Impacts of new environmental standards on mining industry: The case of Peru

This study offers a simple methodology to analyze the impacts of proposed environmental standards on the mining industry and applies it to Peruvian data. The impacts are estimated with two alternative approaches, the discounted cash flow (DCF) and option pricing (OPM) methods, and their results are compared. The findings show that the new standards would cause large reductions in the values of mines under consideration. Environmental expenditures which are prescribed by the two standards are examined in the context of optimal timing of investment (A. Dixit, Investment and Hysteresis, Journal of Economics Perspective, Vol. 6 no. 1, 1992, pp. 107–132); the sensitivity of option values with respect to the duration of postponement period are calculated. The results indicate that even though allowing for a postponement option keeps the mines open, it does not lead the mines to actually undertake the necessary investments without any subsidies. Finally, the effectiveness of two alternative subsidy schemes are analyzed; it is found that conditional (state-specific) subsidies are not as effective as unconditional subsidies.