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Queensland coal: an accounting black hole

The Queensland Government has decided to raise coal mining royalties. Seems reasonable, doesn’t it? A review of Queensland Pty Ltd by Peter Costello revealed a precarious balance sheet. Time to get things…

Given its parlous financial state, Queensland is within its rights to increase mining royalties. But why frame it as a surplus profits tax? AAP

The Queensland Government has decided to raise coal mining royalties. Seems reasonable, doesn’t it?

A review of Queensland Pty Ltd by Peter Costello revealed a precarious balance sheet. Time to get things right, or at least moving in the right direction. Probably the word “responsible” needs to be inserted here too.

Part of that agenda is an evaluation of state costs and revenues. Part also is the evaluation of state assets and liabilities. Coal reserves are an asset, and the extraction of coal reserves generates a revenue. So it is hardly surprising that coal should feature in Queensland Treasurer Tim Nicholl’s new fiscal planning.

When the Treasurer said at his press conference that “Queenslanders own the resources in the ground here and are entitled to get a return on those resources”, he’s right.

The charges state governments make for the extraction of coal are called royalties. The term causes confusion, for it suggests they are charges made by the crown and hence they get conflated with the crown’s capacity to appropriate taxes. But royalties are not taxes.

Hancock Prospecting, the company at the core of Gina Reinhart’s corporate wealth, made its fortune charging royalties for the extraction of Hamersly iron ore. Royalties attach to the ownership of in situ reserves, and that ownership may or may not lie with the state.

So we need to think of coal reserves as a warehouse, and when you take commodities out of a warehouse, you diminish the asset base. There is appropriately a charge. The royalty is to be understood as a cost of production that must be paid along with the costs such as labour and freight.

It is inherently contentious how much of the cost of a tonne of extracted coal is to be called a cost of digging the stuff up, and how much of it the value of the stuff itself.

There is, accordingly, a debate to be had about dividing up the revenue of a tonne of coal, for each mine has different costs of production (difficulty of getting it out the ground, onto ships, and into the hands of end-users), mines can have different efficiency, and the coal itself can be of different qualities.

So how the revenue divides between profits, royalties, rent (for use of the surface land) and other costs is something of an arm wrestle.

But the in-situ reserves are finite, and the owner of those reserves can reasonably say that any tonne of coal can only be extracted once, and if the payment to the owner of the coal is not high enough, they might prefer to leave it in the warehouse (the ground) and sell it at another time.

So the Queensland Government is well within its rights to amend the price. BHP Billiton chairman Jac Nasser has described the coal royalty increases as “unbelievable” and “disappointing”. That’s as expected, for it comes off the bottom line of BHP coal mining profits. But he cannot contest the principle that there should be a reasonable price for access to in situ reserves, just as there should be for labour, equipment purchase and transportation.

But the puzzling thing is that the Queensland Government has framed its royalty policy to look like a surplus profits tax, and so it feeds the Nasser response.

The policy is to increase the rate for coal royalties to 12.5% on the value per tonne between $100 and $150 and to 15% thereafter.

But the rate for coal below $100 a tonne is not changing. According to the Treasurer Tim Nicholls: “It is only when prices start climbing that the new higher rates will progressively apply, ensuring Queenslanders share in the upside of the value of their resources.”

So if the charge is a royalty, the government could reasonably say that every tonne of its in-situ reserves has a “reserve” price. But when there is one rate when the price of coal is low, and another when the price of coal is over a threshold, it looks like a different claim.

Either it is simply an exercise of mark-to-market accounting (that the value of coal reserves change directly with each movement with the price of coal) or it looks like the Queensland royalty policy is being framed more as a claim on profits, not a cost of production.

Conceptually, it’s a minefield.

Nonetheless, the Queensland government has a good case. Yet it never really plays itself out as just described. Not only is coal sold on long-term contracts, but there are jobs (and votes) at stake. The mines will never open and shut to secure a constant royalty, and no-one is arguing that they should!

Moreover, in the sphere of national politics, these theoretical niceties disappear. If it looks like a profit-related charge, the Feds will be onto it. They have a right to surplus profits tax, not the states.

So royalties are a cost of production, but it is virtually impossible for state governments to make them appear as such. They appear as a claim on revenue, not as a cost of production, and hence an incursion on the federal government’s domain.

The funny thing is that Gina Rinehart’s royalties do appear as a cost of production for mining companies, but somehow they became tied up in a debate about surplus profit taxes.

Perhaps the Queensland government has something to learn from Gina. Indeed, looking at the public sector sackings that are also part of the Queensland budget, is seems like they already have. It’s a frightening thought, but it will no doubt be on the mind of the Federal Treasurer as he determines his response.

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8 Comments sorted by

  1. John Newlands

    tree changer

    I presume the royalty for coal under $100 is 10%. I get $89.10 net for $99 coal and $88.38 for $101 coal. Anomalous linoleum.

    I understand the State royalty can be deducted from the MRRT assessment so Newman is diddling Swan. The bigger issue is the fact export coal is going to countries that will never have anything like $23 carbon tax on emissions. My suggestion is to either pre-carbon tax export coal while still here or on finished goods from countries that buy our coal.

    I note the Netherlands that buys a lot of Australian coal weren't keen on tightening up the generous offset allowance in the European carbon scheme. I wonder also if this puts the kibosh on the Alpha coal development. Good thing for the planet.

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  2. Garry Baker

    researcher

    Excellent article because it is one of the very few to recognise that digging a crop from the ground is not merely a once in a lifetime activity - it is a once "ever" phenomenon, and by selling it for a pittance we merely rob a future generation in order to gain a few dollars in the here and now.

    Given that Australia only has a few % of the worlds coal resources, yet by far is the biggest exporter of coal to the rest of the globe - one would think the time is well overdue to examine this 'one trick pony' business model we seem to hold dear. Ours is still a 18th century way of life - ie: digging and selling assets, yet the time is fast coming where will be poor from it. Indeed, we may have to buy 21st century pills from advanced civilisations to cure our headaches - such is the mess we face

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    1. Tony Simons
      Tony Simons is a Friend of The Conversation.

      Dodgy Director

      In reply to Garry Baker

      This debate shows that our federal system is dysfunctional and compromised. There should not be state royalties on output but state taxes on gross profits. Also get rid of stamp duty (makes real estate illiquid) and payroll taxes. But Gillard andd Abbott do not have the guts to rejig out rotten tax system (made much worse by Howard and Costello).

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  3. Byron Smith
    Byron Smith is a Friend of The Conversation.

    PhD candidate in Christian Ethics at University of Edinburgh

    Thanks for this article that clarifies some of the conceptual context around coal extraction and its profits.

    According to studies cited by the Australian Climate Commission, if we are going to have at least an 80% chance of staying under an already very dangerous 2ºC rise above pre-industrial levels this century, then we need to leave roughly 80% of all fossil hydrocarbon proven reserves in the ground (not 80% of all fossil hydrocarbon resources, but proven reserves, the bits that companies and…

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  4. Lisa Evett

    logged in via LinkedIn

    Thank you for the article.

    I wanted to comment specifically on:

    "There is, accordingly, a debate to be had about dividing up the revenue of a tonne of coal, for each mine has different costs of production (difficulty of getting it out the ground, onto ships, and into the hands of end-users), mines can have different efficiency, and the coal itself can be of different qualities."

    The difficulty you reference I believe is far more complex that most realise. Not only does each mine manage production…

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    1. Robert McDougall

      Small Business Owner

      In reply to Lisa Evett

      i wonder how cost competitive coal as an energy source would be in comparison to renewables if they finally did a full accounting.

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