Time Consistency in Petroleum Taxation: Lessons from Norway

Abstract

Because of a long time frame, irreversible and specific investments, incomplete contracts and political constraints, it is generally difficult for governments to commit themselves in a credible way to a fixed petroleum tax regime. Many controversial renegotiations and tightenings of such systems have occurred internationally over the past couple of years. In contrast, Norway has succeeded in building credibility as a reasonable tax collector because the government initially tailored the rates imposed to economic, geological and technological conditions, and then gradually changed into a neutral and stable tax system. This chapter applies game theoretic models on commitment and time consistency to petroleum taxation, and identifies special conditions in this industry which complicate a credible commitment. The Norwegian tax system is used as a case. The Norwegian model of petroleum resource administration is outlined, and it is discussed under what conditions this may represent a good system.