Application of New Discounting Approaches for Long-Lived Water Resource Investments

Project ID: 9994
Principal Investigator: David Harpman
Research Topic: Sediment Management and River Restoration
Funded Fiscal Years: 2015
Keywords: discounting, sustainability, intergenerational equity, water resource investments

Research Question

This research project will apply several newly described discounting techniques to one or more examples of long-lived water resource management problems. The objectives of this proposed effort are; (1) to identify barriers to the application of these new discounting approaches, (2) to compare and contrast the results produced by these new approaches to the results obtained using traditional (exponential) discounting approaches, and, (3) to explore the implications of using these new discounting approaches in planning studies and routine cost benefit analyses.

Economic analysis of, for example, 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.

There are a number of new and emerging discounting techniques for use in the cost benefit analysis (CBA) of long-lived water resource investment and management decisions. These newly described discounting procedures are able to explicitly characterize sustainability, intergenerational time-horizons and the equity considerations common to these kinds of decisions.

Our research will apply these new techniques to one or more example long-lived water resource management problems.

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 and is informed by a FY2014 S&T funded scoping study entitled, Discounting for Long-Lived Water Resource Investments (Project ID X3574).

Need and Benefit

Authors from a wide array of disciplines have asserted that exponential (classic) discounting is the antithesis of intergenerational equity and sustainability. They argue that the process of discounting ignores the well-being of future generations and contributes to the near-term and unsustainable exploitation of exhaustible natural resources.

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 during 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, quasi-hyperbolic discounting (Laibson 1997), gamma discounting (Weitzman 2001), Green Book disounting (HM Treasury 2003), intergenerational discounting (Sumaila and Walters 2005), Ramsey discounting (Ramsey 1928) with equity weights and other approaches (Johnson and Hope 2012).

Arguably, these new discounting approaches may better represent future economic uncertainty, regional and intergeneration equity, and sustainability considerations. As a group, these new discounting techniques may be better suited for the analysis of long-lived infrastructure and environmental investments.

The findings of our previous scoping study (X3574) indicate several of these newly emergent discounting approaches could fruitfully be employed for the economic analysis of reservoir sustainability and sediment management measures as well as other long-lived types of problems important to the Bureau of Reclamation.

Contributing Partners

Contact the Principal Investigator for information about partners.

Research Products

An integral part of this research is the dissemination of our research findings. We expect to present one or more professional staff seminars during the course of this research project, to draft a technical report describing our findings and to submit one or more articles to professional journals for publication.

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Last Updated: 4/4/17