With plans for a large copper-nickel mine on Minnesota’s Iron Range under way, the issue of how to deal with ‘external costs’ is worth considering.
When producing something creates external costs — ones that fall on neither the producer selling the product nor the consumer buying it — economists say the outcome is both inefficient and inequitable. “Inefficient” in economic jargon refers to a situation in which society gets fewer of its needs met, relative to the resources it uses up, than it could if things were done in a better way. “Inequitable” simply means unfair.
Thus, when there are external costs, society can be better off if government acts to reduce them. That doesn’t always mean that the costs are reduced to zero. Nor does it mean that any government response whatever is guaranteed to improve things.
But 80 years of economic theory and many centuries of history have demonstrated the harm to society of allowing external costs to accrue unrestrictedly.
State Rep. Alice Hausman, DFL-St. Paul, and state Sen. Jim Carlson, DFL-Eagan, recently introduced a bill intended to reduce water pollution that might result from the copper-nickel mine under development. I don’t know enough about the bill or specific geologic and environmental conditions in northern Minnesota to say whether the bill is good or bad. But the issue is an important one that deserves attention even as the Legislature concentrates on the state’s budget problems.
Mining is often a dirty, dangerous business. Yet many of the most important products that humans need come, at least in part, from mines. We need fuels, metals and other raw materials. Moreover, technology and good mining practices can greatly reduce the damage to human health or the environment that has occurred in the past.
The challenge is framing government policies to create incentives that minimize such external costs while maintaining the production of necessary goods.
Mining can impose costs on third parties in myriad ways. Surface mining requires the movement of large amounts of overburden, often ruining the existing surface ecosystems, disrupting aquifers and groundwater recharge and, particularly in mountainous areas like West Virginia, causing massive silting of nearby streams.
Ore bodies often are parts of aquifers. Removing ore requires some drainage of the aquifer. Mining may free contaminants, particularly arsenic or heavy metals, or may form acids. These then can contaminate the aquifer, or when drained from the mine, whatever streams or lakes the drainage flows into.
The problem of acid drainage is particularly marked when sulfides are present in the ore or surrounding rock. When exposed to air and water, sulfuric acid is formed that can drain from tailings piles or a mine for decades, even after mining ceases. Minnesota ores are low in sulfides, but even low-sulfide ores have caused problems elsewhere.
The oldest mining pollution policy was to apply tort-liability to traditional property rights. If a mine harmed others, its owner was liable for the damages. All the victims had to do is sue. And Ronald Coase got the 1991 Nobel prize for showing that is true in theory.
It can work, that is, when everyone has equal information and power, when “transaction costs” of bringing lawsuits are low and where property rights really are well defined, politics are clean and the judicial system unbiased. That often is not the case. West Virginia is the poster-child example of a state where all of these necessary conditions were violated for more than a century.
The favorite way for most economists to remedy external costs is to impose a tax on the polluting activity equal to the harm caused by the pollution. This creates an incentive for the polluter to find the cheapest way to reduce it. The government does not specify what technology or practice the producer of the pollution must follow. The producer simply must pay for any pollution it causes. And if the harm is to human health or a major ecosystem, the fee may be enormous.
The problem is knowing in advance what the harm might be. A mine using cyanide to extract gold upstream from a major city’s water works might not cause any problems for decades, but then have a major spill that would be catastrophic for the city downstream.
More commonly, a firm may open a mine, and then go broke and abandon any remediation measures, leaving acid or toxic drainage for generations. One could require posting multi-billion dollar bonds against any such eventuality, but again, setting the amount is difficult.
The most common approach is to specify standards for any air or water emissions, including those into aquifers, or requiring specific treatment technologies. This approach often ends up costing more than emissions taxes, and is subject to the same long-run problems if the mine operator goes out of business.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.