Western Australia's Domestic Gas Reservation Policy: The Elemental Economics

Western Australia introduced a domestic gas reservation policy in 2006, which requires new gas developments to supply the equivalent of 15 per cent of their gas exports to the Western Australian domestic gas market. The aim of the policy is to maintain domestic gas prices below export parity. It has been regarded as having the same effects as a tax on production and a subsidy on domestic consumption, with the attendant economic costs. This paper improves on this interpretation by recognising that the policy imposes a proportional relationship between export and domestic supply. While the model developed is consistent with the tax-subsidy interpretation, it enables the quantification of the links between the implicit tax and subsidy rates, the proportion of gas reserved and the domestic market price. The results indicate that a binding reservation policy always causes a deadweight loss. While activity in gas-using industries expands, this does not yield an overall benefit to the economy in the long run. Gas production is reduced and income is foregone because some gas is diverted to lower value uses. The work offers early results from a larger project to model the Australian natural gas industry within a general equilibrium setting.