TORONTO, Sept. 14, 2011 /CNW/ - 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.
For the study go to: http://www.cdhowe.org/pdf/commentary_333.pdf
SOURCE C.D. Howe Institute
For further information:
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.