A 78 per cent tax on fossil fuel companies in Australia is not required to fund a Just Transition away from carbon

As I noted yesterday, last evening I accepted an invitation to speak on a panel at a – Rising Tide – event, which is part of the massive – People’s Blockade – of the port of Newcastle that is running from November 19-24, 2024. The Blockade is a threat to the mining corporations and the NSW State Government has introduced pernicious regulative structures in the last week to make it illegal to venture in into the shipping channel to block the coal ships. Heavy fines and an aggressive police force are waiting for any activist who tries. It is an extraordinary overreach by government, who are clearly siding with these corporations. The discussion last night was interesting if only to confirm that this important group of activists have been channelled by poor advice into adopting mainstream macroeconomic frames, which make it very hard for it to broaden its appeal to the rest of the population. Here is my advice to them which will allow them to break out of that straitjacket and become an important educative vehicle for the climate movement.

Rising Tide, in their own words are:

… the rising tide of ordinary people … a diverse movement demanding Australia honours our commitment to the goals of the Paris Climate Agreement. We are prepared to take whatever peaceful actions are within our power to defend the climate.

They are a very dedicated grassroots movement that is taking on the big (multinational) corporations in the fossil fuel industry, which profit under the protection of the layers of government in Australia that are unwilling to really introduce the significant climate change policy.

I admire their tenacity and sense of purpose, and I said last night that they remind me of the resistance in the late 1960s and early 1970s that brought an end to Australia’s disgraceful involvement in the Vietnam War, as America’s little lap dogs.

Politicians like to tell us what they are doing to protect the environment and fiddle around the edges while continuing to approve new coal and gas mining operations.

Groups like Rising Tide get advice from various sources and in the field of macroeconomics are dependent on that advice for their strategic planning.

The problem is that the advice that Rising Tide has been getting from an organisation that holds itself as being progressive is actually failing them.

The organisation regularly talks about the need for various tax hikes on the rich, on the high income earners, and on corporations in the fossil fuel industry as a means for government to fund various social and environmental programs.

You can immediately see the problem of this sort of narrative.

These organisations who want to appear to be leading the progressive debate actually end up just being captured back into the mainstream fictional ecosystem.

The various spokespersons for these organisations regularly make speeches and hold ‘webinars’ and appear to be authoritative and knowledgeable and offering alternative visions for the nation.

But when it comes down to it, they are just voicing mainstream macroeconomic fictions with a different emphasis.

And at that point, the mainstream, in effect, have these voices where they want them – constructing these important public policy debates within the ‘How are we going to pay for it’ narrative.

And that sort of framing is a losing one for truly progressive groups like Rising Tide.

One of the key demands of Rising Tide, informed by the advice they have been receiving from one particular organisation, is to:

Tax fossil fuel export profits at 78% to fund community and industrial transition, and pay for climate loss and damage.

The genus of this policy demand comes from Norway.

In 1975, the Norwegian government introduced the – Petroleum Tax Act – a few years after the oil reserves were discovered in 1969.

The Government was the sole-owner of Statoil, which was created in 1972 to deal with the oil production and export.

That body was split into two separate organisations: (a) Statoil – the mining and production arm; and (b) the State’s Direct Financial Interest, and ownership structure.

The 1975 act added a resource rent tax on top of the normal company tax structure and specifically aimed to redistribute the profits of the export oil sector into the broader economy.

The current marginal tax rate is 78 per cent and is levied on what are deemed ‘extraordinary profits’ arising from petroleum extraction.

Extraordinary profits are those that exceed the return necessary to maintain the productive resources in their current use.

Importantly, in the Norwegian design:

The petroleum taxation system is intended to be neutral, so that an investment project that is profitable for an investor before tax is also profitable after tax. This ensures substantial revenues for the Norwegian society and at the same time encourages companies to carry out all profitable projects.

So the aim of the 78 per cent tax is not to drive the mining companies out of the industry as a climate mitigation strategy.

The 78 per cent is thus levied on a small proportion of the total profits of the industry, which can manipulate its profit and loss statements to reduce the impost.

Further, the government has modified the tax impost when oil and gas prices drop on the world market to ensure the corporate interests are not damaged.

The mining sector doesn’t resist the impost because the reality is that the industry in Norway is so profitable that the government earns considerable revenue from the tax, without deterring the investment ambitions of the mining sector.

In other words, it is not designed to force closures of these fossil fuel operations.

That alone should warn Rising Tide against such a strategy if their aim is to end the coal export sector.

Somewhere along the way, the advice it has received from economists about the Norwegian model has not indicated the reality of the approach in Norway.

In other words, Rising Tide have just adopted the framing that the government needs funds to pay for climate mitigation and to introduce a Just Transition, which will allow communities affected by the reduction in fossil fuel production (particularly the coal communities in the Hunter region of NSW) to have new jobs and activities.

They then surmise that the government can tap the enormous profits of the fossil fuel companies to provide these funds.

And they claim, Norway proves that to be the case.

Notwithstanding the comments I have made about the Norwegian system above, the fundamental mistake that this type of logic and framing makes is that it presents an All or Nothing perspective to the population.

The question that arises is: If the 78 per cent tax is not introduced does that mean the government cannot provide the outcomes that increased government spending would bring?

Those who listen to Rising Tide Webinars etc could be forgiven if they answered Yes to that question.

Yes, the government requires the revenue from the 78 per cent tax on coal companies if they are to fund climate change transitions.

That is the logic that Rising Tide is presenting to the public on advice from some economists.

It is wrong advice at the most elemental level and makes it hard for Rising Tide to get any traction in the broader community.

First, the belief that a tax on coal export companies is necessary to fund a Just Transition with new jobs is a major misperception and reflects a common misunderstanding among progressive activists that the national government, which issues the currency that we use, is somehow financially constrained and dependent on private taxes to fund useful things.

The Australian government can purchase anything that is for sale in that currency, including all idle labour.

Its spending is constrained (effectively) only by the available resources it can bring back into production.

If there are no available resources, then increased government spending aimed at purchasing the services of those resources will have to be at market prices and will introduce inflationary pressures.

A transition away from the fossil fuel dependency will require massive public investment, far more nominal spending than can be easily absorbed in the short-run horizon, given resource availability.

A person who asked me a question during the Q&A last night made the point that her community in Northern Queensland is struggling to get skilled engineers and technicians that can service the solar systems on the houses there.

It was a great point and illustrates that pumping extra spending into that community will run up against the resource constraint.

The strategy in those cases must be to encourage the expansion of the supply-side via training and educational investments.

The reality is that the government will have to consider increasing taxes as it deals with the climate policy interventions because otherwise the growth in nominal spending in the economy will probably outstrip the supply capacity.

The revenue from the tax hikes is not necessary to fund the spending as the mainstream framing erroneously suggests, but rather is required to reduce the spending capacity of the non-government sector.

Then, think about a 78 per cent tax on the coal companies, which are largely foreign-owned and remit massive profits to the foreign shareholders.

Such a tax would not do much to reduce non-government spending in the domestic economy and so would not be a good vehicle for constraining nominal non-government spending as the government expands its spending on reducing carbon-intensive activities.

But the important point is that the reality is not an All or Nothing choice.

The government does not need tax revenue in order to spend on socially- and environmentally-beneficial outcomes.

Once the two – tax and the spending – are tied together as in the ‘taxes fund spending’ myth – then there is reduced scope for the government to do anything progressive.

The mainstream know that and play it for all it is worth.

They know that once they have corralled the debate in the ‘How to Pay For It’ frame then they can scare the bejesus out of the general population, which is mired in ignorance about these matters, by suggesting that the tax rises will spread and people’s ‘hard work’ will be for nothing as the government takes the income away.

That is such a pervasive narrative and Rising Tide are falling into it because their advice is so poor.

The mainstream also know that when it comes to bailing out banksters who have allowed their greed to outpace their business judgement; or when the military want billions to slaughter innocent civilians, or when the fossil fuel industry wants to have massive subsidies, etc, they can paper over their ”taxes fund spending’ logic.

But when it comes to helping disadvantaged people pay their heating bills or whatever, then it is ‘how can government afford’ all these demands that is immediately injected into the public debate.

Rising Tide should break out of that capture and eschew the advice it has been getting on these issues.

I made the point last night that I wasn’t opposed to ‘taxing the rich’ or the 78 per cent tax in general.

I was just vehemently opposed to the framing of it as a source of funds that would allow the government to provide benefits to society.

The point is that the ‘rich’ or these fossil fuel corporations have disproportionate power to exert leverage in the political process in order to advance their own interests regardless of whether those interests overlap with the general societal well-being.

Usually that overlap is absent.

So the tax in that context is not to give the government extra currency but rather to reduce the capacity of those wealthy and profitable interests to lobby, buy advertising, buy off politicians with revolving door opportunities, and the rest of it.

If Rising Tide framed their tax proposal in that light and also sought to educate the public as to the true nature of the fiscal capacity of the Australian government then they would be doing us a great favour.

Conclusion

The challenge is daunting however.

The speaker that followed me last night, virtually immediately constructed the 78 per cent tax demand as the way the Australian government could afford to pay for a Just Transition.

It was as if I hadn’t spoken.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.