The acrimonious political debate on the proposed Adani mega mine (see Brisbane Times coverage) would be well informed by a number of economic policy considerations that I discuss below. Some of these, but not all, would lend support to a royalties holiday. This is not a straightforward decision for the Queensland Government, so the reported split in Cabinet is understandable from that perspective.
Those considerations which would lend support to the royalties holiday include the following.
- Mining royalties are a bad way to raise revenue in the first place. You may recall Ken Henry’s tax review was scathing of them and recommended they be replaced by a resources rent tax. But the federal government of the day bungled its implementation, and we are no closer to efficient taxation of earnings from natural resources.
- There are quite a few credible predictions of rapid de-carbonisation of the world economy (e.g. see Dieter Helm’s Burn Out: The End Game for Fossil Fuels). So it may well be in Queensland’s economic interests to grant the royalties holiday, so the coal at the site can be extracted as soon as possible, and to get whatever royalties revenue we can, even if lower than previously expected.
- North Queensland economies with high rates of unemployment would benefit substantially from the mine, as I have noted previously (Why the Adani mega mine is welcome news in Townsville). This is relevant in a cost-benefit analysis to the extent that the mine employs people who would otherwise remain unemployed, and along with the royalties revenue is one of the major ways Queenslanders realise part of the net benefits of the mine.
Now for those considerations which would not support a royalties holiday.
- As noted above, royalties are one of the major ways Queenslanders benefit from the project, so any reduction in royalties consequently reduces the net benefits distributed to Queenslanders (and increases the net benefits to the foreign-owned Adani, if the project proceeds) and makes the project less attractive from the community’s point of view. The Government, which had previously decided the mine’s economic benefits outweigh its environmental risks, may well now take a different view.
- If the Government gives in to Adani on this, which mining company will it give in to next? The Treasury will be bombarded by approaches from mining companies pleading for royalties relief so they can maintain production or justify expansion. It may be desirable for the Government to maintain a hard line, to protect other royalties revenues from erosion. Royalties, after all, are worth $2-3 billion to Queensland’s Budget each year.
This is not a straightforward decision for the Queensland Government. I have previously supported the mega mine, but I would be willing to test just how much Adani needs the royalties holiday to make the mine viable. The Government should not meekly give in to Adani’s request for relief. A royalties holiday should only be considered as a last resort, in the case where, if it were not available, Queensland would forever lose any option of developing the resources at the site.
Disclosure: In 2015-16, I worked as a sub-contractor to an engineering company that was consulting to Adani.