Climate royalty surcharges

Abstract

Concerns about climate change have led to calls for reforming or eliminating the extensive US federal fossil fuel leasing program. One proposed reform is adding a climate surcharge to the existing royalty rate. We consider determining this surcharge by maximizing social welfare, including the climate damages from combusting federal fossil fuels and the value of raising revenue when the marginal value of public funds exceeds one. We estimate that the resulting climate royalty surcharge would lead to meaningful declines in global emissions, would significantly increase royalty receipts, and would result in royalty rates substantially greater than those currently in place. We also evaluate the change in onshore royalty rates made by the Inflation Reduction Act of 2022, finding the law's modest rate increases leave substantial welfare gains, emissions reductions, and royalty revenues on the table.