Restoration-based scaling methods, such as Habitat or Resource Equivalency Analysis (HEA or REA), quantify lost resource services from an injury and gained resource services from a restoration project into the future. In many cases, the injury and/or the restoration project are projected to last several decades or even into perpetuity. Following economic theory and federal guidelines, resources provided (or lost) in the future are discounted at some specified rate, usually 3%. This paper reviews the role and significance of discounting in restoration scaling. We review time preference, inter generational concerns, risk, and uncertainty as rationales for discounting, and examine various discounting formulations (e.g. constant and hyperbolic). We present several quantitative examples in a restoration-scaling context regarding different discounting approaches. We conclude that, while the specification of the discount rate can have a large effect on restoration scaling calculations with long time horizons, incorporation of risk and uncertainty of restoration project benefits over time can overwhelm the effect of alternative specifications of time preference.
1 The authors are resource economists at the California Department of Fish and Game, Office of Spill Prevention and Response. This paper represents the views of the authors and not the Department.