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March 2017

Dependent on a perspective, Coal-Seam Gas (CSG) can be seen as a source of plentiful and cleaner energy. Its development promises economic growth in regional areas, revenues for governments, and improved energy security. However, it can have potentially devastating impact on agriculture and on the surrounding environment. In Australia, these concerns have led to fervent opposition to CSG development by landowners and environmentalists alike. As a result, the exploitation of CSG has significantly slowed down in recent years.

In the wake of the perceived energy crisis related to natural gas shortages for the domestic market, unlocking the CSG potential seems like a good idea. Consequently there have been calls for finding modalities that will up-ease landowners’ opposition to CSG. Specifically, and championed by the Deputy Prime Minister Barnaby Joyce, there is a proposal to follow the South Australian example and to share some of the revenue collected from CSG royalties with landowners.

On the face of it, this proposal makes sense. One of the key reasons for landowners’ opposition to CSG is that under Australian sub-surface (mineral) property rights laws, the host landowners are not entitled to any portion of the natural resource rent from sub-surface resources. As the royalty on minerals, including on CSG, payable to the state is one form (and not the best at that, either) to capture the natural resource rent, the recently floated proposal effectively suggests that some of that resource rent should go to the landowners, who are in turn expected to become more welcoming to CSG development on or around their land.

However, that proposal only looks at the surface, and offers a relatively simplistic approach to the problem. In particular, there are at least three considerations of critical importance that are absent from the proposal.

Firstly, under the existing laws the natural resource rent from all sub-surface and mineral assets should be entirely captured by the public as their rightful owner. However in practice, a large proportion of the recourse rent is captured by the companies who exploit the resource. This is due to the imperfections of the resource taxation system, and the resistance to changing it. In light of this, the current proposal suggests that the public should give up a further percentage of the resource rent in order to up-ease landowners, whereas those who exploit the resource are left with whatever proportion of the rent they can get away with under the current natural resource taxation regime. That does not seem right, and does not seem fair.

Secondly, the problem of CSG is not solely about the natural resource rent from CSG. It is also about the natural resource rent from the land (land rent) on which CSG is developed. As a result of CSG development, there are serious threats that land rent appropriable by landowners might significantly diminish over the long term. However, the extent of land rent reduction, its timing, and indeed its very occurrence, is highly uncertain. So, we can only talk about the expected reduction in land rent attributable to CSG. Consequently, the portion of the royalty from CSG to be shared with landowners should be over and above this expected reduction in land rent. Given that the reduction of the land rent is highly uncertain, finding out what proportion of the royalty should be offered to landowners in order to gain their acceptance of CSG development, is difficult, if not impossible task.

Thirdly, recent findings suggest that landowners are likely to value the reduction in land rent attributable to CSG more than the share of CSG rent they might receive, even if the two come in the same amount. This is not surprising in light of the notion of ‘loss aversion’, which is a well-known psychological and economic phenomenon that explains why people are much more devastated by, for example, a $1000 loss on the share market than they are satisfied with a $1000 gain. It suggests that even if landowners are offered a share of the rent from CSG, they are not likely to take it and stop opposing its development, because they value the potential loss of land rent more than the gain from the shared royalty.

While current proposal to open up CSG development by offering landowners a share of the royalty makes some sense at a first glance, it only really scratches the surface. There are several, not as obvious, but nevertheless critically important aspects of the social conundrum that is the CSG that have to be considered in any policy solution.

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