Shale gas in Poland: An analysis of tax mechanismsand dynamic interactions

Abstract

(ProQuest: ... denotes formulae omitted.)IntroductionTo date, not a single cubic meter of shale gas has been extracted and sold in Europe. While the substance still sits deep in the ground, it has already fuelled a fierce debate, protests, hopes and fears across the continent. Poland is the forerunner of exploration of natural gas from unconventional (shale rock) deposits. Nevertheless, little economic research has been conducted on the topic of shale gas in Poland. This exploratory study hopes to contribute to the scholarship on the topic.The aim of this article is to approach the study of shale gas from an economic perspective, with welfare at the centre of the analysis, and to deliver policy recommendations for the Polish government on the taxation of the shale gas extracting firms in Poland.The key result of the static analysis is that is that lump sum tax is the first best of all taxation methods. The second best option for taxation is a combination of the CIT and a windfall profit tax. From the dynamic perspective, this research argues that Gazprom can remain the market leader thanks to the sequential character of the competition in the Polish natural gas market, but this would not have negative welfare effects.This study is structured in the following way: section two introduces the topic of shale gas in Poland, section three elaborates on the methods, section four provides an analysis of the tax mechanisms from a static perspective, section five looks at the dynamic effects and sections six concludes the research.1.Shale gas in PolandThe Polish government initially offered the licenses to explore, or explore and extract, shale gas in the form of concessions. The second license type, to explore and extract, was introduced in order to simplify the market regulation and to attract investors. For a low price firms could purchase the right to explore and extract, regardless of the findings. Concessions are individual parcels of land. The price of each concession is determined by its size multiplied by a single rate that the Polish government sets per square kilometre (km2). A single rate applies to all concessions in the country. For exploration only, the price per km2 had been set at PLN 105.811 and for exploration and extraction PLN 211.622. In addition, the firm that bought the license only for the exploration process had the pre-emptive right to upgrade the license to extraction of shale gas. There were two reason behind this design. First was lack of knowledge about the quantity and quality of natural gas in the Polish shale rock formations. Second, the investors, not the taxpayers, bore the cost of exploration and the associated risk. Shifting the costs and risk associated with exploration process on investors was compensated by the government to the firms in the form of the pre-emptive right to purchase a license for extraction and the single exploration/extraction licenses. A new law, introduced in 2014, has combined previous types of concession into one, in a further effort to simplify access to the market. In all cases the legal set- up has ruled out auctions at the extraction stage. For this reason the Polish government has turned to taxation as a method to collect revenue from the potential shale gas extraction and sales. In the Polish government's view the 19 per cent profit tax is insufficient. Warsaw decided, in the 2014 change of law, to raise the potential revenue from taxation of shale gas firms by adding a complementary tax on fossil fuels, that depends on the profitability of the source, and can amount to 0, 12,5 or 25 per cent and also an additional tax of 1,5 per cent on the total value of extracted natural gas from shale sources. Nevertheless, collection of the complementary tax has been suspended until year 2020, in an attempt to stimulate the industry. Possibly, taxation of shale gas will be adjusted once again in the future. Without certainty about tax regulation and the size of the tax burden, investors are reluctant to invest in exploration or move from exploration to extraction; what harms consumers of natural gas in Poland. …