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Environmental bonds and public liability for resource extraction site cleanup

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  • Insley, Margaret

Abstract

Governments have been left with large liabilities for cleanup at natural resource extraction sites after firms have declared bankruptcy. This research studies the impact of different forms of financial assurance on a firm’s optimal actions over the full life cycle of a hypothetical natural gas well, in a world of uncertain natural gas prices, when firm bankruptcy may shift cleanup costs to the government. A firm’s optimal control problem is described by an HJB equation with the natural gas price modelled as a stochastic differential equation. The firm is assumed to declare bankruptcy if the lease value is negative. The impact of financial assurance is examined in relation to firm investment decisions, the cleanup liability imposed on government, and resource taxation revenue. Sureties in the form of a Cash Deposit and a Surety Bond are contrasted with the case of no financial assurance requirement. Numerical results demonstrate that in the presence of distortionary taxes, there is a trade off between indemnifying the government against cleanup costs versus maintaining government tax and royalty revenues. A numerically plausible case is presented in which the total value of the natural gas well (to the firm and the government) is not increased by the imposition of a strict form of financial assurance. It is important to consider financial assurance in the context of the suite of royalties and taxes collected by governments from the oil and gas industry as well as any potential environmental damages from shut-in oil and gas wells.

Suggested Citation

  • Insley, Margaret, 2025. "Environmental bonds and public liability for resource extraction site cleanup," Energy Economics, Elsevier, vol. 152(C).
    • Handle: RePEc:eee:eneeco:v:152:y:2025:i:c:s0140988325007777
    DOI: 10.1016/j.eneco.2025.108950
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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