September 14, 2011 – When provinces raise royalties charged on oil and gas production, the result can be less, not more tax revenues, according to a report from the C.D. Howe Institute. In Rethinking Royalty Rates: Why There Is a Better Way to Tax Oil and Gas Development, authors Colin Busby, Benjamin Dachis and Bev Dahlby show how resource-rich provinces would be better off relying more on auctions for exploration and development rights and relying less on royalties levied on output.
Oil and gas taxation in Canada, explain the authors, consists of two main elements: an auction payment, known as a bonus bid, by which firms purchase rights to explore and drill for Crown-owned resources for a specified period of time; and royalties that apply to the value of resources extracted. The authors, all current or former Albertans, examine the results of Alberta’s short-lived decision, in 2007, to increase royalty rates on oil and gas production. They measure the impact of the increase on bonus bid values by comparing bonus bids within 100 km of Alberta’s borders with British Columbia and Saskatchewan, provinces that did not change their royalties. Accounting for differences in bonus bids across provinces in the same geological zones, the authors report that Alberta government revenue, collected through bonus bids, declined by nearly as much as the projected increase in royalty payments.
“The increase in royalties reduced the rewards to companies from oil and gas extraction, and therefore reduced the amount they were willing to pay to explore and develop new resource projects,” said co-author Bev Dahlby. “The problem with the current heavy reliance on royalties is that they impede resource exploration and development, whereas upfront auction revenues would not do so.”
“A shift in emphasis toward auction revenues would have the added benefit of reducing government revenue volatility resulting from short-term energy price shocks,” commented co-author Benjamin Dachis.
The authors recommend that provinces should reduce royalties on new, conventional oil and gas, and shale gas production, whether their extractive industries are mature or emerging.
Click here for the full report.
For more information contact:
Bev Dahlby, Professor of Economics,
University of Alberta; 780-437-6740
Colin Busby, Senior Policy Analyst;
Benjamin Dachis, Policy Analyst, C.D. Howe Institute, 416-865-1904.