Mineral Royalties: Historical Uses and Justifications

Abstract

Governments and private landowners have collected royalties on mineral resources for centuries. When comprehensive measures to account for the environmental externalities of mineral extraction are politically or practically unavailable, federal and state governments might consider adjusting royalty rates as an expedient way to account for these externalities and benefit society. One key policy question that has not received attention, however, is whether a royalty rate can and should be manipulated in this way, notwithstanding statutory discretion to do so. This Article fills that gap in the literature, evaluating the argument for increasing federal or state fossil fuel royalty rates through historical, theoretical, and practical lenses: by considering the meaning of royalties, the economic justifications for royalties, the legislative history of the implementation of federal royalties, and the considerations that private landowners have relied upon in setting royalties. This Article concludes that royalties have been used as pragmatic policy tools from almost their inception, and federal and state governments should exercise their existing statutory discretion to adjust mineral royalty rates to promote public welfare. In particular, it would be reasonable for governments to adjust mineral royalty rates to account for negative externalities that are not otherwise addressed by regulation or to pursue royalty rate reform to meet other policy goals.

Keywords: natural resources, environmental economics, government policy, royalty payments

JEL Classification: Q38, Q48, Q58, H23, H25, H27, H71, H75, K32