The taxation of minerals serves as a price to extract scarce resources, such as petroleum and crude oil, which are owned by the government.
[1] Taxing minerals is the more economic approach to incentivise environmental thinking and an alternative to intervene in the market directly.
If on the other hand the imposed tax is too low, firms will extract more, and the mines will live shorter.
That leads to a Laffer curve-shaped function of tax revenue for the government, in which the “optimal level of taxation” is somewhere in the middle.
Neutral is defined as maintaining incentives for investors to exploit minerals.
Under two assumptions regarding the interest rate and the cash flow, this tax has no impact on the firms’ allocative decision.
A different approach of the royalty tax is, to impose it as a factor payment for extraction of minerals.
[4] If royalty taxes are very high, it might influence the production, because it gets too expensive for the firms to produce and extract minerals.
If a Brown tax is used, firms with a negative cash flows receive subsidies from the government.
This is the difference to the resource rent tax, and leads to the fact that the government doesn't have to choose a certain interest rate.
Taxes can initiate environmental behaviour, and can serve as a market-based alternative to intervening directly by regulating.