Sales vs. profit-based royalties: Evidence from lithium in LAC countries
Year: 2025
Type: article
Abstract: Lithium is central to the global energy transition, with Argentina, Brazil, and Chile holding a significant portion of the world's reserves. Designing royalty regimes that capture rents without discouraging investment is therefore a critical policy challenge. While theory emphasizes the neutrality of profit-based instruments, common practice relies on administratively simpler sales-based royalties. In the analysis of these alternatives, existing studies have mostly used partial equilibrium approaches that overlook economy-wide effects. This paper, on the other hand, develops a dynamic stochastic general equilibrium (DSGE) model designed to capture the economy-wide effects of four royalty schemes: a flat sales-based scheme, a flat profit-based scheme, a progressive sales-based scheme, and a progressive profit-based scheme. The model is calibrated with data from Argentina, Brazil, and Chile, and is used to simulate the effects of a 10% lithium price shock on production, investment, and fiscal balances. Results show that sales-based regimes transmit higher prices more effectively to investment, while progressive schemes capture more rents but risk discouraging marginal projects. Profit-based progressivity stabilizes fiscal balances but underperforms in rent capture. These findings can serve to inform royalty design in Latin America and other resource-rich economies facing energy transition challenges. • Lithium royalties affect investment and fiscal stability; DSGE results show royalty design alter mining investment and activities. • Sales-based royalties are easier to administer and encourage investment, but capture fewer rents and distort production decisions. • Progressive regimes raise more public revenues, but risk discouraging new projects if rates are too high. • Profit-based royalties stabilize fiscal balances, but require strong tax administration and good data. • Mixed royalty schemes help balance trade-offs, when combined with fiscal rules and transparent revenue-sharing arrangements.
Source: Resources Policy
Institution: Inter-American Development Bank
Language: English
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,810
OpenAlex ID: W4416543487