Craig Emerson, principal architect of Australia’s Petroleum Resource Rent Tax, is out in the AFR today fighting for good taxes and sound economics.

For thirty years, the PRRT had been a successful revenue-sharing device, delivering well over $33 billion to consolidated revenue, derived from the economic rents of resource extraction and thus causing no harm.

Sadly, the PRRT has been compromised by poorly crafted tax rules and the contribution to national well-being has shrunk to a trickle.

Professor Emerson says:

“As the resource owners, the community is entitled to a share of any resource rents from gas extraction; that is, the profits in excess of the returns needed to attract exploration for and development of gas reserves.

He proposes three changes to the PRRT.

“First, the 15 percentage-point compensation uplift factor for exploration expenditure was agreed as a compromise with industry in 1984 on the assumption that it was mainly searching for oil in frontier offshore territory, not gas.

“As much more offshore gas has been discovered over the past 30 years, it could be argued that 15 percentage points is now overly generous. For future exploration, it could be pared back to 5 percentage points to align it with the treatment of development expenditure.

“Second, one of the three legislated methods of setting a price for gas – called the Residual Price Method – might be open to exploitation by companies seeking to minimise PRRT liabilities.

“This method appears to deduct from the price some downstream costs, whereas the correct price is the one before any processing, transportation and marketing of gas occurs.

“It might be wise for the government to scrap this method in order to guard against transfer pricing.

“Third, if Tax Office projections indicate offshore gas producers are unlikely to pay PRRT in the foreseeable future, a royalty could be contemplated, but one that recognises legitimate gas extraction costs.

“A 10 per cent royalty based on the gross value of gas production – as advocated by the Tax Justice Network – would result in higher-cost gas being left in the ground, generating no government revenue. A royalty that allowed cash operating costs as a deduction would avoid this problem.

This parallels Dr Cameron Murray’s submission on behalf of Prosper Australia to Treasury’s PRRT review, which observes that a flawed royalty is better than the current PRRT which has been neutered by generous and unnecessary exemptions.

Dr Dianne Kraal has useful insights too.

Norway successfully resisted the resource rent-seekers. It gained about a trillion dollars to Norway’s sovereign wealth fund over thirty years – a prize available to Australia as well.

There is a lot of money involved here and we can expect a bare-knuckle response from oil and gas producers offering blood and bruises to anyone wanting to take some of ‘their’ profits as an extraction charge.

Prosper regretfully doubts Australia’s politicians and bureaucrats have the institutional strength – courage and stamina – to stand up to resource rent-seekers and hold them to a quality resource rent regime.

If this is so, we must go back to a royalty – which means marginal production stays in the ground and the economy underperforms.

Australia’s PRRT is more than just another grubby tax. It rises and falls with prices and profits, an automatic stabilizer, reducing oil and gas producers’ risk. It does not deter marginal production. And it means we can take less in damaging taxes from wages and business – an outcome worth fighting for. But do we have a champion?