The Importance of Energy Justice for Oil and Gas Taxation

Energy justice is a 21^st century concept that has emerged in research across many academic disciplines. For law, energy justice often refers to the application of human rights across the energy lifecycle. For social sciences, it has been defined as an application of social justice principles to the global energy system.

Energy justice is a normative theory and sets out the way the energy sector should be, based on five forms of justice: procedural justice, recognition justice, cosmopolitan justice, restorative justice and distributive justice. The last item, distributive justice, concerns the distribution of the benefits and the negatives from the energy sector; with taxation being a key issue, and how revenues are shared is a vital question. The energy justice concept can promote a shift away from the 20^th century era ‘maxima’ ethos of gaining of the highest economic rent from fossil fuels.

The economic rent tax approach is the basis of Australia’s highly-concessional petroleum resource rent tax (PRRT) regime. The approach has its 20^th century origins in the wake of the oil price shocks of the 1970s, when many western jurisdictions urgently sought investment in petroleum exploration and extraction. Australia introduced the tax in the 1987 to attract inward capital and promote the exploration and extraction of Australian petroleum.

In contrast, 21^st century concerns with the oil and gas are about the industry’s associated greenhouse gas emissions. This calls into question the resource rent tax (RRT) principles that underpin the existing PRRT legislation, and warrants a reassessment. My colleague, Professor Raphael Heffron and I recently published a research article titled ‘Resource Rent Tax: Its principles, application and need for change in Australia’, which examines this tax under new guiding principles, and advances the case for energy justice in the Australian context. While there are five aspects of energy justice, our research article explores distributive justice only, and argues it should be central to energy taxation policy and legislation today.

Why energy justice?

Energy justice has become a leading theory in energy research. The theory argues that energy has to play a role in ensuring ‘just’ outcomes for wider society — and not only outcomes for government coffers and investor energy companies. There are major reasons as to why justice is called for in today’s energy sector, and one is the issue of taxation.

Australia’s low PRRT tax take prompted our research question regarding the adequacy of the 20^th-century RRT concept, and its underlying principles that form the basis of the PRRT legislation. We find that the RRT concept is unsuitable for the taxing of gas and needs to be rethought; in particular, that the underlying principles and theory are not appropriate for gas and no longer resonates globally following the 2015 United Nations’ Paris Agreement, which highlights the importance of energy and climate goals, both nationally and internationally.

A new social contract between energy and society

The theory of energy justice is based on five forms of justice that can be used to fashion a new set of principles to underpin taxation of fossil fuel energy resources. First, distributive justice concerns the distribution of the benefits and the negatives from the energy sector. Taxation is a key issue, and how revenues are shared is a vital question.

Next, the procedural justice focus is on legal process and the necessary legislation needed to deliver a legal system that meets energy goals. In terms of taxation, is the Australian Taxation Office forward-looking about change, and how does it interact with the federal Parliament and the relevant government ministries?

Third, recognition justice concerns the recognition of rights of different groups as energy projects develop, such as an offshore gas well to be developed for production situated near the Twelve Apostles in Victoria, which is a celebrated tourist site. Further, are we recognising the rights of indigenous communities? How are they represented in taxation discussions?

Fourth, cosmopolitan justice stems from the belief that we are all citizens of the world and must consider the effects beyond our borders and from a global context. There was a widely reported example from 2019 in Australia, where it was held by the courts, in part, that a coal mine would not receive permission to open. This decision addressed the effects of the carbon dioxide that would be produced in other places in the world once that coal was transported and burnt outside of Australia.

Then fifth, restorative justice concerns the belief that any injustice caused by the energy sector should be rectified, for instance that waste management policy and decommissioning should be properly accounted for. Does taxation policy take this into account?

A new social contract between energy and society can be progressed by consideration of the philosophy of the Enlightenment philosopher Jean Jacques Rousseau that specifically concerns critical questions of how members of a community might join together to enjoy the benefits of the laws of civil society, but in return give up certain freedoms of living in a natural state. A modern example is to give up the right to maximum extraction of natural resources and find new freedoms by living under laws that embody a respect for human rights in the quest for fossil fuels.

Key challenges from a policy perspective

Various disruptions, ranging from emerging technology to the war in Ukraine, are impeding the goal of net zero emissions by 2050. For instance, the Ukraine war has increased demand for new fossil fuel exports from EU and Asia-Pacific countries caused by embargoes on existing Russian energy exports. This is evident in the Australian gas industry’s record LNG export revenue of AU$92.8 billion in 2022 as compared with AU$49.4 billion in 2021. Consequently, tax reform — much less a faster transition to renewable energy — is increasingly difficult politically.

Indeed, while the Paris Agreement has highlighted the importance of global energy and climate goals, Australia, and other energy resource-rich jurisdictions, remain hesitant to change the principles that underpin the current taxation of energy resources.

That notwithstanding, it is imperative to rethink concessional taxation for fossil fuel energy; with the current situation presenting an opportunity for further research to advance energy justice as the driving framework behind energy taxation legislation. Indeed, key literature has identified the need for significant change in energy law and policy in order to achieve international, national and local climate mitigation and adaptation goals.

Our research article’s reflection on RRT theory and its impact on the PRRT contributes to the debate about the effectiveness of the RRT concept for gas in Australia and highlights the need for significant change if we are to meet emissions reduction targets.

 

Recommended reading

Diane Kraal and Raphael Heffron (2022) ‘Resource Rent Tax: Its principles, application and need for change in Australia’, Australian Tax Forum, 37(4): 559-599.