Charge extractive industries a severance fee for the damage they leave behind

Extractive companies come and go, but the damage stays. When local communities welcome oil, gas, and mining business interests into their lands for the short-term economic payoffs, they must also contend with the fallout later. After all, by their very nature extractive companies will eventually leave when they’re done extracting all they can — or when they fail because no one wants their products anymore.

From mass layoffs and governmental budget shocks to environmental degradation, that resulting harm can be severe and even irreparable. Furthermore, in this era of rising corporate power and institutionalized inequality, ordinary working people aren’t the ones who got richer from the exploitation of their country’s natural resources. So when the communities left behind get stuck with the clean up tab, it’s adding insult to injury.

The problem is all too familiar to policymakers, historians, and advocates around the world. Today, we’re seeing the issue again hit close to home in states like Alaska, North Dakota, Louisiana, and Wyoming—states with lots of fossil fuels but also economies excessively dependent on single extractive industries. In the long run, not only must those states keep grappling with the “bust” part of the boom-and-bust cycles of the oil and gas sector, they need to wake up to its dimming prospects in the 21st century. That’s because the stark choice and opportunity for America in this pivotal moment is pursuing the tremendous economic potential of carbon-free clean energy technologies — or fossil fuels whose carbon pollution is dangerously destabilizing our climate.

So what can state governments do to be smarter and less short-sighted about how they manage the extractive industries on their home turf?

One key strategy is to make those extractive companies fund the remedies for the damage they inflict on local economies when they exit. That’s a concept reflected in a recent proposal by the Brookings Institution for more state governments to charge a severance tax on oil and gas extraction activity and use that money to fund permanent trust funds:

To capture the opportunity, advocates in several fracking states have suggested applying or increasing severance taxes (levied on resource extraction) on new oil and gas extraction and managing the revenues for long-term use through the creation of permanent trust funds. Such strategies comport well with the emerging principles of inclusive economic development.

All of which raises anew the question of how states should manage the boom and bust cycle associated with oil and gas development. More specifically, the current bust brings to the fore the opportunity for states that lack severance taxes to impose them and, once enacted, to channel future oil and gas revenue into permanent trust funds—public investment funds, often funded through non-renewable resource revenues, that invest tax or fee revenues in the capital markets to produce a steady flow of income long into the future.

Permanent trust funds—including those in nations like Norway, Chile, Kuwait, Israel, and U.S. states like Alaska, North Dakota, and Texas, among others—have a long history, with the funds generating new sources of capital that have helped smooth out the volatility of commodity price cycles and invested the returns for longer-term economic development. Moreover, numerous U.S. states already have some form of severance tax that can be utilized to capitalize such funds. States as diverse as Pennsylvania, Ohio, North Dakota, and Alaska could establish or improve on fees and funds whose wise management will not only cushion their economies from the volatility of future booms and busts but help finance the investments needed to catalyze economic diversification, promote economic inclusion, and accelerate decarbonization of the economy to reduce climate change.

To be clear, the goal isn’t to prop up oil and gas development, particularly given the dangers of fracking to extract oil and natural gas from inaccessible rock formations. The goal is to ensure that state governments can be better stewards of their budgets and our clean air, water, and other natural resources, all the while allowing the country to transition to a 21st century energy system. Imposing severance fees on extractive industries, as a number of states already do, would be a solid step towards that goal.

For more information, also see “Natural Resource Justice,” Oxfam America (accessed 2016) and “Covering the Extractive Industries,” Global Investigative Journalism Network (2013).