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Mining, lobbying and efficient environmental policy

Periodic Reporting for period 1 - MILO (Mining, lobbying and efficient environmental policy)

Reporting period: 2017-12-01 to 2019-11-30

The project had two main objectives. First objective was to investigate the choice of environmental policy instruments, like emission tax, in the context of polluting exhaustible resource extraction. Exhaustible resource extraction, including mining for metals, is polluting and often results in a polluted site after the extraction ends. Therefore the focus of this research was on the extraction stage and the reclamation or closure stage of a mine. Without any regulation in the form of environmental policy, the extraction operation produces too much pollution which is detrimental both to human well-being and to ecosystems. The project developed understanding on the economic regulation of mining to curtail emission generation by focusing on the properties of the emission tax and reclamation payments in addition to the analysis of enforcement issues.

The second objective was to analyse environmental policy instruments in a political economy context where the polluters can influence the policy maker's instrument choice. The goal was to extend the current literature on the choice of environmental policy instruments under lobbying by focusing on the firms' incentives to join the lobby group and by investigating the consequences of this to instrument choice. In addition, the research looked into how an aggregate emission quota is formed and divided when the polluters lobby the policy maker.
Regarding the first main objective related to mining and environmental policy, the first research paper of the project found that it is possible to use a combination of an emission tax, a shut-down date for the extraction operation and a reclamation payment to incentivize the extraction operation to yield the maximal welfare level. However, as this result hinges upon a complete information assumption, and because reclamation costs are often better known by the mining firm, the incentives were analysed also under asymmetric information over these costs. It was argued in the second paper that the policy maker can design a contract for the mining firm that consists of two parts: a suitable tax scheme to deal with the externality problem and a mechanism to deal with the information problem. The third research paper analysed the enforcement of an emission tax in a mining context.

The analysis on the instrument choice in a political economy context resulted in two research papers. The first of these modelled the choice between a quantity instrument (emission limit) and a price instrument (emission tax) when the formation of the lobby group is endogenous.
In the developed model the policy maker not only chooses the instrument level but also which of the instruments it uses for pollution control. These choices were modelled with a multi-stage game between the policy maker and the firms. It was found that lobbying results in a distortion relative to the social optimum with either instrument and that the policy maker is induced to choose the quantity instrument instead of the price instrument. The second paper focused the formation and division of an emission quota among the polluters, when they can lobby the policy maker for a larger aggregate emission quota and for larger individual slices of this quota. For example, the polluters can be EU member states, who influence the policy maker (European Commission) over its choice on regulation. The task of the policy maker is to decide the aggregate emission reduction and effort sharing between the member states. It is found that both the aggregate quota (i.e. the reduction) and the individual quotas (i.e. the effort sharing) are distorted from the allocation that maximizes social welfare, which is the equilibrium obtained without lobbying. Specifically, it was shown that the equilibrium aggregate quota is distorted from the social optimum characterized by the Samuelson's rule for public goods.

In addition, a joint research with Dr. Jussi Lintunen on optimal nuclear waste disposal derived a waiting rule for the disposal of the waste and concludes that disposal of the waste into a deep geological repository may not be the cost-minimizing solution. Instead, it may be optimal to keep the waste in an ''interim storage'' facility forever.

The research results were published either in peer-reviewed journals or, if possible, as working papers which have been or will be submitted. Before the publication process the results were disseminated in various conferences (IAERE; WCERE; EAERE; IAEE International conference; SING; WCNRM and twice in BIOECON), workshops (twice in NAERE) and seminars (Ca' Foscari University; CIREQ; Helsinki GSE; Luke). In addition, the research results on mining and reclamation were disseminated as newsletters (EAERE Magazine; IAEE Energy Forum).
The research results contribute to the economic literature of mining and environmental policy by analysing the last two stages of exhaustible resource production (extraction and closure/reclamation decisions) and by developing an optimal policy mix. At the societal level, the results can be of help to design policies that both save public funds as monies for reclamation should be collected in advance and improve the state of the environment.

The second part of the research project extends the current literature on environmental policy and lobbying by letting the firms decide whether it is beneficial for them to be part of the lobby group and by developing a framework in which the choice of the instrument, and not just the level of the given instrument, is endogenous.