Climate Royalty Surcharges
In 2019, production on federal lands comprised 40% of domestic coal, 22% of domestic oil, and 12% of domestic natural gas production. Currently, the federal fossil fuel leasing program does not consider the climate costs of burning federal fossil fuels. One way to do so is through a climate royalty surcharge in addition to the current royalty rate, set in 1920, of 12.5% (18.75% offshore). We consider determining this surcharge by maximizing revenue, maximizing welfare, or setting royalties to achieve 80% of the emissions reductions of an outright leasing ban. Using the model in Prest (2021), we calculate the resulting surcharges and their implications. We estimate that all three approaches would lead to meaningful declines in global emissions, and the first two would substantially increase royalty receipts, which are split with the state of production. For example, we estimate that choosing a common royalty rate to maximize revenues yields a climate royalty surcharge of 39%, increases annual royalty receipts by $6.2B, and reduces global emissions by 37 to 63 MMton CO2e/year.
We thank Gib Metcalf for helpful discussions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.