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Environmental bonds applied as insurance policies, bank guarantees or other forms of financial instrument
or insurance contracts are used in most countries to reduce the risk of governments incurring the costs of
mine site remediation. Despite their widespread use and the high cost of bonds to mining companies, the
incentive effects of bonds to encourage timely mine restoration is a neglected topic. This paper presents a
case study based on the mineral sands industry in Western Australia. The analysis indicates that the
imposition of environmental bonds affects the profitability and mineral output of the firm through time.
Depending upon the bond mechanism used and how it is implemented, the rate of mine restoration can be
optimal, too slow, or too rapid. In setting the bond rate, key factors that the regulator should account for
include the profit from mining, restoration costs, the social cost of environmental damage, the discount rate
and the probability that the firm will be bankrupt prior to mine closure.
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