Intergovernmental Interactions between Taxation of Oil and Gas and Environmental Protection

The present paper focuses on the environmental impact deriving from the production of oil and gas and how it can be controlled by using both taxing and/or regulatory instruments. The incentive to use regulations and their impact depends 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 tax revenue. There is frequently, a conflict of interest between the national government, for which the increase in domestic production of energy sources is an important priority and the local governments and communities that are more interested in reducing the local environmental impact. The paper explores, first, the potential of upstream oil and gas taxation to control the environmental impact of production operations and then the interactions between the assignment of the proceeds of upstream taxation among levels of government and residents and the effective use by these levels of the responsibilities for environmental policy assigned to them.