Revenues from resource extraction are an important source of public financing in many resource-rich countries and can support delivery of the SDGs and the Paris Agreement. However, the sector faces several challenges including environmental and social impacts and volatile international markets; while immature or ineffective fiscal regimes, weak governance structures, limited capacities and illegal mining activities in some countries affect the scale and use of revenues. A key challenge facing many resource-rich countries is how to mobilize and effectively use volatile revenues from resource extraction, while addressing the social and environmental externalities of mining activities.
Addressing externalities in the extractives sector
By pricing externalities, green fiscal policies such as environmental taxes, royalties and fees, can help reduce some of the negative environmental and social impacts of extractive activities, leverage finance from the private sector and create incentives for more sustainable mining practices. In this way, fiscal policies can play an important role in the policy mix needed to address the environmental and social impacts of mining, which includes regulations, liability provisions, environmental impact assessments, mitigation measures, insurance mechanisms, and environmental management funds.
Managing natural resource revenues for sustainable development
Countries use different funds and mechanisms to manage and allocate revenues from extractive activities such as spending revenues through the normal budget cycle, creating funds to address volatility and inter-generational aspects, distributing funds to citizens, and spending through a state-owned extractive industry company. Depending on national circumstances and priorities, these funds can be strategically designed to channel resource revenues to support delivery of several SDGs. A 2018 UN Environment study in Senegal explores potential financial vehicles and mechanisms which can be used to manage oil and gas revenues. Drawing on insights from global best practices, the study sets out some policy options to promote sustainable development through the management of revenues from the oil and gas sector. This includes the design of special funds to manage oil and gas revenues.
Case: Funds and mechanisms to manage oil and gas revenues for support sustainable development in Senegal
Senegal is likely to become a significant oil and gas producer by the start of the next decade. These resources can be an important driver of economic growth; however foreign capital inflows could also cause serious macroeconomic and governance challenges. Sovereign Wealth Funds (SWFs), national oil companies, budgetary funds and strategic development funds can be effective tools for addressing such challenges. Policy options to ensure local communities’ benefit from the presence of oil and gas resources include earmarking a portion of oil and gas revenues for subnational governments located near fields or transport routes, implementing local laws or regulations linked to employment opportunities, and establishing local funds, such as community development and other CSR-type funds. There are also several financial vehicles to promote good environmental management, for example governments can require a security deposit or bond to ensure companies set aside a pool of money for closure and site rehabilitation.
