| Title | Geothermal Royalties: Solution to a Missing Market? |
|---|---|
| Authors | Sam Malafeh and Basil Sharp |
| Year | 2012 |
| Conference | New Zealand Geothermal Workshop |
| Keywords | open access, policy, property rights, economics, royalties, renewable, resource |
| Abstract | Sustainable development is ensuring that the benefits accruing from resources are left for future generations while also fulfilling the needs of the current generation. Geothermal resources are renewable when developed under controlled levels of extraction. A high rate of extraction can damage the resource or speed up the depletion process, leaving less for future generations. In addition, today’s knowledge may not necessarily answer all the questions related to the sustainability of the resource. Today’s eco-friendly activities may prove to be harmful in the future. A conservative, step-by-step, approach helps to improve knowledge about the resource and creates opportunities to identify the side effects. It is wise to discourage rapid development when the status of the resource is not fully recognised. Selected policies must balance the costs and benefits of developments at the margin. Resource extraction may have a wider environmental impact. Royalty payments can be an economic instrument to address the market failure to restrict the exploitation of the resource. Royalties may increase the price to a more realistic level that can balance the needs of both today and the future. A higher cost of the supplied geothermal fluid increases the price of the electricity supplied which, in turn, may encourage better planning. Ultimately, it may increase the value of the resource. This paper reviews different forms of royalties that can be applied to geothermal developments for electricity production. It analyses and compares the impact of different royalty approaches on a firm’s behaviour and whether royalties can guarantee the sustainability of the resource. The result shows that royalties or taxes on profit have no impact on the firm’s behaviour. However, royalties on the revenue change firm’s behaviour to take a more conservative approach. The results show multiplied effects in reducing the speed of geothermal developments. Therefore, royalties on revenue can be used as an economic instrument to bring the exploitation of geothermal resources down to a more sustainable level. |