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

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  • Ben White
  • Graeme J. Doole
  • David J. Pannell
  • Veronique Florec

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.
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  • Ben White & Graeme J. Doole & David J. Pannell & Veronique Florec, 2012. "Optimal environmental policy design for mine rehabilitation and pollution with a risk of non‐compliance owing to firm insolvency," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 56(2), pages 280-301, April.
    • Handle: RePEc:bla:ajarec:v:56:y:2012:i:2:p:280-301
    DOI: j.1467-8489.2012.00591.x
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    Cited by:

    1. Sara Aghakazemjourabbaf & Margaret Insley, 2018. "Optimal timing of harzardous waste clean-up under an environmental bond an a strict liability rule," Working Papers 1803, University of Waterloo, Department of Economics, revised 06 Jan 2018.
    2. Matthias Kalkuhl & Max Franks & Friedemann Gruner & Kai Lessmann & Ottmar Edenhofer, 2022. "Pigou’s Advice and Sisyphus’ Warning: Carbon Pricing with Non-Permanent Carbon-Dioxide Removal," CESifo Working Paper Series 10169, CESifo.
    3. repec:ags:aare16:235308 is not listed on IDEAS
    4. Yang, Peifang & Davis, Graham A., 2021. "Why don't environmental bonds fully cover reclamation costs?," Energy Policy, Elsevier, vol. 152(C).
    5. Pauli Lappi & Markku Ollikainen, 2019. "Optimal Environmental Policy for a Mine Under Polluting Waste Rocks and Stock Pollution," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(1), pages 133-158, May.
    6. Lechner, Alex Mark & Kassulke, Owen & Unger, Corinne, 2016. "Spatial assessment of open cut coal mining progressive rehabilitation to support the monitoring of rehabilitation liabilities," Resources Policy, Elsevier, vol. 50(C), pages 234-243.
    7. Aghakazemjourabbaf, Sara & Insley, Margaret, 2021. "Leaving your tailings behind: Environmental bonds, bankruptcy and waste cleanup," Resource and Energy Economics, Elsevier, vol. 65(C).
    8. Burton, Michael & Jasmine Zahedi, Shegufa & White, Ben, 2012. "Public preferences for timeliness and quality of mine site rehabilitation. The case of bauxite mining in Western Australia," Resources Policy, Elsevier, vol. 37(1), pages 1-9.
    9. Yang, Peifang & Davis, Graham A., 2018. "Non-renewable resource extraction under financial incentives to reduce and reverse stock pollution," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 282-299.
    10. Lappi, Pauli, 2020. "On optimal extraction under asymmetric information over reclamation costs," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).
    11. Ben White, 2015. "Do control rights determine the optimal extension of liability to investors? The case of environmental policy for mines," Journal of Regulatory Economics, Springer, vol. 48(1), pages 26-52, August.
    12. Lappi, Pauli, 2020. "A model of optimal extraction and site reclamation," Resource and Energy Economics, Elsevier, vol. 59(C).

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