Hydropower production and environmental regulation: opting for a performance-based tax approach

Abstract

This paper discusses the case for reforming the actual mechanism for charging water abstractions for hydropower production in Italy and proposes to introduce a performance-based environmental fee. This should be able, on the one hand, to internalize the environmental costs that hydropower production causes and, on the other, to stimulate producers to opt for more environment-friendly management of hydropower plants. We think, in fact, that the re-issue of several expired hydropower concessions represents an opportunity to redefine the taxation system to which hydropower is currently subject to, in order to introduce finally a form of environmental taxation coherent with the Water Framework Directive. In particular, the proposed fee is a real environmental tax, as it aims at changing the environmentally impacting behavior by increasing the marginal cost of damaging river ecosystems. Therefore, it is equitable, as it does not tax all producers the same way, but according to the impacts that their production generates. Finally, it is immediately applicable, as it is based on the successful experience of performance-based regulation in several other sectors.