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Insuring the environment – who pays when mining goes wrong?

This past Christmas, Darwin waited with unnecessary nervousness as Cyclone Grant developed to our north. It missed us, but on Boxing Day it dumped 385mm of rain into the Edith River. The resulting flood…

Saying ‘oops’ isn’t enough. AAP

This past Christmas, Darwin waited with unnecessary nervousness as Cyclone Grant developed to our north. It missed us, but on Boxing Day it dumped 385mm of rain into the Edith River.

The resulting flood washed away a railway embankment and sections of a goods train carrying copper concentrate from Oz Minerals’ Prominent Hill mine in South Australia to the Port of Darwin.

Moving minerals in an era of climate uncertainty

More than 1,000 tonnes of copper concentrate was spilled. When rail wagons are covered only by tarpaulins and derailed by floodwaters tracking a well-forecast cyclone, it looks at first glance like a straightforward cock-up — mostly on the part of Genesee and Wyoming Australia, the owners and operators of the railway.

But this incident raises larger questions about Australia’s minerals and energy sector. What is the risk-to-return equation? How are the costs and benefits distributed (geographically, socially and through time)? And how adequate is our infrastructure, both “hard” (roads, railways, ports, energy, water, waste management, telecommunications) and “soft” (planning, risk assessment and management, regulation and the well-trained people to deliver all of the above).

Can Australia’s mining transport infrastructure handle a changing climate? AAP

We are understandably proud of our world-class resources sector, which is innovative and progressive in many areas. The enormous projected growth in the sector is profoundly significant for Australia.

Millions of holes will be drilled and dug, and billions of tonnes of material will be extracted, piped, trucked, railed and shipped. This will often be over vast distances through relatively intact and biologically and socially important environments, terrestrial and marine.

At the same time, climate projections predict we will encounter more extreme weather, with a higher proportion of very intense events. Events that in the past may have been considered a one-in-100 year probability are likely to occur more often.

We contend that a world-class resources sector needs world-class environmental planning, risk management and regulation. Our policy frameworks need to be as smart and innovative as our systems for finding, extracting, moving, refining and marketing depletable resources.

Who is responsible for the by-products left behind?

The upturned rail wagons at Edith River made for spectacular pictures, but a mine tailings dam in its headwaters is arguably a much more ominous long-term threat.

Mount Todd, in the upper reaches of the Edith River catchment, contains low-grade gold ore that was mined from 1993-1997 by General Gold Resources. The company went into receivership, leaving behind an alarmingly blue tailings dam full of acid water and heavy metals.

What’s the risk? Why not ask an expert. RaeAllen/Flickr

An environmental bond of A$900,000 was forfeited, but was never sufficient to remedy the environmental damage. The Northern Territory Government has spent an additional A$5m, but complete remediation of the area will cost much more.

The new owner, Vista Gold Australia, assures investors it will clean up previous problems should it re-open the mine. However it also knows it is sitting on a major liability. It was lucky that this time – the dam wall held and relatively small flows crossed the spillway.

The impact of the copper concentrate spill is still being assessed, but the longer-term risk of serious pollution from the tailings dam remains.

Mines risk their bond, but is this enough?

How can environmental risk like this be managed better? Currently, most mines set aside a bond for environmental remediation and then, sometimes reluctantly, abide by regulations set by government environment departments.

But bonds are rarely adequate, and sometimes not enforced. This means that either the wider community pays for rehabilitation (sometimes for decades such as Mount Lyell in Tasmania), or, by default, the environment pays. The more human waste the environment is forced to absorb, the fewer services it can provide to future generations.

The second problem is for the mining companies themselves. The higher the bond, the less money available for mine development at a time in the life of the project when funds may be tight, especially for smaller companies. The bond money is essentially frozen capital.

The third problem is setting the size of the bond in the first place. This is usually done by government officials, who rarely have specialist skills in evaluating risk and determining appropriate bond levels.

Help from the ‘invisible hand’?

The solution? We suggest the insurance market.

The government’s Natural Disaster Insurance Review made some very sensible recommendations, including a standard national flood definition. This is a good start in retooling a system to become better tuned to a continent of fierce extremes.

Fragile environment, unpredictable climate and more mining. Insurance could help. AAP

It would be a logical progression to extend Treasury thinking beyond floods and resource rent taxes, to consider how Australia can better insure itself against long-term environmental debt incurred by minerals and energy projects, on-shore and off-shore.

Specifically, the insurance industry could assess the risk of environmental damage and the cost of remediation. Insurance companies would then set premiums accordingly.

This would create an incentive for resources and energy companies to minimise the risk of damage, in order to attract lower premiums. If the long-term risks of environmental damage are as low as companies often claim, then it should be possible to prove that to insurance assessors.

Insurance companies would be motivated to get the risk assessment right. And this system would encourage the development of specialist expertise in a much-needed field, as Australia scales up major resources and energy projects over coming decades. In this time it’s predicted that the frequency and intensity of extreme weather events will increase.

Finally, such a system would better manage the risk to the taxpayer and the environment, by creating a much stronger incentive for companies to avoid environmental damage and the consequent remediation costs.

Ships must take out environmental insurance against oil spills. It is time that minerals and energy companies insured against causing environmental damage.

A sophisticated resource development insurance market and the risk management underpinning it, would be a market mechanism encouraging all resources and energy companies to minimise the likelihood of leaving a toxic legacy — of damage to our natural environment and costs imposed on taxpayers.