How Should We Tax the Use of Nonrenewables Under a Public Budget Constraint?

Abstract

Most developed countries will be facing severe public budget constraints. We derive a formula for how extraction or use of nonrenewable resources should be taxed when governments need to collect commodity tax revenues. Moreover, we show how it can be directly used to indicate how carbon taxation should be increased in the presence of public-revenue needs. The obtained tax is an augmented, dynamic version of the standard Ramsey taxation rule. It distorts developed reserves, which are reduced, and their depletion, which is slowed down, going further in the direction prescribed for the resolution of the climate externality. We present a simple calibrated application of our results to illustrate how the carbon taxation of oil should be augmented, and the incidence on oil use and tax revenues.

Keywords: Optimal commodity taxation, Public budget constraints, Nonrenewable resources, Inverse elasticity rule, Carbon tax