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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

Abstract: 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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