Leaving Your Tailings Behind: Environmental Bonds, Bankruptcy and Waste Cleanup

61 Pages Posted: 1 Jul 2020 Last revised: 11 Dec 2020

See all articles by Sara Aghakazemjourabbaf

Sara Aghakazemjourabbaf

affiliation not provided to SSRN

Margaret C. Insley

University of Waterloo - Department of Economics

Date Written: June 18, 2020

Abstract

This paper studies the impacts of an environmental bond, which fully covers waste cleanup costs, on a mining firm's optimal actions over the full life cycle of a mine, 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 shows that under certain assumptions, an environmental bond can ensure that the option to declare bankruptcy has no impact on the firm's optimal actions. A numerical solution is implemented for a hypothetical copper mine using two different models of bankruptcy risk. Numerical results show that when bankruptcy is an option and no bond is required, the firm produces too much waste relative to a benchmark case, resulting in an efficiency loss and a cleanup liability imposed on government. In the presence of bankruptcy risk, a bond ensures that the firm acts optimally and no efficiency loss is imposed on society.

Keywords: environmental bond, bankruptcy, waste cleanup, mining, HJB equation

JEL Classification: C61, D81, K32, Q52, Q58

Suggested Citation

Aghakazemjourabbaf, Sara and Insley, Margaret C., Leaving Your Tailings Behind: Environmental Bonds, Bankruptcy and Waste Cleanup (June 18, 2020). Available at SSRN: https://ssrn.com/abstract=3630374 or http://dx.doi.org/10.2139/ssrn.3630374

Sara Aghakazemjourabbaf

affiliation not provided to SSRN

Margaret C. Insley (Contact Author)

University of Waterloo - Department of Economics ( email )

200 University Avenue, West
Waterloo, Ontario N2L 3G1
Canada
+1 519-888-4567, ext. 38918 (Phone)

HOME PAGE: http://economics.uwaterloo.ca/margaret-insley

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