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Natural Resource Damages & Environmental Justice

By Theodore D. Tomasi, Ph.D., Managing Principal, Business Director, Natural Resources and Enviromental Economics

In natural resource damage assessments (NRDAs), both injury to resources and the beneficial effects of restoration actions unfold over time, sometimes over periods spanning multiple generations. To make losses and gains occurring at different points in time commensurate with one another so they can be added together to a total loss and gain, a discount rate is used to adjust each effect to an equivalent impact at a common date, usually the year when the NRD case is resolved (the “base year”). Effects occurring before the base year (much of the injury) are compounded forward and thereby magnified in size, while future effects (a fraction of injury and all of restoration) are discounted back to the base year and thereby diminished. The expansion and contraction factors increase exponentially with time, which makes the discount rate an extremely influential parameter in determining the magnitude of NRDs.

In virtually all of current practice, a 3% annual discount rate is employed, and applied to all elements of the NRDA. This rate has become a default value, which is rarely discussed, unlike the many other technical determinants of NRDs that are routinely examined in detail.

This paper reexamines the discount rate in NRDA. It describes in conceptual terms what discount rates are, how they have been empirically measured, and the origins and relevance of the 3% rate ubiquitous in NRDA. The discussion reveals that the basis for the 3% rate has a quite narrow range of applicability in NRDA – short term effects on human use – and even then should be updated for new data. The basis for the 3% rate does not apply at all to ecological assessment using habitat and resource equivalency analyses, almost always employed for ecological resource assessments. Further, it is demonstrated that the appropriate discount rates: (i) should be case-specific; (ii) will generally differ across different spans of time; (iii) will be different as between human use and ecological resource assessments, and (iv) will differ across the various ecological resources being assessed. Finally, the public trust nature of NRDA leads one to question the inclusion of individual impatience in a social discount rate stretching across generations. A consideration for justice across time would recognize that impatience (included in the 3% rate) is a form of discrimination based on the timing of an individual’s birth that should not be included in discounting in NRDAs.

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Dr. Ted Tomasi has more than 40 years of experience as a natural resource economist, specializing in the valuation of... Full bio

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