Tax and royalty-related subsidies to oil extraction from high cost fields: A study of Brazil, Canada, Mexico, United Kingdom and the United States

Discussion of fiscal regimes for oil extraction have traditionally focused on the total charges of all sorts levied on a project (the "total government take"), and whether their level and structure optimised oil production and public revenues.  Yet national, or global, policies to meet energy and environmental goals need to maximize benefits across complex energy and economic systems, not just specific projects.  This study argues that there is a need to reframe the debate on how fiscal regimes - notably tax and royalties - to fossil-fuel extraction are evaluated.  It further argues that subsidies, which clearly run into billions of dollars per year, need to be far easier to see and value if sound public policy decisions are to be made.

Subsidization of oil extraction can occur regardless of whether revenue is optimised from a specific project.  Even if the benefits from projects exceed costs, there may still be sub-optimal allocation of capital within the overall energy or economic system.  High-cost fields are but one of a series of more expensive marginal energy options a country may pursue to meet government goals such as energy security. Distortions in investment choices may be particularly large where subsidies support the development and extraction of oil from new high-cost wells, rather than simply keeping declining wells operating for longer than market conditions alone would warrant.