EuroEconomica, Vol 31, No 5 (2012)

Abstract

The supply chain of oil and gas represents a major and multifaceted tax base to be exploited by governments. At the same time, oil and gas have a huge environmental impact related, first, to production operations and, then, to the use of their products. Two distinct sets of taxes are applied: upstream and downstream taxes. Upstream taxes are used almost exclusively for extracting the rent and don’t have an intended direct environmental impact. Downstream taxes have, in addition to their predominant fiscal motive, also an environmental aim, because they reduce emissions and waste in so far as they reduce the use of oil and gas. The present paper has a narrower focus being concentrated exclusively on the environmental impact deriving from the production of oil and gas and not from their consumption. This impact can be controlled by using taxing and regulatory instruments. In the present international practice governments use almost exclusively regulatory instruments to control the environmental impact of production operations. The incentive to use regulations and their impact depends, of course, on the level of government to which the regulatory responsibility is assigned. It also depends on the assignment, between levels of government, of the upstream tax instruments. This is essentially because environmental control has a cost in terms of production and, hence, of upstream taxes. A simple but immediate policy recommendation can be derived: the assignment of environmental responsibilities has to be matched by the assignment of the revenue of upstream taxes. Hence, there may be, and there is frequently, a conflict of interest between, on the one hand, the national government, for which the increase in domestic production of energy sources is an important priority and, on the other, local governments and communities, which are more interested in reducing the local environmental impact, especially if they have no access through the rent to the benefits of expanded production that could compensate them. Two countries, Argentina and Italy, are used to illustrate some of the arguments advanced.