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Abstract
The modified Pigovian tax approach to regulating stock and flow pollutants from a
non-renewable resource firm (Farzin, 1996) provides incentives for the firm to abate
optimally, but does not allow for the possibility that a firm may become insolvent. In
contrast, the current environmental bond policy applied in most jurisdictions across
Australia and New Zealand provides funds in the case of insolvency, but often does
not provide optimal incentives for rehabilitation. This study analyses these alternative
policy approaches through a theoretical model and an empirical case study. From the
case study for a mineral sands firm, the policy recommendation is that, based on
economic efficiency alone, a modified Pigovian tax (termed here a damaged land tax)
is optimal for most combinations of parameters. However, both risk-sharing and
efficiency objectives can be simultaneously addressed by a mixed policy that includes a
damaged land tax and an environmental bond.