Optimal environmental policy design for mine rehabilitation and pollution with a risk of non‐compliance owing to firm insolvency*

Abstract

The modified Pigovian tax approach to regulating stock and flow pollutants from a non‐renewable resource firm (Farzin, 1996) provides incentives for the firm to abate optimally, but does not allow for the possibility that a firm may become insolvent. In contrast, the current environmental bond policy applied in most jurisdictions across Australia and New Zealand provides funds in the case of insolvency, but often does not provide optimal incentives for rehabilitation. This study analyses these alternative policy approaches through a theoretical model and an empirical case study. From the case study for a mineral sands firm, the policy recommendation is that, based on economic efficiency alone, a modified Pigovian tax (termed here a damaged land tax) is optimal for most combinations of parameters. However, both risk‐sharing and efficiency objectives can be simultaneously addressed by a mixed policy that includes a damaged land tax and an environmental bond.

Brazil's worst mining disaster: Corporations must be compelled to pay the actual environmental costs

“…In addition to setting appropriate compensation payments, a clear policy for compelling corporations to maintain high levels of environmental risk management could help prevent disasters (Gerard , White et al. , Edwards and Laurance ). For example, consider the current policy on the management of tailing ponds.…”

“…There are several environmental bond or insurance strategies used in other countries, including Australia and the USA (Gerard , Boyd , White et al. ), which could serve as a model for a similar policy in Brazil.…”

Social cost-benefit analysis in Australia and New Zealand. The state of current practice and what needs to be done

“…Department of Infrastructure and Regional Development, 2011). Others (White et al, 2012;Abelson & Joyeux 2007) tend to cite Campbell and Bond (1997), although White et al (2012) use a value of 10 per cent with no explanation for the difference between that and Campbell and Bond's estimates. Moore et al (2010, p. 9) Communications, 2014, p. 42) applied a METB of 0.24 cents per dollar, which assumes that the full cost of each option is financed by labour income tax.…”

Mitigating undesirable impacts in the marine environment: a review of market-based management measures

“…In addition to incentivizing producers to limit impacts it also ensures funds are available to rectify any damage once the activity has been undertaken. Assurance bonds have been used in a wide range of industries to ensure appropriate environmental outcomes (Costanza and Perrings, 1990;Cornwell and Costanza, 1994;Gerard and Wilson, 2009), including terrestrial based mining operators in Australia and New Zealand (White et al, 2012) and elsewhere (Shogren et al, 1993;Gerard, 2000). Bonding programs in the US have been set up to incentivize compliance with environmental requirements when closing oil and gas operations.…”

“…These appear to have been relatively successful, with non-compliance rates between only 1 and 9% (Gerard and Wilson, 2009). In Western Australia, <2% of mining bonds are called in White et al (2012).…”