Bonding out: Making companies pay up front for potential environmental disasters

February 9, 2012, Arizona State University

Whether it’s building an oil pipeline, drilling for fuel in the ocean or “fracking” to flush natural gas out of the Earth, we’re often asked to believe the process is safe, when companies want to do something that could have big benefits. But that process also could be potentially disastrous for the environment.

Now, an economics professor at ASU’s W. P. Carey School of Business has a way for these companies to show the public that the risks will be managed – by requiring them to post the estimated costs of a spill or major environmental side effect ahead of time through the creation of refundable environmental bonds.

“If the risks are manageable, as proponents suggest, then raising the money for the bonds should not be a challenge,” explains V. Kerry Smith, an environmental economist, who is a member of the National Academy of Sciences. “In each case, the requirement for an environmental bond shifts the responsibility for who assumes the risk of any catastrophic event of large-scale development to those arguing the risks are small. When enough others agree, we should have a robust market for those willing to assume the resulting environmental risks.”

Take, for example, the controversial Keystone XL pipeline that President Obama recently rejected, which still is being debated in Washington. Those opposed say a worst-case scenario would result in a release of oil into Nebraska’s groundwater that’s comparable to the scale of the famed Exxon Valdez oil spill off Alaska. Using that as a case example, Smith says a bond for the pipeline might need to be about $11 billion, approximately doubling the estimated capital costs for the project.

“This is about helping to confront the tough environmental decisions that national policymakers face when making irreversible choices,” said Smith, whose research on this will appear in an upcoming edition of The Economists’ Voice. “It’s about estimating the value of an option lost once action is taken. We can securitize the risks posed by these large, seemingly important, commitments.”

Environmental bonds would be held by an independent third party and invested in long-term U.S. Treasury securities. Contracts would specify when the bonds would be used to meet the events causing public concern.

“If those proposing these projects can’t get enough people interested in buying the environmental bonds, then they must decide, in advance, whether they will pay an estimate of the potential losses that could arise,” Smith said. “Either way, society will know that the costs of the worst outcomes – based on our best estimates – will be covered up front.

“Thus, making decisions will be easier for all concerned.”

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3 / 5 (2) Feb 09, 2012
A good idea but for another reason. Industrial disasters usually happen because safety advocates in management fail to win battles with short-term sighted cost cutters. The existence of such bonds would give safety advocates in management battles better ammo against such short termers. Indeed they would be priced by the market by how well companies showed that safety advocates could have a real say in safety critical management decisions.
1.6 / 5 (7) Feb 09, 2012
Bonding out: Making companies pay up front for potential environmental disasters

Yet another insane Luddite wet dream.

This is a stupid idea for a whole host of reasons, dreamed up by an economics professor talking way out of school. Insurance is one thing - having to post a fully-funded bond based on the whimsy of anti-business ecologists is quite another.

"If the risks are manageable, as proponents suggest, then raising the money for the bonds should not be a challenge," explains V. Kerry Smith...

If he thinks having to double the estimated capital costs "should not be a challenge" just because the (environmental) risks are manageable, then he's got no business teaching at a Business school, because that statement is just ridiculous, and in a sane world would garner him great and endless ridicule.

Fortunately this will go nowhere - determining bond sizes would tie up countless courts, and bring new development to a halt nationwide (which is probably their goal).
2 / 5 (6) Feb 09, 2012
If society benefits from the product produced, society will pay for all of this "bonding out" silliness in the form of a higher price. A good example IS the Keystone pipeline which, at 1700 miles will only add a small percentage to the already existing U.S. pipelines so the fears are vastly overblown. If we double the cost WE will pay for it thru higher oil prices. If we don't build it WE will pay a higher cost for middle eastern oil. Then at the pipeline end of life who gets to keep that unused "bonding out" money? The parasitic "money changers" of course.

This idea of Smith's is just another example of impractical silliness we've come to expect from the ivory tower marxist crowd.
5 / 5 (3) Feb 10, 2012
If we double the cost WE will pay for it thru higher oil prices.

You pay either way. The only issue is: do you pay up front or do you pay when disaster strikes (i.e. when you're probably not in a position to pay or when you'd rather spend your reserves on disaster relief)

The aim of this is not to compensate for disaster events. The aim is to make high risk ventures less profitable, so that competing technologies with lower risks will be invested in.

The current strategy of going for high risk/high payoff ventures (cashing in when it works and letting the taxpayer pay for cleanup when it fails) is unsustainable. Privatizing the profits and socialising the costs can't work in the long run.
not rated yet Feb 10, 2012
What I wonder is if the worst case contamination of the aquifer did occur, how exactly would the 11 billion dollars fix it? I don't think it's practical to clean up the aquifer and 11 billion doesn't seem near enough to pay for continued treatment of the water from the aquifer for those who use it now and into the future.
5 / 5 (1) Feb 10, 2012
It'll be paid in bailouts and bribes to fix the consciences of the CEOs and politicians.
not rated yet Feb 10, 2012
Sadly, this is one of the few times I have to agree with antialias_physorg regarding the likely outcome if this is put into place.

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