Environmental Liability Units (ELUs)

Canada, and much of the wider world, is currently in a very unusual situation in which there are a number of powerful imperative forces that seem to be operating in opposition to each other.

On the one hand, there is the need to extract the resources and materials required to strengthen and secure the economy as well as power modern green technologies. On the other hand, the extraction of these same resources can often have extremely detrimental, and expensive, long-term effects on both the environment and the communities that exist nearby these sites.

Although there have been efforts made to try to strike a balance between these two problems, the solutions have generally been sub-optimal in that they do not offer adequate safeguards, leaving the environment and communities vulnerable to negative impacts, while at the same time creating excessively long assessment periods which can curtail investments. This offers the worst of both worlds, with taxpayers having to pick up the tab for extensive and long duration clean-up and remediation efforts and suffering the consequences of permanent damage without receiving the benefits of timely and sustainable infrastructure and resource projects.

These impacts can also damage reconciliation efforts with First Nations and permanently degrade the irreplaceable biodiversity and ecosystems that all Canadians have as their national heritage. Economically, these impacts can also damage supply chains and force companies to source materials that are not truly sustainable, undercutting consumer trust and creating a negative spiral.

There is no silver bullet that can solve all of these problems. However, there are ways to (at least in part) mitigate the negatives and create the conditions whereby the impacts can be dealt with more efficiently and effectively, without governments needing to make costly long-term investments to clean up corporate messes.

Scale of the Problem

Mining and resource extraction is one of the oldest human industrial activities. People have been collecting stones to make tools and weapons since time immemorial, and as civilizations grew and flourished, quarries for raw materials and valuable stones were developed. Even back in the pre-modern era, these types of activities could have toxic effects on people and the environment, but the reach of these impacts was relatively limited, and the technologies were not very advanced. Even if a mess were made, the world was generally big enough that other sites could be found and the impacts could be contained.

Unfortunately, this type of logic no longer applies in the early 21st Century. With a global population of 8 billion plus, advanced extraction technologies, and (in particular) a seemingly insatiable demand for resources, these impacts have become much more widespread and severe. Unfortunately, in the current economic setting, companies involved in the resource extraction industry have not come close to covering these liabilities.

• Financial: Over $850 billion in unfunded environmental liabilities globally
• Geographic: Affecting jurisdictions from Canada to Colombia, Brazil to DRC
• Environmental: Water contamination, soil degradation, acid mine drainage, methane emissions, biodiversity loss
• Social: Community health impacts, displacement, loss of traditional livelihoods

Why Traditional Finance Fails

These failures are part of a larger systemic problem which has led to many of the environmental and societal ills that plague the world currently. Climate change has been termed the ultimate market failure, but this is not because the markets have failed to respond appropriately, quite the contrary. The signals that the markets have received are the problem, and this extends to biodiversity, water and land management, and considerations of community economic and social stability and security. These are what are referred to as Natural, Social and Human Capital, which are often discounted or ignored by corporations and governments in favour of financial capital. These other capitals are seen as externalities outside of the system, but this is increasingly proving to be an incorrect and frankly quite dangerous assumption.

In the case of resource extraction, these externalities represent the aforementioned liabilities which do end up having to be dealt with at some point or another. However, the companies themselves, and governments in the short term, have often not been incentivized to deal with these issues for the following reasons:

• No revenue generation: Remediation costs without asset value
• Long time horizons: 20-50+ year monitoring requirements
• Market failure: Public goods (clean water, ecosystems) not monetized

As such, the current models will continue to fail to address the problems outlined above unless a new paradigm can be introduced.

The ELUs are similar to Carbon Credits, but have a number of advantages and differences which make them particularly well-suited to addressing issues encountered by extractive industries.

A Few Words on Reporting

Much of the positive impact of the ELUs depends on companies clearly and accurately measuring and reporting on their impacts on natural (and social) capital and then assessing how to mitigate those impacts. Clear and accurate reporting is key, as the ELUs will need to be assessed and administered by third parties (i.e. financial institutions, government regulators, etc.) who will need to be able to easily understand and compare these reports. While there are some excellent frameworks being utilized, these can be narrowly focused (on GHG emissions, water use, biodiversity), overly complicated (particularly for SMEs), and mutually incompatible. This severely limits the utility of reporting and also makes companies (again particularly SMEs, which form the backbone of most supply chains) question the utility of the exercise.

The ELUs would provide a solid incentive for resource extraction companies to report more effectively, as there would be a direct financial benefit. If this were also backed by regulations and investor requirements, that would add further incentives.

As part of this project and other related work, the CHC is looking at the use of technology as a means of addressing some of the challenges currently faced by reporting frameworks. This would include ways of making it easier for businesses to obtain the necessary information and correctly complete reporting templates, as well as a method of translating between different systems. This work will progress in parallel with the ELU project.