tl,dr: ground rent from fossil fuels is much greater than the negative externality costs of greenhouse gases, implying it is realistic that we can neutralize all emissions in the near future without any further economic deadweight or the need to subsidize other energy sources.

The ground rent from fossil fuels represents a massive, poorly managed source of wealth, its entity eclipses many of the modern socioeconomic issues that we face, this includes anthropogenic climate change, a problem strongly associated with the oil industry. Ground rent is the unearned increment that results from the exclusive ownership of a natural resource, it is estimated that up go 78% of profits from the oil industry is ground rent.

Norway: a model of oil rent taxation

In the late 60s the country of Norway needed to decide how to manage the exploitation of its natural oil reserves. A Norwegian citizen, Farouk Al-Kasim, a geologist formerly employed by the Iraq Petroleum Company, was disillusioned by the nationalization approach that left the industry in his country of origin in a sorry state characterized by corruption and waste.

The proposal from Al-Kasim and colleagues was as follows, while a Norwegian State Oil Company was to be established, the market was to be left open to other international companies with one caveat: the state was going to levy a severance tax (nominally an income tax) on companies that engage in extraction. The tax was heavy, equal to almost 100% of the ground rent of oil, in return the companies would be exempt from all other taxes and the country would subsidize R&D and exploration of further deposits.

This approach has been characterized as fiscally neutral¹, meaning it does not distort market forces and generates no deadweight loss. It also generates massive public income, in the case of Norway a considerable amount of this went to fund a government sponsored pension fund (the Oil Fund) which is now the world’s largest sovereign wealth fund.

A number of other polities have implemented similar fiscal policies. The state of Alaska manages a similar wealth fund, the Alaska Permanet Fund, established in 1976, which pays dividend to Alaskan residents, it also contributes to Alaska being the state with the lowest tax burden in the union.

In summary, oil rent when properly harnessed, can bring great social wealth without the economic loss that usually comes with most taxation. Of course since oil is mostly valued as a source of energy we can’t neglect to mention its most infamous externality: anthropogenic climate change.

The failed policy of the energy transition

The approach chosen by the ruling class to tackle the issue of climate change is that of the so-called renewable energy transition. A major change to our energy system, mostly imposed from above with various methodologies, the aim is to phase out fossil fuels to reduce greenhouse gas emissions in a sustainable and permanent way. Perhaps the most important international agreement concerning this transition is the Paris Agreement, an international treaty signed in 2016 by almost every polity on the planet; one of its key aim is to keep global average temperatures increase below 2 °C relative to pre-industrial levels as well as to limit temperature increase to 1.5 °C.

“The truth is that we have failed to avoid an overshooting above 1.5 °C in the next few years."

António Guterres, U.N. Secretary General, 2025

Ten years after the Paris Agreement we have already failed its goals². Renewable energy production has increased but not in a meaningful way, and worldwide energy use has increased even more.

The whole energy transition is currently set to fail, the reasons are many, including:

• the strong opposition to nuclear power by most green energy advocates
• the key role played by fossil fuels in our transportation networks for which there is no proper replacement.

This failure is made even more painful if one considers the huge amount of public spending that has been used in subsidies and incentives to boost alternative energy sources to make them competitive with fossil ones. The top-down approach is likely the most problematic, without considerable sponsorship renewables would never have achieved the growth that they did, yet on the grand scale all of that was for naught; turns out sustainable energy is actually not sustainable at all, in an economic sense at least, energy sources are selected by a market process to maximize efficiency given a set of resources and the legislative environment, going against that is antieconomical by definition. To meat least, the whole thing was foolish to begin with.

The alternative: carbon sequestration

Atmospheric carbon on Terra is an element of the carbon cycle. During the cycle carbon atoms can end up in a reservoir for a period of time. Sequestration can be a biological or geological process and the time period spent in the pool can last from hundreds to millions of years. A classic example is plant biomass: plants acquire carbon from the atmosphere for their own growth; therefore reforestation efforts can reduce greenhouse gases concentration, as well as performing other desirable environmental services. Unfortunately even if we were to tile every desert on the planet with trees it would make but a dent on our overall carbon emissions; however other approaches like oceanic and mineral sequestration have the potential to store all the carbon humans emitted since the industrial revolution, more or less permanently. Some businesses have found a number of ways to enhance natural sequestration processes and are currently offering their services on the market.

The price of carbon sequestration can vary a lot, from as low as 12$ per metric ton to over 1000$ in some cases. Volume stored and the technology used are the main variables that influence price, an average of current market offerings could be about 40$ per ton. Technologies that allow for very long term storage tend to have higher prices, for example enhanced rock weathering starts at around 300$; this technology is still being developed and many expect their price to fall in the future (up to slightly below 100$). Techniques based on biological approaches are a few tens of dollars per ton, including some ocean sequestration approaches that can, in theory, scale up to planetary demand. I will use a value of 60$ for the rest of the post.

The Pigouvian exchange

A barrel of oil (boi) is currently priced at about 90$, boi carbon emissions vary with the density of the oil, with a reference value of 430kg CO₂ equivalent per boi. Carbon sequestration would cost 26$ per boi, much less that oil rent which is about 70$ per boi. Therefore, a Norway-style rent tax on crude could easily fund its complete sequestration leaving 63% of rent to spare. It is worth noting that the remaining 44$ per boi that would be left to juice the fund is still more than what Norway has dedicated to the fund on average outside of peak export periods.

Obviously, even if a single first world country were to switch to this system it would be impossible for the current sequestration market to meet demand, it would immediately become saturated. The market would expand quickly, leading to more innovation and lower prices; excess wealth that cannot be absorbed by the market could be placed in a fund were it’d appreciate in value to meet future offer.

Carbon taxes have been criticized has they might shift consumption in the future with no net effect on emission in the long term, due to substitution effects. This problem becomes moot if the tax is used to fund sequestration of carbon emissions, indeed moving consumption in the future would lead to 2 major advantages:

1. It buys time to electrify the grid and change energy supply types.
2. It delays consumption at a point in time when sequestration market provides superior offer, in both price and quantity.

This approach is economically sustainable, it does not create market distortions and generates no deadweight (since the carbon tax is lower than rent). It has also another benefit: it avoids the calculation problem; now it is no longer necessary to estimate climate change future damage to adjust the entity of the tax, we can just use the tax revenue to purchase the corresponding positive externality and let market determine the rate, making the tax intrinsically fair³.

In some cases it can lead to lower oil prices (the carbon tax as described is lower than current taxes in some EU countries⁴).

References

1. State participation and taxation in Norwegian petroleum: Lessons for others?, Diderik Lund, Energy Strategy Review, 2014.
2. Current global efforts are insufficient to limit warming to 1.5°C, Science 2022.
3. Smart Taxes: An Open Invitation to Join the Pigou Club, Gregory Mankiw, Eastern Economic Journal, 2009
4. Oil Price Shock, Energy Prices and Inflation, Monetary Policy and the Economy Q1/06.