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Discounting for Long-Lived Water Resource Investments

Project ID: 3574
Principal Investigator: David Harpman
Research Topic: Sediment Management and River Restoration
Funded Fiscal Years: 2014
Keywords: discounting, sustainability, intergenerational equity, water resource investments

Research Question

This research project arises from discussions held during the Science and Technology Program sponsored Reservoir Sustainability Workshop held in Lakewood, Colorado in July of 2012.

Economic analysis of reservoir sustainablity and sediment managment measures is often confounded by the extemely long time-horizons which must necessarily be considered. Traditional discounting procedures generally produce unfavorable results. Arguably, these outcomes are flawed since they do not account for the sustainable, multi-generational nature of such measures.

During the Reservoir Sustainability workshop, many participants asked-- what were the most appropriate discounting techniques for multi-decadal cost benefit analysis of sediment management measures?

The focus of this proposed research project is on identifying discounting techniques for use in the cost benefit analysis (CBA) of long-lived water resource investment and management decisions. Our purpose is to identify and explore newly described discounting procedures which are able to explicitly characterize sustainability, intergenerational time-horizons and the equity considerations common to these kinds of decisions.

Need and Benefit

Current discounting procedures, as typified by the Economic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies (U.S. Water Resource Council 1983) are not designed to characterize the sustainable, intergenerational nature of long-lived investment and management decisions. As with the often debated topic of climate change, this is particularly apparent for water resource management decisions. In both of these cases, future generations, who had no representation in the decision-making process, must bear costs accruing in their generation.

Some of the recent literature on fisheries, international development, forestry and climate change has explored the application of alternative discounting procedures in the context of extremely long-lived management and investment decisions. There are now published applications of hyperbolic discounting, exponential discounting, declining discount rates (DDR), intergenerational discounting, use of the Ramsey equation (Ramsey 1928) with equity weights and other approaches (Johnson and Hope 2012).

Potentially, one or more of these newly emergent discounting approaches could fruitfully be employed for the economic analysis of reservoir sustainability and sediment management measures.

Research Products

Bureau of Reclamation Review

The following documents were reviewed by experts in fields relating to this project's study and findings. The results were determined to be achieved using valid means.

Discounting for Long-Lived Water Resource Investments (final, PDF, 1.2MB)
By David Harpman
Report completed on April 21, 2014

Exponential (classic) discounting has been taught to engineers, economists and finance specialists, and routinely employed for decades. When exponential discounting is employed, costs and benefits occurring in the distant future have practically no influence on the investment decision. A number of newly emergent discounting approaches have been described in recent years. Arguably, these new discounting approaches may better represent future economic uncertainty, regional and intergeneration eq
Keywords: long-lived investments, discounting, declining discount rate (ddr) methods

This information was last updated on August 22, 2014
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