Towards improved environmental policy in mining

Mining has a large impact on the environment and it is a source of local and global pollutants. For these reasons it is tightly regulated for example by the permit design. However, current environmental regulation of mining is seldom based on economic insights or analysis.

In this paper we offer a dynamic economic analysis on the pollution tax design for a mine, which produces a valuable good and two different stocks that cause the pollution problem, namely, a waste rock stock and another stock (related to, say, turbidity of water bodies or accumulating toxic discharges). The main focus is on the waste rock stock, which has been neglected in the literature. Any mine, and open pit mines in particular, produce a large quantity of waste rocks (and tailings) that are a source of acid mine drainage, which is the main environmental problem in the mining sector. This stock causes damages to nearby ecosystems and poses health risks to humans. The disposal of the stock is costly implying that without regulation the stock size is excessive from the social optimum point of view.

We pose the following research questions:

  1. What are the effects on optimal extraction of taking into the account polluting waste rocks and their disposal?
  2. What is the socially optimal way to handle the waste rock stock?
  3. What kind of time paths do the taxes targeted to limit the two different pollution stocks have?

Inclusion of the waste rock stock affects the socially optimal extraction rate: when the waste rock stock is the sole source of the pollution problem, the socially optimal extraction rate tends to be lower in a mine that produces a large quantity of waste compared to a mine with a smaller waste production. More importantly, we show that it is not optimal from the social optimum perspective to dispose the waste rocks immediately when they are produced. Instead, the stock should be managed such that a part of the stock is left disposed of and moved to the more distant future. This means that the waste stock should be allowed to grow at least on the initial stages of the extraction operation. Hence the tax on the waste generation should be increased as time goes on and the resource is extracted.

Reference: Lappi, P. & Ollikainen, M. 2019. Optimal Environmental Policy for a Mine Under Polluting Waste Rocks and Stock Pollution. Environmental and Resource Econonomics 73 (1), 133-158.