Rethinking Royalty Rates: Why There is a Better Way to Tax Oil and Gas Development

Abstract

When provinces raise royalties charged on oil and gas production, the result can be less, not more tax revenues. The authors 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 consists of two main elements: an auction payment and royalties that apply to the value of resources extracted. The authors examine the results of Alberta’s short-lived decision, in 2007, to increase royalty rates on oil and gas production. 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.