This piece was originally published in the AFR. Click here to read.
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Apr 22, 2026
There is finally a serious debate about gas taxation, and it is overdue. Total government revenue including corporate income tax from oil and gas runs at around 6¢ in every dollar of producer revenue – a share that has fallen sharply from about 30¢ in the 1990s.
That is a strikingly low return for a scarce global commodity. It was too low before the Ukraine war. It is plainly too low now, with the Iran war driving LNG prices well above their long-run average while Australian households and industry face higher prices on multiple fronts.
Getting the taxation of gas right is critical because any reform should do two jobs at once. It has to capture a fair share of the current windfall, driven by a supply shock whose effects we will probably feel for some time. And it should establish a durable architecture for a more appropriate taxation level when prices return to “normal”.
Ideally, the short-term response and long-term framework would be designed together.
To achieve this, we need to adhere to four key design principles.
First, adequacy: the government should get an increased share of returns at normal prices, and materially more when prices are high – or reform is not worth the political cost.
Second, simplicity and robustness to avoidance: complexity makes it easier for producers to exploit information asymmetries and makes it hard for the public to trust the mechanisms.
Third, encourage domestic supply: or at least, do not discourage it.
Fourth, economic growth: we need to ensure that gas tax reform is not seen as a signal that significantly discourages future investments in the broader resources sector, which account for about 60 per cent of Australia’s export earnings.
My proposal
Applying these principles attracted me to a specific design I am proposing to the current Senate inquiry: a progressive price-linked royalty on LNG exports, with a volume-based floor. The mechanism has three moving parts.
First, a levy on the export price of LNG, set at a progressive rate that rises with price and bites hardest when prices are well above their long-run average. At normal prices, the rate is modest and government receipts are predictable. When prices spike, the rate – and the public share – rise automatically. The base is revenue, not profit, which removes the capital-cost assumptions that make effective rent taxes so difficult to design.
Second, the rate is applied to an external price benchmark rather than the producer’s declared revenue. This neutralises the transfer pricing and profit-shifting problems that have dogged the Petroleum Resource Rent Tax (PRRT).
Most long-term offtake contracts are in any event linked to external reference prices rather than fixed prices, which limits the commercial disruption from this approach.
Third, a volume-based floor: a minimum per-gigajoule charge on exported volumes, payable regardless of price.
Even at normal prices, the current return to Australians is implausibly low, and the floor recognises that non-renewable resources, once exported, are permanently lost to the national balance sheet.
It is the resource-tax analogy of a cost-of-goods charge – a minimum payment for the resource itself which most Australians would expect we receive anyway, but we don’t for offshore gas.
Crucially, the mechanism would apply to exports only. Domestic gas is untouched, which avoids adding upward pressure to household and industrial prices and, if anything, improves the relative return on domestic sales.
We already have proof the basic architecture works. Queensland’s progressive coal and gas royalties operate on this logic: modest rates at normal prices, higher rates when prices spike. They raised substantial additional revenue after the Ukraine war and – importantly – have proved politically durable.
The LNP, which inherited the scheme after its 2024 election win, has repeatedly ruled out dismantling it despite sustained industry pressure. That durability reflects a design that is transparent, defensible and intuitively fair.
As public concern grows, alternative options to address the failure of the current tax structure have been proposed. A flat 25 per cent tax on gas revenues is simple and would raise significant revenue, but it hits normal-return periods as hard as boom periods, and it hands the industry a ready-made argument about sovereign risk, with spillover risk to investment sentiment across the wider resources sector.
Further amendment of the PRRT follows a failed path. The flaws are structural, not solely parametric: any rent-tax architecture that relies on uplift rates, transfer pricing and deductions transferable between projects will be gamed because the information asymmetry favours producers. Further tweaking of the PRRT risks continuing to underdeliver.
The window for reform is open. Prices are high, the Senate committee is running, and the community is engaged. With the need to transition away from fossil fuels to address climate change, gas exports at this level cannot be forever – this is the time to ensure fair value is captured.
The government should act on gas taxes this budget. It can manage genuine sovereign risk concerns without ducking the obvious need for change. A progressive export royalty with a volume floor can be fair, durable and built to last beyond this crisis.