Sustainable Development of Geothermal Resources: an Economic Alternative

Abstract

Sustainable development of renewable resources is aimed at meeting the needs of the current generation while providing for future generations. Geothermal resources are renewable when developed under controlled levels of extraction. High rates of extraction can damage the resource or speed the depleting process, as was the case with The Geysers Geothermal Field in California. Appropriately designed public policy can contribute to sustainable development. Royalty payments are an economic instrument that can be used to reduce depletion and contribute to sustaining the productivity of the geothermal resource. This paper reviews different forms of royalties that can be applied to geothermal resources. It analyses and compares the impact of different royalty regimes on a firm’s behaviour and environmental sustainability. The results show that royalties or taxes on profit have no impact on the firm’s approach to sustainability. Indeed, royalties on profit act only as a wealth transfer from a generator to government. However, royalties on revenue encourage the firm to take a more conservative approach because this is linked to temperature and the extraction rate. Firms have to maintain the temperature to be able to sustain the long-term profitability of the development and generate a positive net present profit over the life of the plant. The results show that higher royalties will adversely impact on investment. An alternative is to set royalty rates as the ratio of the current temperature to the original temperature of the reservoir. A variable royalty rate acts as a user charge for damage done to the resource, thereby reducing the depletion rate.