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


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


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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    References listed on IDEAS

    1. Jason F. Shogren & Joseph A. Herriges & Ramu Govindasamy, 1991. "Limits to Environmental Bonds: Lessons from the Labor Literature," Center for Agricultural and Rural Development (CARD) Publications 91-wp82, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    2. H.F. Campbell & K.A. Bond, 1997. "The Cost of Public Funds in Australia," The Economic Record, The Economic Society of Australia, vol. 73(220), pages 22-34, March.
    3. David P. Baron, 1985. "Noncooperative Regulation of a Nonlocalized Externality," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 553-568, Winter.
    4. Jean Tirole, 2010. "From Pigou to Extended Liability: On the Optimal Taxation of Externalities Under Imperfect Financial Markets," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 697-729.
    5. Pesaran, M Hashem, 1990. "An Econometric Analysis of Exploration and Extraction of Oil in the U.K. Continental Shelf," Economic Journal, Royal Economic Society, vol. 100(401), pages 367-390, June.
    6. Perrings, Charles, 1989. "Environmental bonds and environmental research in innovative activities," Ecological Economics, Elsevier, vol. 1(1), pages 95-110, February.
    7. Peck, Philip & Sinding, Knud, 2009. "Financial assurance and mine closure: Stakeholder expectations and effects on operating decisions," Resources Policy, Elsevier, vol. 34(4), pages 227-233, December.
    8. Shogren, Jason F. & Herriges, Joseph A. & Govindasamy, Ramu, 1993. "Limits to environmental bonds," Ecological Economics, Elsevier, vol. 8(2), pages 109-133, October.
    9. Gerard, David, 2000. "The law and economics of reclamation bonds," Resources Policy, Elsevier, vol. 26(4), pages 189-197, December.
    10. Mudd, Gavin M., 2007. "Global trends in gold mining: Towards quantifying environmental and resource sustainability," Resources Policy, Elsevier, vol. 32(1-2), pages 42-56.
    11. Mudd, Gavin M., 2010. "The Environmental sustainability of mining in Australia: key mega-trends and looming constraints," Resources Policy, Elsevier, vol. 35(2), pages 98-115, June.
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    Cited by:

    1. Margaret Insley & Sara Aghakazemjourabbaf, 2020. "Leaving your tailings behind: Environmental bonds, bankruptcy and waste cleanup," Working Papers 2002, University of Waterloo, Department of Economics, revised Jun 2020.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Lappi, Pauli, 2020. "A model of optimal extraction and site reclamation," Resource and Energy Economics, Elsevier, vol. 59(C).
    8. repec:ags:aare16:235308 is not listed on IDEAS

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