The literature on mineral taxation (Hotelling (1931), Burness (1976), Levhari and Liviatan (1977), Fisher (1981), and Heaps (1985)) has concentrated on the effects of these taxes on resource allocation, revenue yield, and stability, conservation, and depletion dates. The general conclusion is that taxes such as a Brown tax, a resource rent, or a pure profits tax are nondistortionary, whereas franchise taxes, a specific tax on output, ad valorem taxes, or property taxes are distortionary.
These studies, with the notable exception of Schulze (1974), however, did not take into account the external effects (or environmental externalities) of mineral extraction. As a result, they did not consider the appropriate corrective taxes required to ensure that mining firms account for the social costs that they may impose on others. Nor have they examined the effects of mineral taxes on the environment.
This paper examines the effects of mineral taxes on the environment in a framework that incorporates current as well as cumulative environmental externalities, and proposes an appropriate corrective tax for extractive firms that generate such externalities. An important finding is that neutral taxes, such as the resource rent tax, need to be combined with an appropriate corrective tax, such as the one proposed in this paper, in order to ensure efficient resource allocation. In the absence of such corrective taxes, neutral taxes may perform worse than some nonneutral taxes because the latter taxes act as proxies that partially offset the impact of environmental externalities on resource allocation. Finally, the paper examines the impact of mineral taxes on issues of environmental concern.
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)| false Stiglitz, Joseph E., and Partha Dasgupta, “Market Structure and Resource Depletion: A Contribution to the Theory of Intertemporal Monopolistic Competition,” The Journal of Economic Theory, Vol. 28( October 1982), pp. 128– 64. 10.1016/0022-0531(82)90096-5
Vousden, Neil, “Basic Theoretical Issues of Resource Depletion,” The Journal of Economic Theory, Vol. 6 (April 1973), pp. 126–43.
Although there may be some obvious cases where these policies may lead to unsustainable growth and development strategies, in general, their net effects on sustainability are complex and often ambiguous (see Muzondo and others (1990)).
The terms “environmental degradation,” “pollution,” and “environmental externalities” are often used interchangeably. In this paper “environmental degradation” and “pollution” refer to the use or consumption of any environmental assets whether or not there are external effects. “Environmental externalities” refers to external effects associated with the use or consumption of environmental assets. All forms of environmental degradation may be of concern to environmentalists. However, from an economic point of view it is the degradation associated with externalities that requires public policy intervention.
None of the many descriptions of environmental damage from mineral extraction have made the analytical distinction between the rate and the amount of cumulative environmental degradation. As shown in Section II below, this distinction is important and calls for different corrective measures from those of standard static analysis.
Under the stipulated assumptions the equilibrium rate of output for a monopolist requires that MRt = MRt + 1/1 + r, where MRt is the marginal revenue at time t, and r is the interest rate. With a constant demand curve, MRt = βPt, where 1/1 — β is the elasticity of demand. It follows that the equilibrium rate of output for a monopolist implies a price such that Pt = Pt+1/1 + r, which is also the equilibrium condition under competition. For further discussion of an extractive monopolist firm, see Stiglitz (1976). See also Stiglitz and Dasgupta (1982) for a discussion of market structure and resource depletion.
This assumes that costs are independent of the cumulative level of extraction.
In addition, a monopolist may, because of its size, have readier access to capital markets than individual competitive firms. If this means that the cost of capital is lower for the monopolist than for firms under competition, this would further strengthen the bias in favor of conservation by the monopolist. It should be stressed, however, that although a monopolist may pursue a more conservationist policy than firms under competition, from a social welfare point of view, the monopolist’s rate of extraction is not necessarily preferred to that of firms under competition.
The exception is ornamental minerals such as gold and diamonds.
Burness (1976) analyzed the effects of resource taxation under the assumption that the costs of resource extraction are not affected by the cumulative amount of extraction—an assumption that leads to the conclusion that resources are completely exhausted at the terminal period. Gordon (1967), Levhari and Liviatan (1977), and Heaps (1985), among others, incorporated the effects of cumulative extraction in their models and modified earlier conclusions. For example, as against the standard Hotelling conclusion that a flat-rate severance tax always prolongs the depletion date of a mine, Levhari and Liviatan show that the impact of the tax is ambiguous. These studies have not, however, incorporated the effects of environmental externalities in their models. Other studies, including those by Anderson (1972) and Vousden (1973), have examined the importance of environmental externalities, resource conservation, and other environmental issues in the context of macroeconomic growth models.
Clearing of forests and park land (which have scenic and recreational values) for agricultural, human settlements, or other economic uses may represent such cases: production costs (that is, costs of clearing) need not increase with the amount of forest already cleared; however, the scenic and recreational value diminishes with the amount of forest already cleared.
The analysis may, however, be relevant for cases beyond extractive industries. For example, it would seem to apply to cases discussed by Pearce (1976) where, beyond a certain level, economically optimal waste emissions into an environmental medium diminish the medium’s assimilative capacity, and this in turn increases marginal environmental damages.
The cutoff point for mineral extraction refers to a point where extraction ceases, or when marginal profits are zero.
See Baumol and Oates (1988) for a suggested way of getting around the problem of designing environmental taxes.
For a discussion of the objectives of mineral resource taxation, see Garnaut and Clunies-Ross (1983).
The case in which the chosen interest rate is higher than the firm’s discount rate is the reverse of that when it is lower.
For a detailed comparison between a Brown and a resource rent tax, see Garnaut and Clunies-Ross (1983).
Perhaps because of its significant revenue risk to governments, many governments do not favor the tax.
The difference in the effects of the lump-sum tax in static analysis and the franchise tax in dynamic analysis is, of course, due to discounting. Since the nominal value of the franchise tax paid is the same in each period irrespective of the level of output, an extractive firm can minimize the present value of its tax liability by reducing the number of periods in which extraction takes place through accelerating extraction from the future toward the present. In this sense the tax is avoidable and, strictly speaking, not a lump-sum tax.
That is, the distinction between a specific tax based on gross value and that based on certain quality of output is ignored. For an analysis that makes the distinction between a specific tax based on gross value and one based on certain quality of output, see Conrad and Hool (1981).