Abstract
An elementary theorem in the theory of public policy indicates that if the Government wishes to achieve certain values of given ‘target’ variables, for example a particular level of employment or size of balance-of-payments surplus, it must have at its disposal at least as many different policy instruments.1 In the field of energy economics this restriction is particularly important because of the extreme complexity and range of objectives which are frequently involved. In Chapter 3 we noted some of the problems in efficiency such as information externalities, and ill-defined property rights (i.e. common pools) which could lead to sub-optimal levels of exploration and too rapid a rate of depletion of known resources. Chapter 4 made reference to the effects on income distribution of energy pricing policies, while in Chapter 5 the problems of pollution externalities which arise from energy use were examined. The development of energy resources may have important consequences for employment and regional policy, as well as for other macro-economic aggregates such as the balance of payments. Governments are also observed to be interested in the extent of foreign control over energy resources and the implications for national security of relying on various sources of supply.
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Notes and References
See, for example, L. Johanson, Public Economics (New York: North-Holland, 1965) pp. 9–22,
and A. Peacock and G. K. Shaw, The Economic Theory of Fiscal Policy (London: Allen & Unwin, 1971) chap. viii.
This may be required where oil or gas fields straddle national boundaries. In the North Sea, for example, the discovery of the Brent field gave rise to classic externality problems. In spite of the ‘go-slow’ policy of Norway towards oil development, production licences were awarded since the reservoir ‘was especially conducive to draining of the Norwegian Oil by pumping from the British side’. See K. W. Dam, ‘The Evolution of North Sea Licensing Policy in Britain and Norway’, Journal of Law and Economics, vol. 17. no. 2 (Oct 1974) p. 234.
The basic issue at stake is whether the corporation tax falls on profits or whether it is shifted forward to consumers in the form of high prices. If companies are profit-maximisers and the tax falls on pure profits one argument runs that no shifting will take place since whatever price and output combination maximised profits before the tax was introduced would also do so afterwards. An alternative view concentrates on behavioural theories of the firm and the existence of mark-up pricing, along with the fact that profits taxes may fall on ‘cost’ items, to make the case for forward shifting. Much empirical work has failed to settle the issue one way or the other. For a survey of the evidence see R. A. Musgrave and P. B. Musgrave, Public Finance in Theory and Practice, 2nd ed. (New York: McGraw-Hill, 1976) chap. 18.
See S. L. McDonald, ‘Percentage Depletion, Expensing of Intangibles, and Petroleum Conservation’, in M. Gaffney (ed.), Extractive Resources and Taxation (Madison: University of Wisconsin Press, 1967) pp. 269–88.
This point is emphasised by J. E. Stiglitz, ‘The Efficiency of Market Prices in Long-run Allocations in the Oil Industry’, in G. M. Brannon (ed.), Studies in Energy Tax Policy (New York: Ballinger, 1975), pp. 77–8.
This is a very important and complex problem for any system of income taxation to solve. See R. A. Musgrave, The Theory of Public Finance (New York: McGraw-Hill, 1959) chap. 8, for a survey of the problem involved in defining ‘taxable income’.
The present U.S. corporation income tax is described in J. A. Pechman, Federal Tax Policy, 3rd ed. (Washington, D.C.: Brookings Institution, 1977) chap.
For the U.K. system see A. R. Prest, Public Finance in Theory and Practice, 5th ed. (London: Weidenfeld & Nicolson, 1975).
Where a firm’s investment expenditures are continually growing, provisions for accelerated depreciation can enable the firm to permanently reduce its tax payments rather than merely to shift them forward. In the limit 100% immediate capital write-off could enable the firm to avoid corporation taxes completely providing sufficient additional investment opportunities were available. See, for example, Johansen, Public Economies (1965) op. cit. pp. 251–6.
The analysis of T. Page, Conservation and Economic Efficiency, Resources for the Future (Baltimore and London: Johns Hopkins University Press, 1977) pp. 112–13, is very similar to that presented below.
A. G. Kemp, ‘Fiscal Policy and the Profitability of North Sea Oil Exploitation’, Scottish Journal of Political Economy, vol. 22, no. 3 (Nov 1975) pp. 244–60.
See D. I. MacKay and G. A. Mackay, The Political Economy of North Sea Oil (London: Martin Robertson, 1975) p. 42.
Studies have been carried out on offshore lease sales in the United States. Erickson and Spann, for example, have attempted to calculate expected bids for various tracts in the Gulf of Mexico. Their results indicate a close relationship between expected and actual bids. ‘The bidding evidence suggests that the offshore leasing process is highly competitive.’ See E. W. Erickson and R. M. Spann, ‘The U.S. Petroleum Industry’, in E. W. Erickson and L. Waverman (eds), The Energy Question (University of Toronto Press, 1974) pp. 5–24.
Economists with an instinctive regard for markets often tend to favour the competitive bidding system over more regulatory alternatives. K. W. Dam, for example, has consistently supported such a scheme in the North Sea while Gardner argues for a similar system in the development of oil shales. See K. W. Dam, ‘Oil and Gas Licensing and the North Sea’, Journal of Law and Economics, vol. 8 (Oct 1965) 51–75, and Gardner, ‘Towards a Disposal Policy for Federally Owned Oil Shales’, op. cit.
Extensive work has been undertaken in the United States on this aspect of mineral leasing policy. A useful survey of the major studies is given in F. M. Peterson and A. C. Fisher, ‘The Exploitation of Extractive Resources: A Survey’, Economic Journal, vol. 87, no. 4 (Dec 1977). pp. 681–721.
K.W. Dam, ‘The Evolution of North Sea Licensing Policy in Britain and Norway’, Journal of Law and Economics, vol. 17, no. 2 (Oct 1974), esp. pp. 221–6, and vol. 13, no. 1 (Apr 1970) pp. 11–44. For a detailed account of the negotiations between the Gas Council and the Oil Companies during the 1960s see ‘The Pricing of North Sea Gas in Britain’, Journal of Law and Economics (1970), by the same author.
See also M. B. Posner, Fuel Policy (London: Macmillan, 1973) chap. 11, for a discussion of the determination of the U.K. price of natural gas.
A breakdown of estimated capital and operating costs of the various fields in the North Sea is given in A. G. Kemp, ‘The Taxation of North Sea Oil’, University of Aberdeen, North Sea Study Occasional Papers (Aug 1976) appx I.
See A. Harberger, ‘The Taxation of Mineral Industries’, Federal Tax Policy for Economic Growth and Stability, 84 Cong., 1 Sess., Nov 1955.
See S. L. McDonald, ‘Percentage Depletion and the Allocation of Resources: The Case of Oil and Gas’, National Tax Journal (Dec 1961) pp. 323–6. His analysis produced a stream of subsequent papers in National Tax Journal: D. H. Eldridge, ‘Rate of Return, Resource Allocation and Percentage Depletion’ (June 1962) pp. 209–17;
R. A. Musgrave, ‘Another Look at Depletion’ (June 1962) pp. 205–8;
and P. O. Steiner, ‘The Non-Neutrality of Corporate Income Taxation — With and Without Depletion’ (Sep 1963) pp. 238–51.
Stiglitz, ‘The Efficiency of Market Prices in Long-run Allocations in the Oil Industry’, in Brannon (ed.), 1975, op. cit. pp. 73–8.
A good general survey is provided by H. W. Richardson, Economic Aspects of the Energy Crisis (Farnborough, Hants: Lexington Books/Saxon House, 1975) pp. 64–9, pp. 132–6.
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© 1980 Michael G. Webb and Martin J. Ricketts
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Webb, M.G., Ricketts, M.J. (1980). Fiscal Instruments of Energy Policy. In: The Economics of Energy. Palgrave, London. https://doi.org/10.1007/978-1-349-16323-6_6
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