Summary

Performance bonds are a widely used enforcement and assurance mechanism in extractive activities and large-scale projects that are associated with clearly defined environmental liabilities. They are especially effective and useful in conditions where the judgment-proof problem is a pervasive challenge. Bonds provide an assurance for the regulator that funds are available to complete the decommissioning activities and the termination of operations under contingencies where the operator fails to follow the contractual obligations or becomes insolvent. Applications of bonding are found in oil and gas drilling, surface mining, renewable energy projects, and timber concessions. However, real bonding systems are not without issues and limitations. Defining a sufficiently high enough bond has been especially challenging in conditions with limited information about costs and environmental risks and where smaller operators may not be able to secure access to required funds or financial services for posting the bond. The use of surety companies, bond pools, and blanket bonds provides a solution to these problems, albeit not without issues of their own. Furthermore, to keep up with the technological developments in extractive industries and with the inescapable uncertainties related to reclamation costs and environmental damages, the regulator should continually review and update bonding instruments based on new available information. Regulatory rules and statistical models that have been developed to adjust the required bonds, based on observable risk factors, provide some encouraging examples for how to design more responsive and effective bonding systems.