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New Publication on Discounting in Natural Resource Damage Assessment

DEC. 12, 2022 — On Nov. 22 2022, the Journal of Benefit Cost Analysis published “Discounting in Natural Resource Damage Assessment '' by OR&R’s economists Cameron Duff, Chris Giguere,  and Jason Murray, and co-authors from Industrial Economics and the University of Wisconsin.

Two people with fishing poles on a shoreline.
Evening fishing in the Pacific Islands.

The paper provides natural resource damage assessment (NRDA) practitioners with alternatives, justifications and implications of choices of the discount rate, used to balance costs of injuries and benefits of restoration across time. The discount rate allows one to translate past and future outcomes into common, present values. In recent years the responsible party community has been advocating for a lower discount rate. NRDA cases often involve long-term injuries or restoration that occur over many years in the past and future. The choice of the discount rate can have a significant impact on the magnitude of injury costs and restoration benefits (i.e., costs and benefits compound over long periods). 

Historically the discount rate in NRDA was simply based on data observed from financial markets. In recent decades, that same underlying data could be used to support a different result - a lower discount rate. This has prompted damage assessment practitioners to reevaluate the original framework supporting a 3% discount rate. The new publication reviews the original framework alongside a new one based on the “coerced loan theory.” It argues that both are useful for understanding the damage assessment discount rate. The original framework, applied to new data, produces a lower discount rate, while the new framework produces a higher one. The publication provides justification for continuing to use 3%, and suggests customized alternatives if parties cannot agree on the 3% rate. 

Last updated Sunday, December 18, 2022 10:02pm PST