Leading economists back Federal Government action to curb rising gas and electricity prices

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Reserve domestic gas equivalent to 15% of LNG production from each LNG export project (ie making the

Reserving a percentage of LNG production for domestic use is the most robust and practical approach to alleviating the domestic energy shortage, albeit it may take time to take effect. This could be supplemented by short-term subsidies for low-income households until prices come down. Regulating the already complex domestic market may distort energy production, have unforeseen effects, and have administrative costs.

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Increase taxation of resource rents for gas producers and use proceeds to reduce electricity and gas

The rise in international gas prices is a windfall gain for extractors of a national resource. Resource rent tax is one mechanism for sharing the windfall gains with the public.

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Reserve domestic gas equivalent to 15% of LNG production from each LNG export project (ie making the

International prices for natural gas and coal have soared in response to the impact on supply chains from the war in Ukraine. Domestic prices for coal and natural gas (outside of WA) have risen in parallel, which in turn has contributed to rising prices for electricity and gas at the retail level. Coal and natural gas producers are receiving windfall profits, whether they supply the domestic or international market. While investment decisions for existing coal and natural gas producers were made under then existing royalty and export licensing arrangements, they were also made on the basis of lower expected product prices. Reserving part of the output from gas wells for the domestic market would ensure domestic supply and at the proposed 15% share would also put downward pressure on domestic prices, directly for retail gas and indirectly for retail electricity. Importantly, this would help to keep retail prices closer to current levels, avoiding a difficult and unexpected burden for consumers.

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Reserve domestic gas equivalent to 15% of LNG production from each LNG export project (ie making the

Best of a list of uncomfortable choices. The WA policy seems to be tried and tested.

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Increase taxation of resource rents for gas producers and use proceeds to reduce electricity and gas

Picking a single policy from this list doesn't make sense, as Chalmers also makes clear in his statement that "any responsible government... needs to consider a broader suite of regulatory interventions than they might have considered in years gone by". My recommendation would be to utilise the following policies: (i) resource taxes (ii) windfall tax for oil and gas producers, given global energy price hikes (iii) the use of WA's 'trigger mechanism' to ensure there's supply to home-based consumers (iv) expand subsidies for renewables like solar, wind, hydrogen and battery storage The goal is to cushion Australians from the misery associated with a declining standard of living as energy costs rise, while at the same time providing an affordable alternative to coal, gas and oil and doing some heavy lifting to reduce our deplorable carbon emissions.

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Unrestricted cash transfers

Let price adjust to world price and give cash subsidies to low income households.. The biggest enemy of high energy prices is high energy prices.

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Government should not intervene

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Reserve domestic gas equivalent to 15% of LNG production from each LNG export project (ie making the

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Increase taxation of resource rents for gas producers and use proceeds to reduce electricity and gas

Increasing the taxation of resource rents for gas producers and using these resources to compensate lower income consumers for higher energy prices has the advantage of being less distortionary than many of the other options and less costly for the budget. Further, compensation/subsidies can be targeted to those who need them most rather than benefitting those who are well-able to afford higher energy prices. In the longer term, policies such as reserving gas for domestic use may be an effective approach for protecting Australian consumers (and businesses) from price hikes but in the shorter term it likely involves the breaking of international contracts with negative consequences for our relationships with countries in our region.

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Targeted support to vulnerable households

Given the nature of the energy shock, it is time to phase out non-targeted measures that act to control or lower the price of energy and move towards targeted support to vulnerable households. Income is of course one criterion to identify vulnerability, but should not be the only one. Other criteria should include housing quality, location and the composition of the household, as recently recommended by the OECD. In other words, government should rely on, and strengthen, social safety nets for vulnerable households.

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Unrestricted cash transfers

Western Australia's 15% reservation policy should be scrapped. It is roughly equivalent to an export tax with all the usual distortionary impact. Better to have high energy prices to encourage conservation and look after the environment. If necessary, unrestricted cash transfers would be a lower-cost way to compensate households. Earlier this year the WA government transferred $400 to all residential electricity accounts ? not an unrestricted cash transfer, but it is a move in that direction.

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Reserve domestic gas equivalent to 15% of LNG production from each LNG export project (ie making the

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Provide information to consumers on using less energy

The standard "no regret" response is to provide public goods, like additional information. Of course, that's not much comfort for many. There's also little comfort in starting a debate about "if only things weren't as market-driven" or "if only government would stay out". The reality is that we have poor outcomes that result from multiple poor choices that span decades. Ideally, when relative prices/technologies change, it occurs in a way that allows people to adapt. In this case, governments have stopped most of the early signals about adjustment, usually for political reasons, so now we face abrupt changes. And we haven't done the hard work to keep our taxation and transfer systems aligned with the way the economy now works, so it's also hard to protect the vulnerable.

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Increase taxation of resource rents for gas producers and use proceeds to reduce electricity and gas

Taxation of resource rents is a way of raising revenue to finance a number of the interventions suggested. It would be very important to enforce good compliance for this to work effectively.

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Reserve domestic gas equivalent to 15% of LNG production from each LNG export project (ie making the

Reserving supplies has worked well in many real-world cases, including WA.

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Targeted subsidies for low income consumers

Prices are high for reasons - they reflect scarcity in the market, they incentivise supply to increase, and the demand side to look for opportunities to reduce consumption (changing consumption patterns, looking for more efficient use options). Policies that subsidise demand won't solve the problem with respect to demand ? the artificially lower price may even increase demand and scarcity, thus the subsidy will be fully absorbed by high prices. The effect of increasing increase supply remains, but over the short term, it may only lead to small increases. Over the long term, we see increases in supply. Depending on the perspective to be taken (do we care only about Australians or not), a reservation for domestic markets of gas produced, can increase supply on the domestic market, and given the high profits currently to be made on the international market, I wouldn't expect companies to forego those opportunities because the need to deliver to the Australian market. The trick here ? as with a smart and targeted subsidy for low-income consumers ? to have a system that keeps incentives at the margin to play their role in getting consumers to use gas/energy more efficiently. That is, a subsidy should be a lump sum, and consumers should face market prices, at least for the "last units" they purchase (the marginal consumption). Similarly, forcing producers to sell "base" production at lower prices (via the domestic reservation) or to take part of the profit generated from those base levels, should not change incentives to increase supply if marginal units can be sold at market prices.

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Cap the price at which producers can sell gas domestically (for already agreed supply)

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Government should not intervene

Most of the options suggested would exacerbate inflation (e.g. subsidising energy bills) or merely cover it up rather than solving it (e.g. instituting price caps or pushing the government in other ways to become an energy-market middleman), or simply have tiny impacts (e.g. providing information to consumers about using less energy). The price-fiddling suggestions remind me of the failed Nixon price-fixing tactics of the early 70s. Consumers are not idiots, and they will work out that they're paying a lot for energy as prices rise and will naturally then have incentives to scale back their demand to the extent possible ? that is basic economics. I was tempted to select the domestic gas reservation option, as I think that's the best of a bad lot of options here, but another option that didn't make it to the list is to re-institute the suspension of the fuel excise tax. That would really help consumers (including poor ones) at the pump, which is where a significant fraction of energy budgets go and would not be inflationary. It's potentially quite an effective quiver in the government's bow at a time when it doesn't have many.

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Government should not intervene

Economic theory, and the experience of microeconomic reform in the 1980s, explain why Australian productivity and higher living standards are improved if we allow variations of international prices to also vary in Australia. This is as true for gas as for milk, grains etc which we export and for oil and other products we import. Further, the regulated price would be arbitrary, chosen in a context of much uncertainty about prices in the future. Legitimate society equity concerns for higher electricity prices, food prices, interest rates and so forth are best addressed by direct income transfers via the social security payments and the income tax systems. Arguably a better system of special taxation of the mining sector discussed in the Henry Review of 2010, and many others, should be implemented to increase the government share of above-normal economic rents generated by companies granted licences to mine Australian-owned deposits. For example, a 40% PPRT along with the 30% corporate income tax would return 58% of above-normal returns to the government.

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Increased resource rent taxation spent on keeping up the purchasing power of the poorest.

Increasing resource rent taxation is important to repair the budget. You don't want to interfere with prices as they give incentives, but you do want to shield the poorest from extreme hardship.

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Increase taxation of resource rents for gas producers and use proceeds to reduce electricity and gas

The tax revenue could be used to subsidise gas and electricity prices for vulnerable consumers and also to encourage the use of renewables.

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Domestic gas reservation in conjunction with increased supply as part of a deal with gas companies

These are all bad options. Cutting a deal for gas reservation plus increased supply is the least bad option.

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Cap the price at which producers can sell gas domestically (for already agreed supply)

The Russian invasion of Ukraine has created windfall profits for gas companies at the expense of Australian households. There are a number of ways this could be dealt with, but the quickest is to cap prices (this also avoids government having to collect and redistribute income). Ideally, government (federal and state) will also provide support for more energy-efficient homes and appliances and accelerate investment in renewables. We should be weaning off all fossil fuels as quickly as possible.

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Cap the price at which producers can sell gas domestically (for already agreed supply)

This is a short-term response only to ease the cost of living in the short term. Longer term action will require ensuring a smooth (and quick) transition to alternative renewable energy resources.

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Reserve domestic gas equivalent to 15% of LNG production from each LNG export project (ie making the

While I think the Government must reserve sufficient gas for the Australian market, I would also favour a price cap for that gas. Both measures are needed, and neither is sufficient on their own.

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Lift supply

The federal government needs a mixture of carrots and sticks to prevent state governments from obstructing the development of gas fields.

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Lift supply

Victoria and other southern states should follow Queensland's lead in allowing exploration and drilling for gas for domestic production. Page 43 of the International Energy Association's World Energy Outlook appears to show that although coal use will decline by 2050, the use of both natural gas and oil will remain strong through to mid-century. https://www.iea.org/reports/world-energy-outlook-2022 Renewable use will expand to allow for growth in energy use. What will result is an "all of the above " strategy will emerge, including all forms of energy, including natural gas, to supply future energy needs.

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Increase taxation of resource rents for gas producers and use proceeds to reduce electricity and gas

Such a hypothecated tax allows a share of windfall profits to be channeled to reduced energy prices for consumers, addresses both gas and electricity, and could be implemented with a review date. Capping the price at which producers can sell gas domestically (for already agreed supply) was a close second. More generally, current price hikes offer an opportunity to re-think and re-design the supply side of the market, including supporting transition to renewable energy.

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Targeted subsidies for low income consumers

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Increase taxation of resource rents for gas producers and use proceeds to reduce electricity and gas

High energy prices are not simply a sudden result of the Ukraine-Russia war. Rather they continue a trend dating back to the post-GFC period. As ABS data illustrate, from 2009 to 2015 the average weekly household spending on domestic fuel and power costs increased by 25 per cent. In 2017 and 2018, two ACCC reports expressed concerns about the effect of high electricity prices on low-income households. The recent spikes in electricity and gas prices significantly affect Australian households and firms and exacerbate the ongoing problem of energy poverty among the most vulnerable groups. The recent report by Aviel Verbruggen based on World Bank data has well documented the profits of the energy sector, particularly oil and gas, over the last 50 years. These profits continue to rise while firms and households face energy prices that challenge their savings and ability to cope in the face of ongoing inflationary pressures that affect the cost of housing and the cost of living. There is also another set of long-run considerations, those related to how to transform the Australian economy into a clean, fair and resilient one. As the IPCC?s recent report argues, transformational plans that aim to reach climate change targets must necessarily involve the private sector (households and businesses). Short-run and long-run policy choices should be implemented with this context in mind. At the least, these policy measures have to do more than simply provide incentives for consumers to exercise market freedom. As the OECD report of June 2022 illustrates, policy interventions that directly act to reduce the price of energy suffer from two major flaws; they are not targeted, and they risk weakening the incentives to reduce energy use. By impacting government expenditure, across-the-board subsidies may contribute to inflationary pressures and attract further interest rate rises, resulting in unintended consequences on stressed households? budgets. Instead, through increased taxation of resource rents for gas producers, governments could use the tax proceeds to reduce electricity and gas prices for consumers, particularly the vulnerable ones. In so doing, Australia could (i) send unequivocal messages about the need to contain energy consumption (let?s remember that in 2021 51% of electricity generation is still derived from coal according to government data) (ii) address the need to place equity and energy poverty at the centre of the policy agenda (iii) avoid an increase in government deficit and debt (iv) address the long-run dimensions of the climate crisis. This last aspect could be achieved if increased taxation of resource rents went towards needed private investments in net-zero strategies. If companies were asked to invest in net-zero strategies in return for a reduced resource rent tax, there would be the further advantage of firms having to demonstrate their willingness and ability to channel profits into net-zero investments.

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Increase taxation of resource rents for gas producers but use revenues for general tax relief, not t

There are windfall profits in the gas sector that could be used to provide relief for Australian households facing higher prices for consumer goods like electricity and gas that make up a disproportionate share of living expenses of lower-income families. But those revenues should be allocated via general tax relief programs and not be tied to levels of electricity or gas use. We want to protect vulnerable consumers without distorting incentives away from the conservation of what are largely polluting resources. There are arguments for rate reform in retail electricity, but these require careful design, stakeholder participation, etc. which take time. One option in that area that I would like to hear more about involves public sector-led competition in retail: an option for consumers who are not eager to engage in the retail market provided by an aggregator chosen via a competitive reverse bid process.

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Regulate retail prices of electricity

?? The regulation of domestic energy prices is proposed as an initial strategy. At the moment the higher international energy prices from the boycott of Russia have benefitted Australia's exports but made Australia's domestic consumers suffer in a Dutch disease scenario. A return to public ownership is needed as is shown in the rent-seeking available in the energy almost natural monopolies over decades. The option to reinvent the wheel should not be ignored. This would promote a coherent and climate-sensitive innovation and investment strategy which has been missing over the last few decades. It will support the transition to what are being shown to be cheaper renewable sources and their utilization. It would allow something like the far superior public accumulation model of Norway, with social priorities first and foremost.

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Reserve domestic gas equivalent to 15% of LNG production from each LNG export project (ie making the

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Targeted subsidies for low income consumers

Retail electricity prices are increasing for at least two key reasons. First and foremost, due to the increase in gas and coal prices resulting from the brutal invasion of Ukraine by Russia and from increased demand arising from more extreme weather patterns due to climate change. While we do share some responsibility for climate change, gas and coal prices are not under the government?s control. In contrast, the second reason for higher retail electricity prices is entirely under our control. The energy transition will be messier, and result in higher prices, than necessary due to the convoluted mix of climate change and energy policies that we had over the last decade. This includes the abolition of the carbon price, the ramping up of the Renewable Energy Target but a lack of coordination between investment in renewables and transmission expansion, half of the NEG (the national energy guarantee), which is yet to be tested, and so on and so for. Clearly, this incremental, piecemeal approach has not been successful and the states and territories, not the market, are now doing the heavy lifting for the transition. The big challenge is to pull together all the large, ambitious energy plans put forward by the states and territories into a consistent set of market and regulatory arrangements that promote the long-term interest of consumers in a net zero economy. This should be the main focus of the government. An important step is to manage the exit of coal to ensure the security of supply and to reduce emissions, but at the same time ensuring that prices do not increase more than what they need to.

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Targeted subsidies for low income consumers

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Cap the price at which producers can sell gas domestically (for already agreed supply)

It is too late now to introduce the WA solution of gas reservation. Producers could rightly call for compensation given what would be an unheralded change in their licence requirements. Consumer subsidies also have drawbacks, while putting the onus on the consumer to shop around assumes consumers do not and that there are bargains to be had, which is a cop-out. Capping the price for already-agreed domestic supply would not result in sovereign risk because the investments that led to this supply were undertaken under price and capital return expectations at the time (which were much lower than the present and presently-expected prices). The domestic price increases predicted would result in windfall profits for the producers. Capping the price would be the least distorting of demand relative to a range of subsidies.

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Reduce regulated rates of return on transmission and distribution

See this analysis from the Institute for Energy Economics and Financial Analysis: https://ieefa.org/resources/no-justification-10-billion-monopoly-power-bill-shock More generally private equity returns are way too high.

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Regulate retail prices of electricity

I have selected "regulating retail prices of electricity" as my first choice, as the government must closely monitor the prices set by retailers. However, as a long-term solution, there needs to be more pressure on energy providers to move towards green energy. Consumers must also be educated and incentivised to make green choices and use energy-efficient products.

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Cap the price at which producers can sell gas domestically (for already agreed supply)

Capping the price of domestic gas has the benefit of both reducing the impact on inflation and reducing the gas and electricity bills to businesses and households. The gas price directly affects the price of electricity when gas turbines are the last to be despatched as suppliers of electricity.

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Reserve domestic gas equivalent to 15% of LNG production from each LNG export project (ie making the

When navigating policy settings to ensure affordability and accessibility to energy sources for consumers and businesses, there is a strong economic logic that solutions need to be focused on supply-side, rather than consumer-side approaches such as consumer subsidies, especially in the high inflation environment. But these supply-side strategies won't deliver price effects immediately and will require a more medium-run and longer-run time perspective. So some short-term costs may need to be shouldered while investments are made in long-term solutions. Any policy action taken to alleviate energy costs also needs to be considered as part of the energy mix that the Australian economy is aiming to steer towards in the longer-run, and the transition path we going to take to get there. Given the concerning implications of rising energy prices for households and businesses, there is a legitimate case to push for greater transparency of information into the factors that determine the pricing decisions of energy providers. The government is wise to draw upon the advice of the ACCC and other sources of expertise who specialise in these matters, including monitoring for potential instances of inefficiency that could contribute to higher prices. At the end of the day, what we need are market design mechanisms that will align the objectives of energy providers with the objective of affordable and accessible energy for households and businesses.

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Increase taxation of resource rents for gas producers and use proceeds to reduce electricity and gas

Quite independently of the current and prospective increase in the retail price of gas and electricity, I have long supported the increased taxation of resource rents for gas producers and the use of the proceeds to reduce electricity and gas prices for consumers. The taxation of the economic rent from land and natural resources is a prescription that follows from the long-established first principles of economics. Every serious economist ? from the time of Francois Quesnay and Adam Smith to the time of Ken Henry, of the Henry Review, and the present author, in multiple texts for the OECD and other international agencies ? has advocated it. It is, or at least ought to be, uncontroversial. At the same time, the alignment of the price paid by consumers to the marginal social cost imposed by their consumption ? whether by means of a tax to raise the price up to the level of the marginal social cost, a la Arthur Pigo, or by means of a subsidy to reduce the price down to the level of the marginal social cost, a la Howard Hotelling ? is also a prescription that follows from well-established first principles. Turning to the here and now: the price for gas and electricity paid by final consumers in Australia today is, in many instances, well above the marginal social cost. And the price paid by final consumers of electricity in Tasmania today ? where the marginal producer cost of our hydro-electric power is very low and its marginal external cost is zero ? is arguably the single greatest price distortion, the single greatest deviation of price from marginal social cost, applied to electricity anywhere in the world. It is only on the basis of this economic reasoning, and only to the extent mandated by this reasoning, that I support the increased taxation of resource rents for gas producers and the use of the proceeds to reduce electricity and gas prices for consumers. Beyond this, I certainly would not support market-distorting price caps and reductions simply because ?prices are rising?.

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Increase taxation of resource rents for gas producers and use proceeds to reduce electricity and gas

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Increase taxation of resource rents for gas producers and use proceeds to reduce electricity and gas

Government has several policy levers available right now. It must use them. A high and consistent resources rent tax should be enforced. It would provide fiscal benefits to the government and would help to address peak pricing if part of the proceeds were redistributed to energy retailers and customers. Domestic gas reservations, retail pricing caps and targeted consumer subsidies should also be employed, to complement a national permanent resources rent tax.

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Reserve domestic gas equivalent to 15% of LNG production from each LNG export project (ie making the

I don't think there is any scope in the budget (given the huge deficit) to go down the path of subsidies for consumers. The issue is primarily a supply problem amplified by global uncertainties in supply flows. The appropriate way of tackling this would therefore be to secure domestic supply.

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Increase taxation of resource rents for gas producers and use proceeds to support low income househo

The government should not interfere with price signals that reflect the true cost of energy. High prices will encourage consumers to conserve energy and switch to cheaper renewables. They will also boost R&D and infrastructure spending on renewable energy. The best way to mitigate the unequal burden on low-income households is through direct payments to households - probably through the pension and benefits scheme. On the other hand, the windfall gains to energy companies from the current situation should not go to shareholders, many of which are foreign, but to a sovereign wealth fund or a fund to benefit national priorities such as relief for Australians on low incomes.

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Capping the price at which producers can sell gas domestically (for already agreed supply)

I would normally be hesitant to promote this type of intervention, but this is a pretty exceptional set of circumstances. The magnitude of the short-term price prices (entirely due to an external shock) makes them a significant transfer from Australian consumers of power to gas producers. Low-income consumers and business users that rely heavily on gas will be hit particularly hard. At the same time, gas producers in Australia are making extraordinary 'super profits' of which Australians are receiving very little dividend due to a poorly designed resource rent tax (the PRRT). There is an imperative to bring down the price for the most vulnerable. If we had better rent taxation, I would argue for short-term subsidies targeted at significant business users and vulnerable consumers. But any changes to the tax arrangements are unlikely to come quickly enough. Given this, I think the best way to offer price relief is through regulating the price of gas that has been committed for domestic supply through the Heads of Agreement. This would help offset the price hikes for both gas and electricity (since gas sets the market price in the National Electricity Market too). A 'cap' of this type would have an immediate effect on the wholesale price. This will flow through to the retail price through purchasers via the spot market and through increasing the negotiating power of large customers (including electricity retailers) with producers as they renegotiate their contracts (their outside option of purchasing on the spot market just got a lot more attractive). So long as regulators pick a reasonable benchmark (such as the pre-shock price) producers will still earn a healthy return. It is difficult to see that any move to curtail prices for a small fraction of their outputs would meaningfully change their investment decisions going forward. If governments do intervene, they should make clear why this is exceptional and make any intervention time-limited. In the longer term, the government should move to improve the PRRT to better compensate Australians for the use of our gas resources.