Financial assurance (FA) is a well recognized regulatory mechanism designed to ensure site remediation or clean-up costs are adequately performed by duty holders under the Environment Protection Act 2017 (Vic) (Act).
Introduced under the Environment Protection (Amendment) Act 1988 (Vic), FA is not a new regulatory tool. If adequately designed, FA serves a function in avoiding liability for the costs of contaminated land remediation falling to the public.
Where land is contaminated, the Act establishes a scheme whereby EPA Victoria may require FA as a condition of a site management order (SMO) or environmental action notice (EAN). It can include a bank guarantee, bond, another appropriate form of security or any combination of these.[1]
EPA Victoria is currently developing a Draft Framework Methodology (Draft Methodology) for estimating FA for contaminated land. FA assessments are adjusted periodically to revisit assumptions concerning clean-up and remediation costs as new information becomes available and better understanding of actual site issues and constraints emerge. FA assessment can involve considerable uncertainty and divergence[2].
Applied mathematics now shows an ability of mathematical finance methods[3] to respond to incomplete information and uncertainty in assessing contaminated land cleanup costs.[4] Commentary suggests that third-party review may facilitate financial accountability in environmental reporting.[5]
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Kellehers Australia sees a number of gaps in the Draft Methodology.
While the Draft Methodology does not revisit the type of bonding instrument, recent scholarly literature has considered the effectiveness of FA-backed securitised mechanisms as an alternative to FA.[6]
The Draft Methodology does not provide a review mechanism to ensure that FA, as assessed, appropriately caters for clean-up and remediation costs at a future point. While the Act acknowledges that assessment may be conducted on more than one occasion, the Draft Methodology suggests that re-assessment will not be mandatory, and that cost uncertainty cam be adequately addressed by a set of lower, reasonable, and upper range scenarios.
While the Draft Methodology recognises that the EPA may exercise discretion in determining the final amount of FA required, it does not stipulate factors which the EPA must consider in exercising discretion nor does it clarify how a proponent would challenge a determination by the EPA concerning the appropriateness and amount of FA.
Cameron Algie, B.A., B.Mus., L.L.B.(Hons)
Dr Leonie Kelleher OAM, B.A., L.L.B., Dip.TRP, MEI, PhD.
KELLEHERS AUSTRALIA PTY LTD
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This fact sheet is intended only to provide a summary and general overview on matters of interest. It does not constitute legal advice. You should always seek legal and other professional advice which takes account of your individual circumstances.
[1] Environment Protection Act 2017 (Vic), s 220(2).
[2] In the United States, mean cleanup costs at petroleum-contaminated sites with drinking water impacts were two to four times as great as sites with no drinking water impact: Wilson, B. H., et al., “Costs and Issues related to Remediation of Petroleum-Contaminated Sites” (Paper to the NGWA Remediation Conference, 30 November 2004).
[3] Including stochastic modelling where a random pattern may be analysed statistically, but not precisely predicted.
[4] Barrieu, Pauline, Nadine Bellamy and Bernard Sinclair-Desgagné, ‘Assessing contaminated land cleanup costs and strategies’ 42 Applied Mathematical Modelling (February 2017), 478-492.
[5] Nishitani, Kimitaka, et al., ‘Are third-party assurances preferable to third-party comments for promoting financial accountability in environmental reporting?; 248 Journal of Cleaner Production Volume (1 March 2020).
[6] Lopes da Costa, José Carlos, Environmental Financial Assurance: Current Coverage, Institutional Challenges, and Alternative Financial Guarantee Arrangements (PhD Thesis, 2020).
[7] The duty holder may also appoint qualified environmental consultant to provide its own estimate of e Reasonable Cost Remediation Action and the Methodology makes clear that, ultimately, the amount of FA required of the duty holder will be agreed upon by all parties. Environment Protection Authority Victoria, Draft Framework Methodology for Estimating Financial Assurance for Contaminated Land – Draft Framework for Consultation (EPA, 2023), 11.