Climate Royalty Surcharges
An examination of the use, determination, and implications of a surcharge on oil and gas production on federal lands to achieve emission reductions and climate goals.
Abstract
Concerns about climate change have led to calls for reforming or eliminating the extensive US federal fossil fuel leasing program. One proposed reform is adding a climate surcharge to the existing royalty rate. We consider determining this surcharge by maximizing social welfare, including the climate damages from combusting federal fossil fuels and the value of raising revenue when the marginal value of public funds exceeds one. We estimate that the resulting climate royalty surcharge would lead to meaningful declines in global emissions, would significantly increase royalty receipts, and would result in royalty rates substantially greater than those currently in place. We also evaluate the change in onshore royalty rates made by the Inflation Reduction Act of 2022, finding the law’s modest rate increases leaves substantial welfare gains, emissions reductions, and royalty revenues on the table.
A previous version of this paper was originally published as part of the National Bureau of Economic Research working paper series.
