Leaving your tailings behind: Environmental bonds, bankruptcy and waste cleanup
Margaret Insley () and
Sara Aghakazemjourabbaf ()
No 2002, Working Papers from University of Waterloo, Department of Economics
The paper studies the impacts of an environmental bond, which fully covers waste cleanup costs, on a mining firm's optimal actions when bankruptcy may shift cleanup costs to the government. A firm's stochastic optimal control problem is described by an HJB equation with the resource price modelled as an Ito process. A theoretical result is derived, showing that when a firm does not have the option to declare bankruptcy, the bond has no impact on the optimal controls. In contrast, if a firm does have a bankruptcy option and if no environmental bond is required, the firm produces too much waste relative to a benchmark case, resulting in an effciency loss and a cleanup liability imposed on government. In the presence of a bankruptcy option, a bond ensures that the firm acts optimally and no effciency loss is imposed on society. A numerical solution of the HJB equation is implemented for a hypothetical copper mine and results are analyzed for two different models of bankruptcy risk.
JEL-codes: C61 D81 K32 Q52 Q58 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2020-06, Revised 2020-06
New Economics Papers: this item is included in nep-env and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:wat:wpaper:2002
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