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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.

Join the conversation

7 Comments sorted by

  1. Will Hardy

    logged in via Twitter

    What's missing from your discussion of insurance approach is the implicit need for strict liability and (rebuttable) presumption of causation that must support it. Otherwise the insurance companies will find ways not to pay and therefore to offer lower premiums.

    This would work in a number of other areas where massive environmental damage might eventuate (GMOs, pesticides etc) because it pushes the concern onto those who can best prevent the damage.

    Of course, it doesn't always work. As BP and the US financial sector has recently demonstrated, sometimes companies don't operate in their best interests when dealing with risks. If everyone else manages to avoid the costs, we're all left with the bill eventually.

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  2. wilma western

    logged in via email @bigpond.com

    Agree, Will Hardy . it would be interesting to know who paid for the damage done when that tailings dam was breached in the Czech republic in 2010 , causing widespread damage . What was the story re the huge oil spill in the Gulf of Mexico last year - apart from Govt funds has any insurance money been released yet to cover damages or are they still litigating it all?

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  3. Stephen Garnett

    Professor of Biodiversity and Sustainability at Charles Darwin University

    Yours is a very good point, Will - the introduction of environmental insurance would require high quality research by ecologists to prove causation, the setting of appropriate thresholds and detection of breaching of those thresholds. Causation could potentially be proven through appropriate statistical modelling, given that there is already a reasonable understanding of statistical probability in the court system that is implied by the widespread acceptance of DNA-based evidence. There are also…

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  4. Shirley Birney

    retiree

    Agreed on the points raised so far. Additionally, the costs of insurance payouts to mining companies responsible for these disasters would inevitably be passed on to non-mining clients anyway.

    Further Australian and Australian based miners continue to run amok with impunity in other countries as we speak – .the “eco-colonisation" of foreign soils. They profit there, leave the contamination and use the money elsewhere.

    Santos’ JV was responsible for the mud volcano known as Lusi which is…

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  5. Stephen Garnett

    Professor of Biodiversity and Sustainability at Charles Darwin University

    One would hope that an insurance scheme would reduce the probability of mining disasters like the ones you describe Shirley, with the insurers imposing high premiums on campanies where the risk is high. However one would also hope that the mining companies that do the right thing, and minimise risk, are rewarded with lower premiums. It may be that the State contributes to the insurance payments on the basis of perceived benefits - that is a separate discussion from that relating to environmental risk management. We argue that using insurance rather than a bond to manage risk would help ensure that there is a proper actuarial process undertaken, and thus a conscious assessment of risks and costs of remediation. The level of risk deemed acceptable is a political decision, but at least one that is informed by evidence and subject to democratic processes.

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    1. Shirley Birney

      retiree

      In reply to Stephen Garnett

      Stephen, while it may be a good idea to insure against
      unforseen, catastrophic mining events, would insurance companies be happy to insure for rehabilitation costs since remediating a site on closure is a contractual agreement between state and miner? It appears to me that the responsibility of the miner to meet the costs of cleaning up would merely be transferred to the insurer. Would they (the insurer) buy that?

      Perhaps your proposal would be more advantageous to the taxpayer than that proposed in the following link?:

      http://www.miningaustralia.com.au/news/new-proposals-for-mine-site-cleanup

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  6. Stephen Garnett

    Professor of Biodiversity and Sustainability at Charles Darwin University

    While a mining rehabilitation fund would be better than the current system, I wonder if there is a danger of large companies funding smaller defaulters. While rehabilitation is a contractual agreement between state and miner, the state could insist that the miner take out insurance against failure to meet adequate standards. The insurance company would then make an assessment, motivated by strong financial incentives, of the risk that the miner would fail to fulfil their obligations - this would…

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