Ecofiscal Commission urges governments to make environmental disasters less likely by closing gaps

Canada's Ecofiscal Commission recently released a new report outlining the problem of un-priced environmental risk and potential solutions. — Photo courtesy Canada's Ecofiscal Commission

Canada’s Ecofiscal Commission released a new report, Responsible Risk: How putting a price on environmental risk makes disasters less likely.

Environmental disasters — for example, train derailments, tailings pond failures, or oil spills — are infrequent, but also potentially costly. The economic activity that drives our prosperity comes with risk to the environment. We cannot eliminate that risk, but we can do more to manage it. Putting a price on environmental risk is key to doing so.

From a policy perspective, managing risk means getting incentives right. Firms already want to avoid disasters and environmental damage, given costs to their reputation and their bottom line. But those incentives are sometimes insufficient.

Gaps in existing policies — we call them “liability gaps” — mean that firms are not always held fully accountable. These gaps can shift risk—and any related costs of environmental damage—away from firms and onto taxpayers. For example, firms that declare bankruptcy might be unable to pay the full costs of clean up, leaving society to cover the rest of the bill.

When firms do not bear the full cost of potential environmental damage, they have less incentive to reduce risk. As a result, industrial disasters might be more likely to occur.

Better financial assurance policies— for example, cash deposits, insurance, and industry funds — address this problem by putting a price on environmental risk. They create incentives for firms to reduce risk. They ensure that taxpayers do not end up bearing the costs of environmental damage, should those unlikely disasters occur. And they support economic activity by harnessing market forces to achieve these objectives at lowest cost.

The report unpacks both the problem of un-priced environmental risk and potential solutions. It identifies five types of liability gaps that can result in firms’ not bearing the full cost of potential environmental damage. It shows how financial assurance can address these gaps, and considers the tradeoffs across different financial assurance tools. And it develops a detailed case study of financial assurance in Canada’s mining sector, evaluating current provincial policies in Yukon, British Columbia, Alberta, Ontario, and Quebec.

The report is accompanied by a:

• Video
• Summary Table of Financial Assurance Tools

The report and related materials are available at ecofiscal.ca/risk.

Anniversaries of recent disasters this summer:

• Lac-Mégatic, Quebec derailment of July 6th, 2013 (5 years)
• Husky Energy oil spill in Saskatchewan of July 21st, 2016 (2 years)
• Mount Polley tailings-pond dam rupture in British Columbia on August 4th, 2014 (4 years).

Related environmental risk stories

• Trans Mountain pipeline debate
• Redwater Energy Corp. case on abandoned oil wells with the Supreme Court of Canada
• Oil sand tailings management plans that don’t fulfil Alberta Energy Regulator’s Directive 085

“Policy-makers should ensure that businesses have the incentives to manage environmental risks in ways that work for them. Policies that put a price on risk can do exactly that. They can also make sure taxpayers don’t pay to clean up the environmental disasters that do occur.”

Chris Ragan
Chair, Canada’s Ecofiscal Commission
Economist and Director, Max Bell School of Public Policy, McGill University

“The Ecofiscal Commission report shows how good policy can use market forces to manage environmental risks while also supporting the activities that underpin our economy. Making disasters less likely makes sense for businesses, society, and the environment.

Dale Beugin
Executive Director, Canada’s Ecofiscal Commission

“The latest report from the Ecofiscal Commission unpacks how risks to the environment and our communities can be better managed. Financial assurance tools are a powerful way to reduce the likelihood of disasters while also holding polluters accountable.”

France St-Hilaire
Commissioner, Canada’s Ecofiscal Commission
Vice-president of research, Institute for Research on Public Policy (IRPP)

• Chris Ragan, Chair, Ecofiscal Commission and economics professor at McGill University
• Dale Beugin, Executive Director, Ecofiscal Commission
• France St. Hilaire, Commissioner, Ecofiscal Commission and vice-president of research at the Institute for Research on Public Policy (IRPP)