Abstract:Hydropower is the leading renewable source of electricity generation and a low emission energy source. In order to be developed sustainably, it is important that its costs and benefits are adequately set and distributed. Different mechanisms, such as royalties, can be used for this purpose. Governments have usually kept hydropower royalty rates low, without internalizing negative externalities. This strategy is inefficient because it leads to larger electricity production and consumption, and hence exacerbates environmental impacts. This paper reviews the criteria proposed and used to set hydropower royalties. It also compares practices of the four main hydropower producers in the world: China, Brazil, Canada and the United States. Results show that royalty rates and distribution policies are determined in an arbitrary and unsystematic manner, but also that water use is usually undervalued. In order to encourage the development of this key renewable resource, in a sustainable and responsible way, national and international efforts should be made to rationalize and harmonize hydropower royalty rates.