As part of the recent reforms to NSW mining policy, the NSW Government has now released the much anticipated draft Guidelines for the economic assessment of mining and coal seam gas proposals to clarify what proponents need to address in their economic assessments to be submitted as part of an Environmental Impact Statement.

Feedback is being sought by the NSW Government on the draft Guidelines and associated Excel appraisal workbooks which aim to assist proponents to evaluate the economic, social and environmental impact of their mining or coal seam gas proposal on the local community and the state in a more transparent and consistent way.

Comments can be made until 24 November 2015 and can be submitted by uploading a submission response or writing to the Department of Planning and Environment.

What will the Guidelines do?

When assessing a development application for a mining or coal seam gas proposals, the consent authority must take into consideration a range of issues under the Environmental Planning and Assessment Act 1979, including the following which are the focus of the draft Guidelines:

  • the collective public interest of households in NSW; and
  • the likely impacts of that development, including environmental impacts on both the natural and built environments, and social and economic impacts in the locality.
  • The draft Guidelines and associated workbooks [1] set out the methodology for undertaking an economic assessment of a proposed project, with proponents being required to complete:
  • a cost benefit analysis to assess the public interest by estimating the net present value of the project to NSW; and a local effects analysis to assess the likely economic impacts of the project on the local community.

Cost benefit analysis of a proposed mining or CSG project

The cost benefit analysis allows a proponent to quantify and value the potential impacts, economic, social or environmental (including human health) to the NSW community of the project. Where feasible and material, all costs and benefits of these impacts should be quantified and monetised and converted into a single unit (preferably using the Australian dollar in current day prices). Any future impacts are converted into today's terms so that all impacts can be meaningfully compared regardless of timing.

The costs and benefits of a project are then to be compared to the costs and benefits without the project. The "without project" case is referred to as the "base case" and is to reflect the existing use of the land (based on current and committed policy settings) where the project is proposed.

The base case:

  • should include existing and already approved (but not yet operational) projects that will interact with the mining or coal seam gas project, so that the cost benefit analysis at the project level accounts for cumulative impacts and threshold effects to the extent possible; and
  • should not include projects that may potentially be approved in the future as these will be subject to their own cost benefit analysis during the assessment process.

After a base case is determined, a proponent may choose one of the following two options for the cost benefit analysis: 

  • Approach 1: Full cost benefit analysis for NSW – quantifies and attributes to NSW all the incremental costs and benefits of the project (see below); or

  • Approach 2: Minimum threshold analysis for NSW – quantifies and attributes to NSW a component of company income tax, royalty payments and all indirect costs and benefits of the project.

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The cost benefit analysis framework is outlined in the draft Guidelines:

  • Scope ‒ consider all primary (not secondary) impacts:
    • direct impacts ‒ revenues of the project less the opportunity cost of resources (such as land, labour and capital) used for the project; and
    • indirect impacts ‒ impacts on third parties, including all the environmental, social and health cost and benefits and associated public expenditure.The cost benefit analysis framework is outlined in the draft Guidelines:
    • Discount rate – a discount rate of 7% per annum with sensitivity testing at 4% and 10% per annum should be used.
    • Timeframe – the evaluation period should be long enough to capture all costs and benefits attributable to the project:
      • in general ‒ the expected economic life of the principal asset;
      • orwhere a project has environmental impacts (positive or negative) which may continue well after the productive life of the project:
        • long-term projects ‒ use a 30 year time-frame post construction (for a mining project ‒ 30 years begins from when the mine begins operating) and where applicable, a residual value for impacts beyond that time-period; or
        • alternatively, where predictable a longer time-frame can be adopted.
    • ​​Risk and uncertainty ‒ core estimates of costs and benefits should reflect average (mean) estimates of the likely outcomes so as to reflect a "risk neutral" approach and sensitivity testing should be conducted around key parameters.
    • Unquantified impacts ‒ these impacts should also be included where they are material to the decision making for the project..

The draft Guidelines provide the details of how to appraise environmental, heritage, social and transport impacts, including the tasks and inputs for the associated workbooks, for the economic assessment.

They also confirm the need for sensitivity analysis to be carried out to account for the uncertainty in assessing costs and benefits. A cost benefit analysis workbook has been specifically developed with sensitivity analysis scenarios for this purpose.

Local effects analysis

The local effects analysis is focused on the effects of a project on the local communities located near the project site and is intended to be complementary to the cost benefit analysis. The draft Guidelines state that:

"From an economic point of view, the mine or coal seam gas project creates two major effects in the locality: it employs people and it purchases goods and services. The project may also affect other industries through channels such as the direct use of land."

Much of the detail contained in the cost benefit analysis will be relevant for the local effects analysis (for example, the assessment of the economic benefits to workers and suppliers) and it will simply be a matter of translating the impacts estimated at a State level to what effects these impacts will have at local level. For example, on the positive side the local community may receive access to better quality infrastructure while on the negative side they may be exposed to noise from machinery.

The local effects analysis is also required to include additional information to describe changes that are anticipated to occur within a locality (scale of change rather than cost or benefit to the local community), such as employment changes.

The draft Guidelines acknowledge that it is unlikely to be practical or cost-effective to undertake a quantitative assessment of all local effects, and therefore based upon the legislation, local issues, the cost and complexity of assessment and the costs of obtaining the information required for quantitative assessment, the following should be prioritised:

  • local employment and income effects;
  • other local industry effects, for example on suppliers; and
  • environmental and social changes in the local community.

The draft Guidelines outline how these effects are to be estimated and how this detail is to be presented in an economic assessment.

Assessing environmental impacts

Mining and coal seam gas projects can cause environmental impacts to air quality, ambient noise, biodiversity, greenhouse gas emissions, groundwater, non-Aboriginal heritage, Aboriginal heritage, surface water and visual amenity.

Transport related impacts can also occur such as increased traffic congestion. In addition, multiple projects in a given region may cause cumulative impacts which are greater than the impact of the individual project.

According to the draft Guidelines, the two key steps to estimate economic value are:

  • identifying the physical change in the environmental condition (ie. the duration and extent of impact, whether the change is temporary or permanent or irreversible); and
  • estimating the economic value associated with the physical change (using non-market valuation techniques such as choice modelling and benefit transfer where necessary).

The purpose of the workbooks is to outline a consistent framework for appraisal of these impacts to improve the quality and transparency of economic assessments of projects. The Department's appraisal workbooks allow for:

  • quantitative appraisals for air quality, greenhouse gas emissions, surface water, traffic impact and visual amenity;
  • quantitative and qualitative appraisals for ambient noise and biodiversity;
  • quantitative appraisal of groundwater impacts with the ability to insert additional comments to explain the qualitative reasoning behind the level of impact scores; and
  • qualitative appraisals for Aboriginal heritage and non-Aboriginal heritage.

The focus of the assessment is the economic value of the "unmitigated environmental impacts" ie. those impacts that will occur despite mitigation or management strategies. The draft Guidelines note that mitigation and management costs will form part of the project's estimated capital and operating costs.

In light of recent court challenges of coal mining projects on the basis of greenhouse gas emissions which are generated by the use of the material extracted during the project, the provisions for greenhouse gas emissions in the draft Guidelines are of particular interest.

The scope of greenhouse gas emissions is defined as follows in the draft Guidelines:

  • Scope 1: All direct GHG emissions.
  • Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam.
  • Scope 3: Other indirect emissions, such as the extraction and production of purchased materials and fuels, non-production transport-related activities, electricity-related activities (eg. T&D losses) not covered in Scope 2, outsourced activities, waste disposal, etc.

For the purpose of the economic assessment, the draft Guidelines provide that Scope 1 and 2 emissions (being the direct and indirect greenhouse gas emissions arising from the extraction process) are to be accounted for in the economic assessment, however Scope 3 emissions, being secondary effects, will not need to be accounted for in the assessment.

Who will use the Guidelines?

It is expected that project proponents and relevant professionals engaged by them will use the Guidelines to assist in the preparation of the EIS. However, the Guidelines will also be used by the Department of Planning and Environment to assess the adequacy of a proponent's economic assessment report.

When will the Guidelines apply?

Once the Guidelines are finalised, all new State significant development for mining and coal seam gas proposals will need to include an economic assessment as part of the EIS which complies with the Guidelines.

It is understood that the need to comply with the Guidelines will be set out in the Secretary's environmental assessment requirements for new proposals. The draft Guidelines recognise that proponents may want to use alternative values to complement the default parameters, but a detailed justification for any alternatives will be required.

Assessment of economic reports

The Department has advised that it will establish a panel of independent reviewers with expertise in undertaking cost benefit analysis for the resources sector to advise the Department and the consent authority as to whether the economic assessment:

  • has been prepared in accordance with the Guidelines;
  • provides adequate information to validate the outcomes of the report;
  • is "fit for purpose" for the project being proposed; and
  • has any other matters relevant to the consideration of the economic benefits of the development of the resource.