Managing environmental risk in mining by putting a (fair) price on it
Like many important forms of economic activity, mining comes with risks to the environment. Faro and Giant mines in Canada’s North underscore the costs that can arise from non-remediation. And Mount Polley provided us with a vivid reminder of the risks that can come with tailings dams.
Of course, mining disasters are the exception, not the rule. And the mining industry and governments work hard to avoid them. But a new report from Canada’s Ecofiscal Commission, Responsible Risk, shows how we could benefit by putting a price on risk, especially the risk of mining disasters. And it shows why risk pricing works best when it’s fair.
What do we mean when we say “risk pricing”? Governments put a price on risk to the environment using a tool called financial assurance. financial assurance requires companies to promise or commit funds against their environmental risks. The bigger the risk, the more they commit. Bonds, insurance coverage, and industry funds are examples of different kinds of financial assurance.
Using financial assurance in the mining sector is not new. Across Canada, governments already use financial assurance to address the risk of non-remediated mines being orphaned or abandoned. Different provinces take different approaches. Quebec, for example, requires full financial assurance against closure costs within two years of approving a mine’s closure plan. British Columbia, on the other hand, allows operators to make annual payments until the mine reaches the end of its life. No matter where a mining firm operates, however, it needs financial assurance in some form to cover the risk of non-remediation— be it cash, insurance or letters of credit, environmental bonds, a sinking fund, or some other financial agreement.
Pricing risk in this way doesn’t just make sense for the tax-paying public; it also makes sense for industry. It improves public confidence in mining by showing that companies are accountable for damage they cause and have an incentive to operate responsibly. Canada has come a long way when it comes to orphaned and abandoned mines, and financial assurance is a big part of the reason.
How can we price risk fairly? financial assurance works best when it isn’t one-size-fits-all. Mining companies and operations are all unique in the amount of environmental risk they pose, depending on their production processes, waste streams, location, and other factors. The risks can also be financial. A thinly-capitalized company with a single operation is probably less able to cover unexpected costs than a bigger one. The Ecofiscal Commission’s analysis shows that provincial financial assurance policies for remediation functions best when they recognize these kinds of differences. For example, Ontario treats firms differently based on the amount of financial risk they pose, as assessed by independent ratings agencies. And Yukon requires financial assurance in line with existing – rather than planned or eventual – site disturbance.
Differentiating companies based on their unique risks should be a guiding principle in the design of provincial financial assurance policies. Doing so gives mining companies a powerful economic incentive to find new ways to reduce environmental risk. The lower the risk they pose, the less they’ll pay in financial assurance. This approach is also fairer. Low-risk operations shouldn’t have to subsidize the potential costs of higher-risk ones. The fairer we make financial assurance, the better it is for society and the mining sector.
Though financial assurance policies are currently used in the Canadian mining sector, there is one important gap – disasters. Financial assurance currently covers the risk of non-remediation on mine sites, but not the risk of accidental releases or tailings dam failures like Mount Polley. This leaves the public exposed to a significant source of risk. If a disaster were to occur, there is no guarantee that the responsible company would pay the costs. For example, if a company was bankrupted by a disaster, Canadian taxpayers would get stuck with the bill.
The Ecofiscal report presents a strong case for applying financial assurance to the risk of mining disasters. Doing so would strengthen incentives to reduce risk and would make another Mount Polley less likely.
What would this look like? For most mining companies, covering this risk themselves would be too large of an expense. But by using financial assurance that pools risk, we could keep costs low and help Canadian mining companies stay competitive. For example, companies could pool their risk in an industry fund. Or Canada could put together a “Superfund” to pool risk across different industrial sectors, including mining, as occurs in the United States. Hybrids of these options are also possible.
This idea may be new for the mining sector, but we already require financial assurance against the risk of disaster in many sectors in Canada, including pipelines, rail transport, offshore drilling, and nuclear energy. Governments and the mining sector have done a lot to address the risk of another Mount Polley. It’s time we started talking about pricing it as we do in these other sectors.
The mining sector can be a valuable part of this conversation by highlighting the importance of making disaster risk pricing fair. Not all tailings dams pose equal risks. Different tailings composition, dam construction, and dam locations translate to different levels of risk. Mines also differ across other risks, like the risk of Acid Mine Drainage. Financial assurance can and should reflect these differences. Where mines’ unique risk was too difficult or costly to measure, we could use risk proxies. For example, the Mining Association of Canada’s Tailings Management Protocol represents a world-class standard for tailings management. Mines that meet it could potentially face lower financial assurance requirements.
Financial assurance is a cost-effective way to manage mining’s environmental risk. It reduces the risk of disasters at a lower cost than other policy tools because it provides companies with flexibility in how they reduce risk. No one understands mines better than the companies who own and operate them, so it makes perfect sense to provide them with options. By embracing financial assurance, the mining sector can end up with more of a say in tailings risk management than it will have if other instruments are used.
We’re already using financial assurance in the mining sector, but there’s plenty of room for improvement in how we use it. We should certainly broaden its use by applying it to mining disasters. But we should also make sure it is fair.
JASON DION is the lead researcher at the Ecofiscal Commission. BRENDAN FRANK is a research associate at the Ecofiscal Commission (www.ecofiscal.ca).