Non-renewable resource extraction under financial incentives to reduce and reverse stock pollution

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This paper examines the impacts of three types of financial incentives on non-renewable resource extraction that produces reversible stock pollution. A particular emphasis is the timing of remediation. We show that traditional standards-based regulation incentivizes operators to delay remediation. A policy that instead requires the operator to pay ongoing damages from the pollution stock via a Pigouvian stock tax is socially optimal and provides the operator with the correct incentives to remediate the pollution stock. A Pigouvian pollution flow tax, which has been a popular recommendation in the stock pollution literature, does not generate these remediation incentives. Nor do financial assurances, also known as reclamation bonds. The financial incentives embodied in mine regulatory reform in the United States, China and Western Australia have no explicit intention of implementing a Pigouvian stock tax. They are therefore unlikely to incentivize optimally timed remediation by the firm, even though the policy reforms have been driven by a recognition that past standards-based policies were ineffective at incentivizing timely remediation.