Nonrenewable Resources, Vol. 7, No. 4, 1998

Sustainable Development and Mine Management Carmine Nappi 1 and Richard Poulin 2'3

Received April 5, 1998; accepted June 10, 1998

The sustainable development concept has generated a large body of literature. It has also divided economists into numerous schools of thought. The neoclassical, London, and other schools are painted in broad strokes in the first part of this paper. They debate the extent to which manufactured capital and "natural" capital are believed to be substitutes or complements in a macroeconomics context. The problem stems from the difficulty to measure "natural" capital. The second part of the paper looks at sustainable development in mining at the firm level. First, it is argued that the capital value of the mineral reserves can be maintained by discovering reserves or by saving part of the rent. Second, we show that mine manager actions can be induced to follow efficiency and equity principles when proper limits or constraints are imposed by the legislator. It is concluded that a set of indicators need to be defined and calibrated to ensure that the economic, environmental, and social limits imposed on the mine manager become a framework inside which he competes for the best interest of the firm. KEY WORDS: Mining firm; efficiency;mineral stock; nonrenewableresources.

is only one of six different definitions presented in that report. The ambiguity surrounding this concept becomes more troublesome when one peruses the economic, ecological, or evolutionary literature on the subject. For example, Pezzey (1989) has recorded more than 60 different definitions of SD, while Pearce (1989) has registered 26 of them. Not only does this concept mean different things to different people (depending on the selected paradigm or on the chosen method of analysis), but it also has been discussed over the years mainly as a macroeconomic problem, since it is concerned with aggregate variables, such as a nation's stock of natural, human, and manufactured capital, environmental assets, or the well-being of current and future generations. This is unfortunate to the extent that development may be "sustainable" (no matter how it is defined) mainly if it is practiced at the microeconomic level. For example, what are the actions that a mine manager should take or that a mining executive should encourage in order to develop the mine for "the present-day needs without compromising the basis for future generations to meet their own needs"? In other words, how can the SD concept be made operational or workable for any manager using "the fruits of nature"?

INTRODUCTION Few concepts have attracted as much attention as that of sustainable development (SD). A plethora of books and articles have been written on the subject. A number of national and international committees have been established to promote it. Political leaders, mass media, and numerous analysts interpret environmental problems, such as climate change and ozone layer depletion, in terms of SD. Despite its notoriety, this concept still lacks a clear, accepted, and unambiguous definition. Of course, most people recall the definition given in the Bruntland Report ("Our Common Feature," 1987) suggesting that SD must respond to present-day needs without compromising the basis for future generations to meet their own needs, but that

lnstitut d' t~conomieAppliqu6e, Ecole des Hautes Etudes Commerciales, Montr6al, Canada. 2D6partement de Mines el M6tallurgie, Universit6 Laval, Quebec G 1K 7P4, Canada. 3Correspondenceshould be directed to Richard Poulin, Facultd de Sciences et de G6nie, 1033, Pavillon Alexandre-Vachon, Universit6 Laval, Quebec GI K 7P4, Canada. 263

0961-1444/98/1200-0263515.00/I 9 1998 Internalional As~;ccia;ion for Malhematical Geology

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Before considering some tentative answers to these questions, a review of the literature on SD concept will present the main contributions of various schools of thought.

BRIEF SURVEY OF THE LITERATURE If a paradigm may be defined as a description, an explanation, a model, a way of defining and looking at the world that gives rise to assumptions about what is important, then the economic paradigm may be considered as one of the most debated explanations or descriptions of SD. It asserts that the issue of sustainable growth revolves essentially around intertemporal choice. To achieve SD, an economy requires that the stock of capital (made of two elements: manufactured capital and "natural" capital) that one generation passes on to the next be maintained or enhanced. Now the extent to which these two forms of capital are believed to be substitutes or complements is one factor that separates some economists from others.

The Neoclassical School Some pioneering contributions to the neoclassical school where made by Dasgupta and Heal (1974), Hartwick (1977, 1978), Solow (1974,1978,1986,1993) and Stiglitz (1979). All these authors examined, within a neoclassical framework, the problem of sustainability of the economic activity with exhaustible resources. Their early work implicitly modeled SD as nondeclining consumption over time, such consumption being interpreted in a very broad way, including not only conventional items, such as food, clothing, and shelter, but also services and intangibles, such as culture, recreation, leisure, and enjoying the environment. Using a production function in which an input of natural resources is essential for production, but which allows output to be maintained through the substitution of manufactured capital for resources, they come to the conclusion that a constant or a nondiminishing per capita consumption path can be maintained indefinitely: "...as long as the positive effects of technical progress and/or capital accumulation are sufficient (through substitution away from scarce natural capital and/or through improved productivity) to offset the negative effects of the exhaustion of natural resources, pollution, population growth .... " (Faucheux and others, 1996).

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Hartwick went even further by proposing a rule for ensuring nondeclining consumption through time in the case where an economy made use of a nonrenewable resource in its economic process. The Hartwick rule states that this is possible so long as the stock of capital does not decline over time, which is achieved by reinvesting in reproducible capital precisely the current returns from the use of flows of exhaustible resources (currently called the Hotelling rents). As mentioned by Solow (1986), such a policy of investing resource rents in reproducible capital suggests that some appropriately defined stock is being maintained intact, and that consumption can be regarded as the "interest" on that stock. Such conclusions have attracted at least two sets of criticisms. First, the neoclassical proposition of sustained economic activity depends on the degree of substitution between the productive inputs from which output is obtained. Thus, if someone uses a CobbDouglas production function (like in Hartwick, 1977), then a constant degree of substitution between inputs is, in fact, "assumed" and not observed. Therefore, critics suggest that the Hartwick rule depends on the particular functional form that is chosen for the aggregate production function. Such a criticism is not totally correct to the extent that Hartwick(1978) has been able to restate his rule for a CES production function where the elasticity of substitution between the natural resource and the manufactured capital is greater than one (this, in fact, causes an additional problem to the extent that the fixity in supply of the natural resource then becomes irrelevant) (Hanley and others, 1997, p. 427). Despite such restatements of the neoclassical propositions on SD, the fact remains that if technological progress is subject to some diminishing returns, then it will be unable to compensate fully for continuing depletion of the resource stock. The second line of criticism is much more important and is related to the neoclassical conceptualization of resources and capital. Its critics maintain that natural resources and man-made capital are not so substitutable as the neoclassical approach suggests. Even more, natural capital and man-made capital may, in many cases, be considered much more as complements than as substitutes. If this is the case (if resources are required to manufacture capital goods and if increasing output means, in most cases, increasing the use of both types of inputs), then the substitution of the former by the latter may be limited by the fact that an increase in capital requires an input of resources. Therefore, as pointed out by Victor (1991), even if

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the elasticities of output with respect to reproducible capital and to exhaustible resources may satisfy the neoclassical condition for substitution as a solution to resource depletion, they may not satisfy the equivalent condition required when capital is produced from resources. The London school pushes this point further by advocating a nondeclining natural capital approach. Before presenting and criticizing this alternative definition of SD, it must be stressed that the neoclassical approach draws our attention to various indicators in order to evaluate to what extent resources are being allocated over time in an efficient and equitable manner. These indicators are the elasticities of substitution, technological change, and net prices (production costs of resources minus their extraction costs). By adopting a more desegregated approach to production and by examining, in detail, specific sectors and the technologies they employ, one may better assess which sectors of the economy are, in their pursuit of economic growth, living off capital rather than income.

The London School The London school (Pearce and Turner, 1990; Klaasen and Opschoor, 1991; Pearce and others, 1990) has adopted the view that while some substitution is possible between certain elements of natural and manmade capital (for example, development of new products and technologies that reduce the intensity of use of materials), many elements of natural capital provide nonsubstitutable services. They therefore suggest the constancy of the natural capital stock as a key necessary condition for achieving SD. In their words, "the requirement is for non-negative change in the stock of natural resources and environmental quality" (Pearce and others, 1990, p. 4). Thus, the London School questions the long-term prospects for resourcesaving technological progress. The attempt to identify a sustainable growth path with nondeclining capital has at least two major shortcomings. First, as showed by Nordhaus (1992), a declining capital path can be rigorously associated with a declining consumption path only when technology is stationary. Even though technological change may not remove all environmental, resource, and ecological problems, one can hardly assume that the industrial revolution has completely run out of steam. Because technological change is most likely to continue, a declining total capital path cannot be necessarily associated with a

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declining consumption path. Likewise, nondeclining total capital is not, in fact, identical with nondeclining consumption possibilities. The criterion of maintaining capital intact may be unattractive for a society, with a finite stock of an essential resource, which it must allocate over time, because the only sustainable (capital-intact) path may be permanent starvation unless the society benefits from a technological breakthrough. Second, if the maintenance of the stock of natural capital is a condition for sustainable development, then you get stuck with the problem of measuring natural capital at any point in time or the problem of aggregating heterogeneous elements of natural capital together in comparable units. After examining the four different ways of performing this task (adding physical quantities or keeping constant, in real terms, the total value of natural capital stocks, the unit value of the services of the natural resources or the value of the resource flows from the natural resources), Victor (1991) came to the conclusion that each of them represents a very unreliable indicator of sustainable development and that the theoretical and practical problems of actually measuring the capital stock are unlikely to be overcome easily.

Other Approaches The evolutionary paradigm presents a different view or explanation of the world. It breaks with the axiomatic equilibrium framework found in neoclassical economic models, makes use of disequilibrium concepts, and looks more at conflict aspects of economic processes. Using inductive approaches based on observations of the recurrent interactions between technical, socioeconomic, and sociological systems, evolutionary models (Faucheux and others, 1996) highlight the multidimensional character of the causes of economic and technological change and suggest some essential roles that technical change may play in the definition of a sustainable development path. Most of these models advocate government intervention and, therefore, the use of public policy tools in order to deeply influence the direction and shape of economic activity. The ecological economic paradigm represents an alternative way to look at sustainable development. Such a model (Perrings, 1996; Beckenbach and Pasche, 1996) asserts that there are limits to the possibilities for substitution, not just between produced and natural capital, but between different types of natural capital.

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Therefore, since conservation of irreplaceable environmental resources implies conservation of the capacity of ecological systems to provide those resources, to evaluate SD one must simultaneously take into account the economic and the ecological systems and study how these dynamic systems are jointly determined. Any change will generate a set of ecological effects and a set of economic effects. The more highly connected ecological and economic systems are, the more change in one will imply change in the other, or the more they will "coevolve" through interdependencies and feedback mechanisms. The typical focus of such models is the persistence or the degree of sustainability of system functioning under changing environmental conditions, such changes being partly due to the system activity itself. Finally, in order to insist on instability, multiple equilibria and the increasing complexity of living systems, ecological economics modeling draws most often on the mathematical theory of complex dynamic systems. Other approaches (the post-Keynesian school; the neo-Ricardian school; the thermodynamic school; or Bishop's safe minimum standards proposition) have been proposed to measure or to assess the sustainability of the economic system. All of them consider SD as a macroeconomic problem and very rarely have asked themselves what all these discussions really imply for the mine manager. What actions should the mine manager consider at the firm level in order to develop the mine without compromising the basis for future generations to meet their own needs?

SUSTAINABLE DEVELOPMENT AT THE FIRM LEVEL Mikeseli (1994) is very much interested in the microeconomic view of SD. He adopts the general rule advocated by most economists that the present generation bequeath to future generations a natural resource base with a capital value at least equal to that which it inherited. The application of this sustainability concept to the mineral industry raises several questions related to the valuation of the annual depletion of the minerals, the degree of substitutability of reproducible capital for natural capital, and the mechanisms for transferring the capital value of the depletion to future generations. Using a broad definition of substitution (see Tilton, 1983: material-for-material substitution, other factors-for-material substitution, quality-formaterial substitution, interproduct substitution, or tech-

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nological substitution), Mikesell comes to the conclusion that the capital value of the mineral reserves can be maintained for future generations by discovering an equivalent value of additional reserves or by saving and reinvesting capital depletion rather than by consuming it. Sustainability can thus be achieved from a microeconomic standpoint by saving and reinvesting each year an amount equal to the present value of the annual net revenue (after deducting extraction costs) from the sale of the mineral products. Therefore, as previously suggested by Hartwick (1977, 1978) and Solow (1986) in a more economic context: "by saving a portion of the annual net revenue from producing the mineral and accumulating the annual amounts at compound interest, there can be created a fund sufficient to yield the same net income (after depletion) for future generations as the net income received from exploiting the mineral" (Mikesell, 1994, p. 85). As outlined by an anonymous referee, if for some exogenous reason the resource price (and hence revenue) is too low, then current investment will exceed resource rent and the proposed solution will not necessarily lead to a sustainable outcome (see Toman and others, 1994). The accumulation of such a depletion fund could be assured by an appropriate tax on the annual output of each mineral, the tax varying with the present value of annual revenue from producing the mineral. Such ideas were already present among Daly's "operational principles" (1990). In the case of nonrenewable resources, this author had proposed to divide receipts from nonrenewable extraction into income and an investment streams. Only the former would be available for consumption while the latter would be invested in renewable substitutes, such that, at the end of the economic extraction of the nonrenewable resource, an identical level of consumption is available from the renewable substitute as was available from the nonrenewable resource at the start of the depletion program. Despite their interest, these methods to achieve sustainability are not very operational at the mine management level because the calculation of the investment stream would be difficult. Much simpler is to "motivate" the mine manager to comply with SD objectives by following efficiency and equity principles. The first principle stipulates that all economic, environmental, and social costs and benefits must be considered when operating a mine, a smelter, or a refinery, even those externalities for which a market value is not readily available. This first principle is not sufficient to ensure that the economy will develop

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in a sustainable manner because the consequences of actions on the welfare of future generations (the equity principle) must be taken into account. To the extent that the mine manager tries to maximize the short- and long-run interest of the firm, many of the actions may already be considered as conforming to the abovementioned principles. However, acknowledging that imperfect markets are present and property rights are neither well-defined nor fully allocated, a complete "laissez faire" attitude is not desirable and a framework of limits is required. Economically, the mineral producer is confronted with the sustainability of demand, producing sufficient quantity of metal at a given price that will not favor substitution or recycling, and with the sustainability of supply, finding sources of low-cost feed. In response to these constraints, the mine manager will invest in productivity and exploration. This may explain why labor in Canadian mining has twice the national average productivity measured as a ratio to the overall business sector average (Duncan, 1997). Investing in productivity through advanced mining methods and technology improvements will lower production cost, thus maintaining the firm's share of demand against competing sources, or increasing the resource base as lower-grade deposits become economic. Investing in exploration and associated technologies improves efficiency of discovery, results in increased reserves, 4 and security of supply. Normal market forces will dictate to the firm the proper level of investment necessary to maintain economic competitiveness and to secure market share. Table I presents, for a selected group of metals, the reserves in 1970 and 1997 and the cumulative production between these dates. Taking the example of copper, we see that reserves are higher in 1997 than in 1970 by 31 million tonnes, despite the fact that 226 million tonnes have been produced since 1970 and are now available for recycling to varying degrees. Investments by mining firms actually result in an increase in total stock. As the foregoing demonstrates, exploration and production actions are well-embedded into the mining firm market environment, as long as sufficient mineral rent is available. Thus, the major sustainability issue for metals is not physical exhaustion of nonfuel 4 Reserves are the portion of resources whose existence has been demonstrated to a high degree of certainty (see Riddler, 1996) and from which a usable mineral commoditycan be economically and legally extracted at the time of determination.

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Table 1. Reservesfor Selected Metals in 1970and 1997, and Cumulative Production from 1970 to 1996a (000 Tonnes)

Metal

Global reserves 1970

Copper Zinc Tin Silver Gold

279,000 I 12,000 4,400 171 11

Cumulative production, 1970-1996 226,000 178,000 5,800 326 43

Global reserves 1997 310,000 140,000 7,000 280 46

a From Selinus, 1997.

resources, 5 but rather the influence on environmental and social conditions that maintaining mineral stock will have. In other words, this would be accounting the full cost of introducing new metal in the market in accordance with the efficiency principle. It was with the realization that wide-ranging spatial externalities 6 affected the environment, exceeding the boundaries of the mining property and going unchecked because of imperfect property rights, that specific environmental regulations became warranted. Insufficient planning and engineering by mining operations made the command-and-control regulations very costly. This has been particularly true for the mines already in operation, since regulation provided them with little flexibility in how to meet environmental objectives. However, laws and regulations provided incentive to develop economically and technically viable environmental mitigation measures. Investing in new and cleaner technologies and procedures reduces compliance cost. Biohydrometallurgy processes that can exceed actual environmental requirements (Poulin and Lawrence, 1996) and closure methods that can prevent unwanted chemical reactions to be initiated have been developed (Feasby and Tremblay, 1995). Simultaneously, mounting expectations by shareholders, changing social values, and complex permitting procedures by regulatory bodies have prompted the mine manager to take new actions. Voluntary approaches and industry/government partnerships to achieve environmental goals is fostering goodwill from the community and placing more techni-

5 Acknowledgingthat mineral resources are finite. 6 Anexternalityis presentwheneversomeagentutilityor production relationship include real variables, whose values are chosen by others without particular attention to the effects on the agent's welfare, and is not compensated(Baumol and Oates, 1988).

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cal responsibilities onto those who have the know-how to deal with them, having regulators setting goals and operators deciding means to achieve them. The mine manager is taking measures by investing in technology and methods, to efficiently respect the environmental limits, just as investments have been made to support the mineral stock. We turn now to social issues. To maintain the stock of minerals, the mining company will invest in exploration. A key factor to renew depleting reserves is having land access (McAllister and Alexander, 1997). Exploration requires vast areas to be mapped and analyzed, even if, in final analysis, the actual mining takes place in a very limited space. In historical terms, there has not been, until recently, much conflict between competing land uses, mining being usually considered the "highest and best" use of the land (Leshy, 1987). Today, however, land use decisions have to satisfy various social factors and, sometime, competing needs. Mining is a user among others and, to benefit from sequential land use, it must convince other users that mining is only an episode in man's occupation of the land. Many do recognize that mining can be a shortterm occupation of the land, but that recognition can also generate opposition based on fears of a "boom and bust" cycle. In addition, it is not just the duration that is a concern, but rather the state in which it is returned to original or different conditions and uses. Because of poor community understanding and acceptance of the industry, as well as ongoing uncertainties associated with native title claims, the accessible land base has been reduced. The mine manager has had to react by creating partnerships with social stakeholders and invest in creating a better social integration. This contradicts past successes that have been based on entrepreneurial independence. Examples exist where mining firms have made arrangements with natives or guarimperos to jointly exploit the resource. The efficiency principle is promoted by ensuring a stable, level-playing field in which participants benefit (or reduce disbenefits) from investing. This is achieved by the introduction of limits to ensure the presence of environmental and social objectives. Economic, environmental, and social limits become a framework inside which the mine manager competes for the best interest of the firm by investing part of the rent to increase efficiency. The regulator has the responsibility, with stakeholders, to see if the limits, by themselves, are efficient. What about the equity principle, i.e., intergeneration sharing? Investing resource rent in reproducible

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capital suggests that some appropriately defined stock is being maintained intact. This stock is composed of manufactured and natural capital. However, because the value of natural capital is not well-defined, longrun stewardship dictates a minimization of nonreversible uses. At the level of the mining firm, the equity principle is served if the above-mentioned limits ensure management for the well-being of current and future generations. Environmental and social limits are imposed to minimize costs to future generations. It is difficult to value these costs in the absence of a market and to calculate taxes to compensate the inevitable disturbance. It is also difficult to decide who to compensate between groups and between generations. Mineral stocks are easily valued so market forces, in an imperfect way and with some delays, replace limits. This is achieved by offsetting exhaustion through technical progress by using another mineral that is abundant, or mining lower grades (Querini, 1996). However, also needed are sets of indicators to ensure that the limits imposed on the mine manager are stimulating and do not dampen the willingness to invest and that natural capital is managed with foresight. Some sets of indicators are suggested by the proponents of the different schools of thought described in the first part of this paper. Specifically for mineral resources, example of indicators that can be considered are: declining long-run price reflecting long-run production cost, level of resource stocks, cumulative stocks of metal, percentage of disturbed area rehabilitated, level of impact beyond the limits of the mining property, and land base area and local participation (both of these on individual and in aggregated form). Other issues that have not been raised include, energy consumption/production and health, for example, those that could eventually be proved pivotal. Despite the interest of these potential indicators, the analyst must keep in mind that these are just measures and data. They do not by themselves explain or simplify complex phenomena unless they are integrated with other signals. Such an integration has proved, until now, to be an impossible task.

CONCLUSIONS It was observed that the normal actions of the mining firm can be in accordance with SD principles. However, because of imperfect markets and ill-defined property rights, limits need to be imposed in environmental and social matters. This procures a level-play-

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ing field that can be raised to a proper height to satisfy the equity principle. A set of indicators needs to be calibrated and used to adjust limits that will stimulate investment with respect to the principles necessary to comply with sustainable development objectives. The selection of indicators is no easy task since they must be representative, responsive to change, analytically sound, and accepted by all stakeholders. Finally, in order to be considered as performance assessment tools, some agreement is needed first on what exactly is assessed.

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