The Hartwick-Rule for the Evaluation of Mining Projects: An Illustration through Two Case Studies

Abstract

This paper illustrates a due process for the economic evaluation of mining projects that impact sensitive and irreversible ecological assets. Towards this end, two case studies of coal mining projects in Australia are considered – one on the Liverpool Plains in New South Wales and the other on the Galilee Basin in Central Queensland. The adverse environmental and social externalities of these projects are well known – especially the impacts on the Gunnedah and the Great Artesian Basins. Notwithstanding these impacts, which are exceedingly difficult to value, private financial analyses demonstrate significant revenue gains. Mining firms find such gains difficult to ignore. Nevertheless, economic analyses illustrate that the net benefits to Australia are possibly absent even without accounting for the costs of environmental social externalities. Given that the property rights of the mineral reserves are vested with the State, the Resource Rent Tax (RRT) becomes a legitimate fiscal policy tool. The paper argues that the assessment of mining decisions, must account for the depreciation of the Mineral asset. When this depreciation is measured by recourse to the Hartwick-Rule, the mining projects demonstrate monetary viability only when the RRT is enforced and is invested in its entirety on options that generate annual returns in excess of 3 to 4 per cent. If recognized, the costs of environmental and social externalities could readily wipe out this, and for that matter any, monetary viability owing to the irreversible nature of the natural social endowments.