Department of the Environment

About us | Contact us | Publications

About us header images - leftAbout us header images - centreAbout us header images - right

Publications archive

Disclaimer

Key departmental publications, e.g. annual reports, budget papers and program guidelines are available in our online archive.

Much of the material listed on these archived web pages has been superseded, or served a particular purpose at a particular time. It may contain references to activities or policies that have no current application. Many archived documents may link to web pages that have moved or no longer exist, or may refer to other documents that are no longer available.

Environmental Incentives:
Australian Experience with Economic Instruments for Environmental Management

Environmental Economics Research Paper No.5
Consultancy report prepared by: Dr David James, Ecoservices Pty Ltd
Commissioned by Environment Australia
Commonwealth of Australia, 1997
ISBN 0 642 26850 9

12. User charges for natural resources and environmental amenity

12.1 General application

User fees are applied by Commonwealth, State, Territory and local government agencies for the use of natural environmental amenities for recreation, scientific research and education. Areas for which fees may be charged include national parks, recreation areas and conservation reserves.

In principle, fees could be used to ration use of such resources, especially to reduce congestion and resource degradation. However, this is rarely the case in practice. Mostly, fees are imposed to help cover management costs. Deficits are common among conservation reserve management agencies, as documented by the Resource Assessment Commission (1992).

12.2 National parks and conservation reserves

The Great Barrier Reef Marine Park Authority applies fees and charges to users to partially offset the costs of management of the park. These charges supplement funds provided by the Commonwealth and Queensland Governments. An Environmental Management Charge applies to all commercial operations in the marine park, including tourism, mariculture and commercial construction. A permit system also applies to users of the park. Some of these permits are long-term and can be transferred. A new tourist visitor charge of $4 will be applied to all tourists visiting the marine park who use commercial facilities and craft from 1 January 1998.

13. Performance bonds

13.1 General application

Performance bonds are being used as an economic instrument in a number of applications for environmental protection in Australia. They have been chiefly used in the mining industry to encourage land rehabilitation, but other applications include pollution reduction programs in New South Wales and effluent control programs in South Australia.

The general principle of performance bonds is that the supervising government agency is guaranteed sufficient funds, in the form of a bond or security, to cover the cost of rehabilitation in the event of failure by the enterprise concerned. One potential disadvantage of performance bonds is that they may not be able to compensate for irreversible environmental damage. Thus where large-scale irreversible damage is possible, it may be more effective to rely on direct regulations.

There are various ways in which such finance may be provided. One is the provision of upfront capital funding. This, however, may place severe constraints on the cash flow position of enterprises. A company may reduce strains on working capital by taking out a loan with a financing body, in which case the annual cost would be the interest on the loan. The main requirement of a performance bond, however, is that government has a guarantee against the risk of default of conditions prescribed for environmental safeguards. Arrangements have thus evolved similar to risk insurance, whereby guarantees of rehabilitation or restoration are obtained by payment of a risk premium to a bank, insurance company or other financial institution.

Queensland and New South Wales have introduced performance bonds to induce mining companies to rehabilitate mined areas. Extensions of mining leases depend on compliance conditions for staged rehabilitation according to a mine development plan.

The next section describes the operation of the performance bond system for the mining industry in Queensland. The bond system will henceforth be covered under new management arrangements, but its basic features will remain. Of particular note in the Queensland system is the encouragement of self-regulation and monitoring by the mining industry. This has advantages for government by cutting the costs of administration, but the success of this policy will clearly depend on the environmental integrity of industry and the efficacy of supervision.

In New South Wales, performance bonds for mining must be lodged with the Department of Natural Resources. Bonds may be forfeited as a result of failure to comply with the environmental protection, management and rehabilitation conditions of an exploration or mining title, or with related provisions of the Mining Act 1992. Bonds are designed to ensure compliance with environmental conditions and ensure that the community is not burdened with the costs of rectification. There have been few transgressions. The effectiveness of bonds depends on the appropriateness, detail and wording of the environmental conditions. The introduction of mining, rehabilitation and environmental management plans has helped to prescribe environmental conditions.

In New South Wales, bonds are applied under the Trade Waste Program. Bonds may also be prescribed by the New South Wales Environment Protection Authority (EPA) in pollution reduction programs negotiated with industry. There are currently $5.5 million in performance bonds associated with these programs.

In South Australia the Marine Environment Management Act 1990 provided the power to require the lodging of a bond or pecuniary sum to secure compliance with the Act. The value of the bond was specified as directly proportional to the total likely costs, expenses, loss and damage that might be incurred or suffered by persons as a result of a failure by the licensee to satisfy the conditions of discharge or repayment of the bond or pecuniary sum. The Act has since been superseded by the Environment Protection Act 1993, proclaimed in 1995.

Bonds may be used from time to time for other environmental protection measures. For example, a feedlot in the Murrumbidgee Irrigation Area had to lodge a bond of $2 million with the Department of Water Resources and the EPA as security against environmental damage.

It is clear that performance bonds could be extended to a wide range of natural resources where proper rehabilitation or restoration is required, for example, public forests logged by private contractors, national parks or recreation areas leased by private operators, and public lands leased for grazing or agricultural activities.

13.2 Rehabilitation of mine sites in Queensland

Problem Identification

The Queensland Government recognises the importance of mining activity to the Queensland economy. At the same time, it accepts the need for all mining developments to assess the likely environmental impacts of a proposed mining project and plan to avoid or minimise these impacts. The Government has sought an acceptable balance of public interest, environmental protection and industry development.

Positive action has been facilitated by the Mineral Resources Act 1989, which came into force in 1990. The Act represents the outcome of years of extensive negotiation between the State Government and mining and rural groups.

The Act encourages explorers and miners to assess, develop and use the State's mineral resources and supports the concept of sustainable development. It emphasises environmental responsibilities at all stages of mining, from exploration and mining to the expiry of activity.

Rehabilitation of mine sites is an important component of strategies to protect the environment. Land disturbance at mine sites can result in air pollution from dust, while water pollution can result from leachates of heavy metals and acid waters. Increased sediment loads in rivers and alteration of groundwater tables are other potential environmental impacts.

Up to the late 1980s, requirements for rehabilitation were enforced by direct regulations, with a security deposit scheme involving a flat rate per hectare, regardless of the cost of rehabilitation.

A problem facing government was how to encourage improved performance of rehabilitation and environmental protection without adversely affecting the economic viability of mining operations. An additional aim has been to guide environmental management towards industry self-regulation, with government ultimately playing an advisory and monitoring role. Self-regulation has a number of advantages, including incentives for industry to improve their environmental performance, lower costs for government and less intervention by government in the resource management practices of mining companies.

Instrument Selection

The Queensland Department of Resource Industries administers the Act. The department has introduced a new policy, the Environmental Policy for Mining, which was prepared by the State Government in cooperation with the Queensland Mining Council. The policy defines environmental performance criteria and details the setting of securities for mining operations. It is being administered within a broader framework of planning and environmental management for the mining industry.

Description of Instrument

The department uses the term 'environment' in a broad sense to include the natural environment of land, plants, animals, water and air as well as social matters. The impact of a project also relates to the conservation, heritage and cultural values of the environment.

The objectives of the Environmental Policy for Mining, defined in the policy booklet issued by the Department of Resource Industries (undated), are as follows.

Environmental management is to be conducted in the context of an Environmental Management Overview Strategy (EMOS), which provides a mechanism that links any study of environmental impact with the Plan of Operation. An EMOS consists of:

Regulatory controls incorporated in the Act will be used, if necessary, to ensure that the objectives are achieved. Compliance is required also with other Acts, including:

Other measures that the Department of Resource Industries may adopt in implementing the Act include providing education programs for leaseholders; lowering security deposits for competent planning and performance; fostering better rehabilitation and pollution control technology; issuing cautions for poor performance; taking Notice to Show Cause action; imposing penalties for non-compliance with the Act; and refusing tenure where there is demonstrated non-performance.

Economic incentives for the mining industry to implement environmental safeguards are provided under the arrangements for the lodgement of a security with the department.

The alternative forms of the security are:

The maximum amount of the security depends on the real cost of rehabilitation. This may be estimated from the leaseholder's own experience, advice from other miners, quotes from contractors or advice from district offices of the Department of Resource Industries.

A category system has been established to determine the risk of leaseholder non-performance on a particular lease. The categories range from Category 1 leaseholders, who demonstrate that they are able to meet or have met their responsibilities in terms of environmental management, to Category 6 leaseholders, who are unable to demonstrate these attributes.

Performance discounts apply to all new mines and to existing mines (except those that will be ceasing operations before the end of the phase-in period and have the choice of continuing with the pervious security deposit scheme). Changes from one performance category to another can be achieved by submitting a new Plan of Operation or by submitting a notice to vary the current Plan of Operation. For mines already in existence, a further discount may be obtained, based on the phasing in of a new Plan of Operation.

Environmental auditing of operator performance will be carried out to ensure compliance with the Plan of Operation and to determine an operator's performance category. Auditing will be carried out by persons with suitable qualifications and experience, which may include full-time employees of the leaseholder. This provision is designed to support the move to industry self-regulation.

In addition to audits, the department is empowered to make site inspections to ensure that activity complies with the Plan of Operation. Failure to comply with the plan may result in a penalty or cancellation of the mining lease. The maximum penalty is $90,000.

Assessment Against Criteria for Evaluation

There is clearly a strong economic incentive for leaseholders to improve their environmental performance.

The compliance, auditing and inspection provisions should ensure sound control over protection of the environment.

Industry has accepted the policy and indeed has contributed significantly to its formulation. The policy has the added attraction of industry self-regulation, but strict monitoring by an external body will be needed to ensure compliance with the conditions of the scheme.

Details of administrative costs have not been provided, but the policy is clearly administratively feasible. It represents an extension of responsibilities and functions already borne by the Department of Resource Industries.

Concluding Evaluation

The bonding system adopted by Queensland for the environmental management of mining represents an innovative application of regulations and economic incentives. The use of performance standards to reduce the size of the bond offers a strong inducement for operators to comply with the conditions of the scheme and improve their environmental management practices. The move towards self-regulation should produce cost savings in government administration, but there is a risk that self-regulation could reduce the effectiveness of environmental controls. It is clear that the success of the scheme in meeting environmental objectives will require adequate monitoring and enforcement mechanisms within government.

13.3 Lender liability in Victoria

A further related initiative introduced by the Victorian EPA is the limiting of lender liability for the clean-up of contaminated sites. Increased liability for the cost of cleaning up land held by borrowers has caused great concern among lending institutions worldwide. As a result of increased exposure, lending institutions have become more cautious about lending to businesses they perceive to be risky from an environmental viewpoint. This trend could have serious consequences, particularly for environmentally important sectors such as the waste management industry.

The Victorian approach to dealing with this problem was to harness some of the power of financial markets for environmental purposes. The Environment Protection Act was amended in 1994 to exclude 'passive lenders' from the definition of 'occupier' under the Act. The amendments limit the liability of financial institutions that act as mortgagee in possession, controller or managing controller to:

(a) making the site safe (that is, abating any existing hazard)

(b) ensuring that any further operations do not cause pollution.

This approach represents an appropriate balance of liability while also achieving environmental protection. It ensures that lending institutions will not be subject to unlimited liability as a consequence of the actions of others.

A further benefit of this approach is that good environmental performers may be able to obtain finance at a lower cost than competitors who do not perform as well. A difference of 0.5 per cent or 1.0 per cent in interest rates can have a marked effect on the financial profitability of a project. This is a message that the business community can readily understand and should act as a strong economic inducement for them to implement sound environmental management.


Department of the Environment, Sport and Territories Logo