Raising Revenue from Mineral Deposits

Prospector
Creative Commons License photo credit: ToOliver2


Dr Gavin Putland

Taken from the Dec – Jan edition of Progress.
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If a “site” is a piece of ground or airspace, then the “rent” of the site is simple enough: it is the price per unit time that the highest rational bidder will pay for the use of that ground or airspace, subject to any legal constraints on the uses to which that ground or airspace may be put.

But what if the “site” confers — or simply is — the right to exploit a mineral deposit? At any given time, that right will command a rent of so much per year. But because the deposit is depletable, the time over which the rent can be collected is limited. Moreover, as other deposits are depleted, the value of this deposit will presumably increase over time.

“Hotelling’s rule” says that because the conservation of this resource must be competitive with other uses of capital, the capitalized rent per unit of the remaining portion of this deposit must increase at the going rate of interest, in which case the present value of the right to exploit the deposit is independent of the timing. But this rule assumes unrestricted competition between uses of “capital”.

If in fact the “capital” available to exploit this deposit comes from a limited pool of which the owners expect some element of economic rent, then the remaining portion of the deposit must appreciate faster than the going rate of interest in order to justify its conservation. If, in addition, this deposit is a small part of the global reserve, exploiting it faster will not significantly accelerate the appreciation of the remaining portion, in which case the company with access to the resource will simply deplete the resource as fast as its capital allows. That (as Michael Hudson told me in October) is what typically happens.

With this background, let us consider six possible methods of raising public revenue from the mineral deposit:

1. Impose a “specific” royalty — that is, a charge proportional to the quantity extracted.
This charge bears no relation to the economic rent, but has the virtue of encouraging conservation: if the rent of extraction is not sufficient to cover the royalty, the deposit will be conserved until prices rise high enough to cover the royalty.

2. Impose an “ad valorem” royalty — that is, a charge proportional to the sale price at the mine head.
This is closer to “capacity to pay” than a specific royalty, but still does not reflect economic rent. Like a specific royalty, it encourages conservation.

3. Charge the market rent for access to the deposit.
This approach collects economic rent. But for that very reason, this approach makes inaccessible (low-rent) deposits competitive with accessible (high-rent) deposits, and does not force the conservation of the former. And because it collects rent per unit *time*, it encourages the mining company to minimize the time — by depleting the resource as fast as possible.

4. Bill the mining company for the reduction in the total assessed value of the deposit.
This approach captures economic rent because the total value of the deposit is none other than capitalized economic rent. So it too does not force the conservation of low-rent deposits. But because the charge is proportional to depletion rather than time, it does not encourage the mining company to exhaust the deposit as fast as possible.

5. Assert public ownership of the resource, and retain the proceeds of sales as public revenue, but call competitive tenders for the extraction.
Under this approach, the lowest tenderer will get only a normal return on its capital, so that the surplus return (economic rent) will accrue to the public. If the tender is for a fixed amount, the winning tenderer will want to get out of the project as soon as possible, and will not want to exert itself to extract the more inaccessible parts of the deposit. If the tender is an amount per annum, the winning tenderer will not be in any hurry to get on with the job.

6. Some combination of the above
A mixture of the above approaches will produce a mixture of the associated incentives. In deciding what mixture is appropriate, one should note that to encourage conservation of a resource is to discourage any undesirable side-effects caused by exploitation of the resource. One such side-effect is greenhouse gas emissions.

Download Progress – Dec Jan 2009 edition

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https://prosper.org.au/2010/02/17/raising-revenue-from-mineral-deposits/