Tax system analysis for deep-sea mining in Norway: A genetic algorithm approach

In January 2024, the Norwegian Government approved the opening of the Norwegian Continental Shelf for deep-sea mineral exploration for commercial actors, marking the potential dawn of a new industry. Worldwide, no successful commercial mining operations have been conducted on the deep ocean floor, creating numerous uncertainties, one being the choice of tax system for the prospective industry. This paper investigates the trade-offs the Norwegian state must navigate to implement a tax system for this nascent sector. We propose a methodology based on single- and multi-objective genetic algorithms to examine the profitability and risk associated with different tax systems. The central research question is how various measures of profitability and risk, from the state’s perspective, affect the choice of tax system for deep-sea mining on the Norwegian Continental Shelf. We find that relatively high tax and refund rates maximize state tax profit. A high refund rate incentivizes companies to take higher exploration risks and mine more deposits, resulting in greater taxable income. This aligns with the existing petroleum tax system in Norway. When considering both state tax profit and company net present value, the optimal solution maintains a high refund rate but lowers the tax rate. A lower tax rate makes more deposits economically viable, creating greater overall value. From a multi-objective perspective, we derive a Pareto front illustrating the trade-off between profitability and risk: Higher tax and refund rates increase state profit but also risk. Finally, systems modeled on the Norwegian petroleum regime achieve greater profitability than royalty-based tax systems.