Rent seizing and environmental concerns: A parametric valuation of the Italian hydropower sector

This paper is the first attempt to estimate the hydroelectricity rent in Italy, as several concessions are about to expire, and the first to analyze the implications of different redistribution mechanisms. Due to budgetary constraints, local authorities want to capture a higher part of the rent, thought to be considerable. At the same time, the renewal procedure entails the implementation of environmental mitigation measures, as set forth in the water framework directive. Hence, rent-seizing and environmental protection generate a major trade-off. We focus our analysis on the County of Sondrio, home to 18% of the overall hydropower capacity, where the first renewals will take place. We obtain the highest rent ever estimated for hydropower production, averaging from 30.3 €/MWh to 82.4 €/MWh. These high values explain why local authorities are pushing for the introduction of a 30% revenue sharing fee, as they would earn almost 90% of the rent, much more than the 50% currently seized. Albeit satisfying the rent-seizing objective, the proposed fee hinders the implementation of costly mitigation measures. In this paper, we advocate the adoption of a resource rent tax, as we show that it would reduce the trade-off between rent-seizing and environmental protection. - Highlights: • This paper is the first attempt to estimate the hydroelectricity rent in Italy. • We find the highest rent ever estimated for hydropower, up to 82.4 €/MWh. • We show the impact of three different rent extraction mechanism. • We demonstrate that a resource rent tax (RTT) is neutral to investments. • We show how an RTT fosters the implementation of environmental mitigation measures