A recent article by Integral economists Ted Tomasi, Will Cooper, and Dave Anning, published in the December 2024 issue of The Environmental Claims Journal, undertakes a comprehensive examination of the process of discounting in the context of natural resource damage assessment (NRDA). The discount rate reflects the rate at which individuals or public decision-makers are willing to substitute an effect experienced in the present for that same effect experienced in another time period. It is used to convert the value of changes in resource services occurring at different points in time into “discounted present value equivalents,” a common unit that can be used to assess the overall effects.
How the discount rate is calculated can have a dramatic impact on the estimated natural resource damages (NRDs) because of the long time periods of effects common in NRDAs. As it has been applied in NRDA, this effect exponentially inflates past effects (largely service losses) and deflates future ones (largely restoration benefits). The paper provides an example in which the range of discount rates currently under discussion leads to a 30- to 50-fold difference in estimated NRDs. The differences can be even greater when asserted injuries go back hundreds of years, as in some state cases. In addition to being computationally important, the approach used has important ethical implications regarding intergenerational equity and ecological services that have not been adequately considered in NRDA.
Despite the importance of the discount rate and unique aspects of NRDA, past practice typically defaulted to using a 3 percent rate based on discounting in benefit-cost analysis (BCA) with rates estimated from financial markets; little attention was devoted to the issue by practitioners. However, deference to that default rate is diminishing and recent scholarship and posts on legal blogs have reawakened consideration of the discount rate. The issue is now actively being discussed in NRD cases, and novel methods implying very high rates, such as the “coerced loan theory” have been forwarded. Yet no adequate, comprehensive analysis has been available to guide the discussions. This paper seeks to fill that void. To do so, Integral’s economists melded the general economic theory of discounting with the particulars of NRDA practice.
The paper’s analysis results in four key insights.
- Distinct discount rates must be carefully crafted within the context of the specific NRD case in question using common underlying principles applied to case-specific facts—one rate does not fit all services. The discount rate from BCA is applicable to services that are monetized (such as recreation) and with short time horizons of effects (but not to other situations) and generally will be positive. Other situations, however, call for different rates.
- Ecological effects on are not monetized, and the market rate does not apply—an ecological rate is needed. This ecological rate can be larger than the market rate (if the resource baseline is improving rapidly) or smaller and even negative when baseline availability of resources is rapidly declining, as may be the case under climate change. Thus, the ecological rate generally varies across resources and across time.
- For effects over long time horizons, one must directly address intergenerational equity concerns. Closer attention needs to be paid to the demographics of affected populations over time and to avoiding discriminatory weighting of effects on individuals based on when they are born.
- The Coerced Loan Theory, derived from tort law cases, has several theoretical and policy implications that render it inapplicable in NRDA.
The authors’ conclusions call for a marked departure from status quo discounting in NRDA and imply substantive changes in restoration scaling practices for many elements of NRDA. Although somewhat more complicated than the generic application of a single market discount rate as in past practice, the paper’s refined methodology better reflects the effects of environmental changes on individuals’ lives and more accurately estimates the true value of a natural resource to the public.
