In natural resource damage assessment (NRDA) cases, the discount rate used to convert effects across different time periods to present value equivalents is a critical parameter. This rate directly influences both the scale of compensatory restoration required and the magnitude of monetary damages awarded.
Foundational Research
A 2024 paper by Integral economists Ted Tomasi, Will Cooper, and Dave Anning, published in the Environmental Claims Journal, examined this issue in depth. The authors concluded that typical discount rate choices in NRDAs lack proper justification and provided guidance for selecting rates in a more defensible manner.
Among other topics, the paper highlighted an important distinction between assessments of injuries to ecological services versus direct human use services (such as recreation). Certain discounting considerations that are automatically incorporated when addressing human use services are notably absent from the service equivalency analysis (SEA) scaling methods typically used for ecological effects. The gap between current standard practices and defensible methods is larger when ecological services are at issue.
New Accessible Analysis
While the economic analysis in the 2024 paper is somewhat technical, a new paper by Integral’s Ted Tomasi, Andrew Bechard, and Will Cooper offers practitioners a more accessible treatment of discounting for ecological services. This new work provides a short, intuitive, and informal treatment of the issues—featuring just one simple equation—and describes practical ways to incorporate these insights into standard NRDA practice.
Discounting Methods for Ecological Services
For 30+ years, economists have used a 3 percent discount rate when determining damages for ecological services. This involves three problems:
- It inappropriately applies a rate from financial markets (dollars) to ecological resources (services).
- It ignores population changes over time.
- It values the same amount of harm differently according to when people are born.
The first problem is a foundational one, the second a mere oversight, and the third introduces ethically questionable discrimination across individuals based on when they are born. Using current approaches, an effect experienced by people in the past is weighted more heavily than an identical effect on people alive today, while that same effect on future generations is weighted less. This weighting occurs regardless of other relevant NRDA considerations. The new paper clearly demonstrates how this “birthism” manifests in current methods and shows how it can be eliminated from NRDA scaling methods.
The paper shows via an example that the combined impact of correcting these deficiencies in the current approach is of overwhelming importance when injuries extend to the distant past and restoration benefits are realized into the distant future. The proposed solutions are relatively straightforward to implement while preserving all the legitimate discounting considerations in NRDAs.
