decades.

Disclosure: I own no oil or gas company shares other than those held in diversified index and managed funds, and receive no funding from any group associated with the sector. The Australia Institute and the politicians pushing this tax are funded in part by groups opposed to fossil fuel development. Readers can weigh that accordingly.