Financial Assurance for Environmental Protection: Trends and Opportunities

Abstract

A basic moral hazard problem has potential to avoid socially beneficial development of natural resources. Various financial assurance mechanisms have evolved to satisfy regulatory requirements for credible environmental protection. But recent macroeconomic and financial market developments have increased the cost of financial assurance. In addition, traditional methods of financial assurance may be inappropriate for addressing long-term risks to water quality, an issue of growing concern. Revised collateral requirements along with explicit capital safety standards can reduce the cost of long-term financial assurance for environmental protection and reclamation by enabling resource developers to exploit the benefits of portfolio diversification. These policy proposals may be particularly beneficial in less-developed institutional regimes, where enforcement is less effective and costly regulation is more likely to result in unsanctioned exploitation.