How are YOU telling BP to go **** itself?

[ricketyclik]

Yes, but my suggestion of the particular form of royalties was a side-note to my central theme. KH was circling for what he perceived as a weakness in order to come in for a kill, regardless of the rights and wrongs of the central premise. His ego demands a regular victory.

Look, essentially what you're asking is for the oil companies to internalize the cost "to the commons" of their use of a non-renewable resource. Anyone with a serious interest in economics understands and agrees with that point, including KH. He disagreed with you on the method, claiming [rightly] that the tax you support results in a decrease in welfare for everybody relative to the current system of auctions.

I agree with all of that, except the [rightly] bit

In my opinion a resource tax on profits is good because:

1. It rises and falls according to the market for the commodity in question, which can be a great deal over the life of a well or mine,
2. It doesn't penalise an investment when it is struggling due to a market downturn, and
3. It is pro-competitive, in that because it applies to profits only, start-ups won't have to pay it until their investments are repaid.

My problem with an auction system is that it is a fixed moment in time when the market may not be reflective of market conditions over the life of the investment.

1 and 2 in particular are actually bad things. Whenever the market price* of oil is greater than the marginal cost of extracting it, we want that oil extracted. Placing a tax on profits from these sales makes investing in new machinery and such to extract oil less attractive than investing in other markets, and so a suboptimal amount of oil is extracted (meaning fewer jobs, fewer profits, and more expensive oil for everyone). Note that the price of using a "common" resource has already been internalized because of the auction, as I mentioned before.

The reason we prefer an up-front payment to an ongoing per-barrel type payment is the investment has been made in all the expensive machinery and drilling and such, we want them to be exploited to capacity. We don't want to discourage existing capital from being used, because that's just wasteful. We want as much of the costs to be known right at the start, because that lets companies make the best decisions where to allocate their capital - and drilling is really, really expensive, so mistakes represent huge wastes.

* this represents the true value of oil, and incorporates our best knowledge as to future demand and supply for it. Oil has an extremely active and liquid market, and an active and liquid futures market, with many very smart people employed predicting the future supply and demand of oil as best they can. It genuinely approaches the sort of ideal market used in basic economic theory.

There is no disincentive to maximise use of existing capital, or to invest in new capital, as it is a profits tax, so a) increased profit = increased revenue, and b) capital investment reduces profit, thus reducing the tax rate applied to revenue.

WRT knowing the costs in advance, everyone is subject to varying tax rates, so why shouldn't the mining sector be? Yes the costs are big, but we're talking about a tax applied to profits here, not revenue.

Plus, being the public's resource, I defend the right of the public to set the price, rather than the industry. This allows the public to take other factors in to consideration besides "what the market will bear". If the industry doesn't want to invest at that price, then the public is free to reconsider, or not, as the case may be.

The public has the right to do plenty of things, but it ought to pick the policies that will maximize state revenue while minimizing economic distortion (except to correct for externalities such as pollution and global warming).

I agree, but as I said, the distortion is there already, and shouldn't, to be fair to renewables, be ignored. To be specific, the coal industry argues that a hotrocks power plant in remote Australia is not economically competetive if the cost of providing power lines to that point is taken in to account, ignoring the fact that much of Australia's coal was originally remote, but publicly funded infrastructure (roads, train lines, power lines, power stations) grew up around it to reduce that remoteness.

[Asher]

I accept your apology, ricketclik, but not your posts.

[ricketyclik]

I accept your apology, ricketclik, but not your posts.

Why would you? You said yourself you owe your upbringing to the oil industry.

[Asher]

Yes, anyone who argues against the oil industry is arguing against the realization of prosperous lives of children.

[Flubber]

Yes, but the point here is that the sunk subsidies make the oil industry appear more efficient than renewable sector more than they actually are. It is a built in distortion that if allowed to continue reaches a sub-optimal outcome.
.

I would dispute this--

We are chasing oil and gas in remote places with ZERO infrastructure. In NE BC we build our own powerplants, roads, powerlines, pipelines--hell we even build camps that will likely function as small towns for years to support the construction whille your vaunted renewables could theoretically be constructed alongside existing infrastructure paid for by the taxes and royalties coming from the oil industry.

The fact that most of the renewables are NOT done even though there is a free market ( and any petroleum company that saw an opportunity would jump on it) is a function of the relative economic realities of the various sources of energy .

[Kuciwalker]

Yes, but the point here is that the sunk subsidies make the oil industry appear more efficient than renewable sector more than they actually are. It is a built in distortion that if allowed to continue reaches a sub-optimal outcome.

Only to the degree that the oil industry genuinely is more efficient after we've made the substantial investment and can't take it back.

There is no disincentive to maximise use of existing capital, or to invest in new capital, as it is a profits tax, so a) increased profit = increased revenue, and b) capital investment reduces profit, thus reducing the tax rate applied to revenue.

That's why I was careful to phrase that as an advantage over per-barrel auctions. The profits tax disincentivizes investment in new capital.

WRT knowing the costs in advance, everyone is subject to varying tax rates, so why shouldn't the mining sector be? Yes the costs are big, but we're talking about a tax applied to profits here, not revenue.

The mining companies are presumably already subject to a standard corporate tax, so I don't understand your point.

I agree, but as I said, the distortion is there already, and shouldn't, to be fair to renewables, be ignored.

No, you don't understand at all. Remember the car analogy? We ALREADY SUBSIDIZED the capital investment in the less-efficient type of factory - so yes, there's a distortion in the sense that had we not subsidized them, there would be fewer of them and more of the more-efficient type of factory - but the most efficient course of action going forward is to take advantage of the capital we already have, rather than trying to subsidize the more-efficient type too. The extra subsidy just results in more economic harm by creating overinvestment in the energy sector as a whole.

[Kuciwalker]

And the point that fairness is irrelevant/doesn't exist is both true and important. Renewable energy sources don't have feelings that can be hurt. We should make decisions now that result in the best possible future - not make bad decisions to mirror the harm caused by past bad decisions.

[ricketyclik]

But if we make decisions now based purely on maximising economic gain in the short term how can we not?

[ricketyclik]

I would dispute this--

We are chasing oil and gas in remote places with ZERO infrastructure. In NE BC we build our own powerplants, roads, powerlines, pipelines--hell we even build camps that will likely function as small towns for years to support the construction whille your vaunted renewables could theoretically be constructed alongside existing infrastructure paid for by the taxes and royalties coming from the oil industry.

My point was that this occurred at the birth of the industry (in Australia). I'm not suggesting that it continues to be the case.

The fact that most of the renewables are NOT done even though there is a free market ( and any petroleum company that saw an opportunity would jump on it) is a function of the relative economic realities of the various sources of energy .

I completely agree.

[ricketyclik]

-hell we even build camps that will likely function as small towns for years to support the construction whille your vaunted renewables could theoretically be constructed alongside existing infrastructure paid for by the taxes and royalties coming from the oil industry.

Theoretically. But they aren't.

When I said "allowed to continue" I meant not giving renewables the free kick non-renewables did.

[Solomwi]

You don't fix a mistake by repeating it somewhere else. The subsidies to oil can't be undone. What may have been the optimal energy mix in 2010 if they had never happened is completely irrelevant, because the subsidies happened, and that can't change. The 2010 optimal mix in the real world is going to be different from the 2010 optimal mix in fantasyland, where oil was never subsidized. Trying to reach the latter through subsidizing the new kid on the block is foolish for the reasons Kuci has explained. You're falling victim to the sunk cost fallacy.

Consider a maze with four possible endpoints: death, a kick in the nuts, a steak dinner, and one million dollars. You know going in that there are to forks, and left is the best way to go for one of them, right for the other. You come to the first fork, and choose to go left. A door slams shut behind you as soon as you go through. You're then informed that the only two possible endpoints you now have access to are death and the steak dinner. The optimal outcome now is a steak dinner. The million dollars has just ceased to matter. The only sane thing to do is go right at the next fork, not go left in a vain attempt to find the million.

[ricketyclik]

There is no disincentive to maximise use of existing capital, or to invest in new capital, as it is a profits tax, so a) increased profit = increased revenue, and b) capital investment reduces profit, thus reducing the tax rate applied to revenue.

That's why I was careful to phrase that as an advantage over per-barrel auctions. The profits tax disincentivizes investment in new capital.

I don't quite follow you there. You seem to be saying that the profits tax advantage over auctions is that it acts as a disincentive to investment in capital.

It is only a disincentive to investment as much as any cost is, assuming it's of the same magnitude. Are you saying a profits tax will be of a greater magnitude than an auctioned right?

WRT knowing the costs in advance, everyone is subject to varying tax rates, so why shouldn't the mining sector be? Yes the costs are big, but we're talking about a tax applied to profits here, not revenue.

The mining companies are presumably already subject to a standard corporate tax, so I don't understand your point.

You said that it is ideal to know as much of the upfront cost as possible. The usual argument put against a profits tax in this context is that it is an unforeseeable amount. When I make an investment the proceeds will be subject to varying rates of tax (eg, land tax, income tax and capital gains tax rates all change, why should resource extractors not be subject to the same uncertainty? (Again, given that it applies to profits, not revenue).

I agree, but as I said, the distortion is there already, and shouldn't, to be fair to renewables, be ignored.

No, you don't understand at all. Remember the car analogy? We ALREADY SUBSIDIZED the capital investment in the less-efficient type of factory - so yes, there's a distortion in the sense that had we not subsidized them, there would be fewer of them and more of the more-efficient type of factory - but the most efficient course of action going forward is to take advantage of the capital we already have, rather than trying to subsidize the more-efficient type too. The extra subsidy just results in more economic harm by creating overinvestment in the energy sector as a whole.

Fair enough. Can't argue against that.


By the way, I probably should mention that the proposed "resource super profits tax" proposed for Australia kicks in after a "reasonable return on investment" related to the government bond rate of return IIRC. I think that means it applies to profits above a 6% rate of return. The company is allowed to spread this number across its operations, including new ones. This number is probably what the whole thing will ultimately swing on - i.e., the Government will probably get the industry to back down from its anti-government advertising campaign if the threshold is raised.

[ricketyclik]

You don't fix a mistake by repeating it somewhere else. The subsidies to oil can't be undone. What may have been the optimal energy mix in 2010 if they had never happened is completely irrelevant, because the subsidies happened, and that can't change. The 2010 optimal mix in the real world is going to be different from the 2010 optimal mix in fantasyland, where oil was never subsidized. Trying to reach the latter through subsidizing the new kid on the block is foolish for the reasons Kuci has explained. You're falling victim to the sunk cost fallacy.

Consider a maze with four possible endpoints: death, a kick in the nuts, a steak dinner, and one million dollars. You know going in that there are to forks, and left is the best way to go for one of them, right for the other. You come to the first fork, and choose to go left. A door slams shut behind you as soon as you go through. You're then informed that the only two possible endpoints you now have access to are death and the steak dinner. The optimal outcome now is a steak dinner. The million dollars has just ceased to matter. The only sane thing to do is go right at the next fork, not go left in a vain attempt to find the million.

Fair point. I concede.

I guess I was hoping to make an argument for renewables on economics alone, which, given what the present market says, apparently can't be done.

On the other hand I often hear that if carbon were priced at A$30/tonne that would put many renewables on competitive footing with coal (in Australia). If coal ever allows that to happen of course.

[N35t0r]

But coal mining companies don't really have a say on the matter... as soon as extracting new coal costs more than A$30/tonne, that is what coal will cost (well, not directly), unless, of course, some ****er decides that subsidizing coal to prevent job loss would be a good idea.

[Flubber]

Theoretically. But they aren't.

Actually here-- Alberta Canada, most of the infrastructure in the province can be attributed either directly or indirectly to revenues from the oil industry-- its that dominant as a revenue source. So ANY new industry would benefit from the existing infrastructure

Theoretically. But they aren't.

When I said "allowed to continue" I meant not giving renewables the free kick non-renewables did.

and if I understand your other posts, you now see the folly in that (on an economic basis)