David Gerard

The Law and Economics of Reclamation Bonds

Bonding is a market-based enforcement mechanism that relies on financial incentives and reputation effects to deliver compliance with regulations at the lowest possible cost. For example, bonding is used to ensure court appearances, completion of construction projects, and the payment of taxes. Governments worldwide require mining firms to post bonds to promote site reclamation. A firm posts a bond that is released by the regulator if and when reclamation is successfully completed. If reclamation is not completed, the firm forfeits the bond and the proceeds are used to finance reclamation. Thus, the use of bonds transfers some of the risk of default from the public to the private sector. Despite the widespread use of bonding, there are numerous unresolved policy questions. For example, should all firms be required to post bonds? Should the bond amount be set at the expected cost of reclamation, the worst-case scenario, or some other level? Should this level depend on the financial strength of the firm? Does the bond requirement discourage exploration and development? And, perhaps most importantly, does bonding effectively promote site reclamation? In this paper we develop a theoretical framework for examining these questions, and look at the effectiveness of bonding for hardrock mining on public lands in the western United States. We find that bonds are a complement to ? not a substitute for ? the use of liability rules, and the same elements that confound successful working of liability rules also limit the effectiveness of bonding mechanisms. We also find that bonding is a means to enforce a standard, not necessarily deliver an efficient outcome.

Environmental bonds and the challenge of long-term carbon sequestration

The potential to capture carbon from industrial sources and dispose of it for the long-term, known as carbon capture and sequestration (CCS), is widely recognized as an important option to reduce atmospheric carbon dioxide emissions. Specifically, CCS has the potential to provide emissions cuts sufficient to stabilize greenhouse gas levels, while still allowing for the continued use of fossil fuels. In addition, CCS is both technologically-feasible and commercially viable compared with alternatives with the same emissions profile. Although the concept appears to be solid from a technical perspective, initial public perceptions of the technology are uncertain. Moreover, little attention has been paid to developing an understanding of the social and political institutional infrastructure necessary to implement CCS projects. In this paper we explore a particularly dicey issue--how to ensure adequate long-term monitoring and maintenance of the carbon sequestration sites. Bonding mechanisms have been suggested as a potential mechanism to reduce these problems (where bonding refers to financial instruments used to ensure regulatory or contractual commitments). Such mechanisms have been successfully applied in a number of settings (e.g., to ensure court appearances, completion of construction projects, and payment of taxes). The paper examines the use of bonding to address environmental problems and looks at its possible application to nascent CCS projects. We also present evidence on the use of bonding for other projects involving deep underground injection of materials for the purpose of long-term storage or disposal.

Experiments in technology forcing: comparing the regulatory processes of US automobile safety and emissions regulations

Technology forcing is a strategy where a regulator mandates a standard that cannot be met with existing technology to internalise external costs associated with the production and/or use of a product. We argue that the implementation process for these policies has a pronounced effect on how regulations affect the development and diffusion of new technologies. To examine this proposition, we look at two case studies of technology forcing policies targeting US automakers: The 1969 Department of Transportation airbag mandate and the 1970 Clean Air Act emissions requirements for new vehicles by 1975. The results of these two mandates were quite different. EPA successfully forced the adoption of catalytic converters, while airbags did not become compulsory for nearly 20 years. We demonstrate that these results did not stem from differences in complexity or costs of adopting the technologies, but instead were a product of political and regulatory variables that influenced the implementation process.

Transaction Costs and the Value of Mining Claims

This paper examines the relationship between transaction costs and the value of full title to mining claims staked under the 1872 Mining Law. Miners can either acquire full title to their claims (known as a mineral patent) or mine unpatented claims. The costs of enforcing claim rights is lower when the claimant holds full title, but the patenting process is costly. The decline in claim disputes after the turn of the century reduced the value of full title, and the demand for patents decreased. An analysis of data from 12 western states for the period 1882–1932 is consistent with this argument. (JEL Q31)

Interactive Forecasting Tool for Impact of New Engine Technologies on Fuel Consumption and Emissions

Recent gasoline price spikes have heightened interest in new technologies to improve vehicle fuel economy. Indeed, policies in the United States and abroad often target new vehicles as a means to improve fuel economy and reduce passenger vehicle emissions. Although fuel economy and emissions performance of new vehicles are easily compared on an individual basis to the extant vehicle stock, information about long-term aggregate effects is much more difficult to obtain. This project addresses this limitation with the development of an interactive tool that allows users to investigate how scenarios of the penetration of new vehicle technologies would affect future fleet fuel consumption and vehicle emissions (CO, HC, NOx, PM, CO2). The attractiveness of this approach is in the transparency of the assumptions, the ease with which input variables can be manipulated, and the incorporation of uncertainty. Users can vary a number of parameter inputs (e.g., growth of the passenger vehicle fleet, the rates of technological diffusion, and future emissions and fuel economy of these technologies) and generate instantaneous forecasts of pollution and fuel consumption compared with 2005 levels, as well as a baseline technology scenario, for the period 2005 to 2020. Currently, the tool runs as an Excel spreadsheet application with 15 variable inputs and output for four criteria pollutants, CO2, and future fuel consumption. This paper describes the motivation for the model, explains its development as a spreadsheet application, and demonstrates its utility with a number of examples. Future work will improve the sophistication of certain default assumptions and upgrade the software from a spreadsheet application to an interactive website.

Diesel and Hybrids Don’t Mix: Perceptions of the Interested Public and Actual Driving Behavior of New Car Owners

Hybrid gasoline–electric and fuel-efficient, low-emission diesels are becoming more popular as these technologies improve and fuel prices increase. In Europe, light-duty diesels are the technology of choice for many consumers (“good, clean, green fun”), while in the United States, diesels face significant regulatory certification hurdles. Moreover, U.S. consumers are more interested in hybrids as a solution for improving fuel efficiency and reducing CO2 emissions. The objective of this paper is to assess U.S. attitudes about hybrid and diesel technologies and behavior of those who purchase these technologies. With survey research, the attitudes of likely diesel and hybrid new car buyers are compared, and the actual driving behavior of new owners of diesels and hybrids is examined. Significant differences were found in both cases. Significant attitudinal differences exist across 20 questions spanning regulatory and environmental issues, with likely hybrid buyers being more environmentally concerned and willing to accept tougher regulatory standards. Hybrid drivers logged fewer annual miles and had a higher percentage of in-city driving. Hybrid buyers generally traded in vehicles that were newer, had better fuel economy, and had smaller engines than did diesel buyers. Both hybrid and diesel drivers saw significant fuel savings with their new vehicles. Because of the bigger improvement from their previous cars and the greater number of miles per year that they drove, however, diesel owners saved more fuel than did new hybrid owners (420 gal per year compared with 275 gal). Acknowledging these differences in public attitudes and behavior is a necessary first step in the development of strategies to reduce mobile source greenhouse gas emissions.

Identifying and Correcting Errors with Odometer Readings from Inspection and Maintenance Data: Rollover Problem for Estimation of Emissions and Technical Change

The analysis of data from state inspection and maintenance (I/M) programs and remote-sensing studies has revealed a number of fundamental insights about vehicle emissions. These include a deterioration effect (emissions increase as vehicles age) and the vintage effect (because of technological improvements, newer model year vehicles are cleaner at any given age than older model year vehicles). As a result, vehicle age and vehicle mileage (from odometer readings) are both important proxies for estimating deterioration and identifying high-emitting vehicles. In this paper, Colorado data are used to demonstrate systematic problems with odometer readings from state I/M data. The paper shows that odometer readings are notoriously poor indicators of actual vehicle miles because of the rollover of five-digit odometers (i.e., from 99,999 to 0) and recording errors. Visual inspection of a distribution of I/M records plotted against odometer readings shows obvious issues with the use of raw odometer readings and implausibly high emissions levels for low-mileage vehicles. A three-part iterative process for identifying and correcting these readings is proposed. After the method is applied, it is found that the rollover problem affects roughly 1 in 20 of the observations in the data set. The problem is particularly acute for older model year vehicles, and negative correlations are observed between miles driven and emissions for certain model years. The results suggest that some results of empirical studies of I/M data need to be reexamined and that emissions improvements resulting from technical change may be overstated.

The development of first-possession rules in US mining, 1872–1920: theory, evidence, and policy implications

Between 1872 and 1920 rights to hardrock mineral stocks and petroleum reservoirs on public lands in the western United States were assigned using essentially the same system. In 1920, however, Congress enacted a leasing system for petroleum, leaving the 1872 Mining Law intact for hardrock minerals. This paper uses a property rights framework to examine these divergent paths of the institutional development, and draws two major conclusions. First, the Mining Law appears to have been an effective means for assigning rights to hardrock mineral stocks on federal lands through 1920. Second, although it is a common belief that the Mineral Leasing Act was enacted in response to different physical characteristics of hardrock minerals and petroleum (i.e., stock v. flow), the benefits stemming from restrictions imposed by the 1920 legislation could have been accomplished through modifications of the Mining Law.