SPD Analysis on Discounting Avoided Emissions 9/10/10

o EPA ’s Guidelines for Preparing Economic Analyses issued September 2000 provides

t wo basic lines of reasoning for not discounting benefits :

o Discounting is a financial process relevant to money therefore physical benefits cannot be discounted; and

o Discounting physical units is ethically unacceptable because it cheapens the impact for later generations or future years.

o The Economic Guidelines provide examples of when it may be appropriate and not appropria te to consider discounting non

- monetized effects

o Discounting non

- monetized effects is appropriate when:

**•** “ Quantitative information on the time streams of physical effects is available and these effects are measured in terms of human health consequences and ecosystem damages that are normally monetized

. If so, then these non

- monetized benefits ought to be discounted if monetized costs and benefits are discounted. Discounting non

monetary effects in these cases is not inherently different from discounting the se units after attaching a unit value in dollar terms

. What is being conveyed is the notion that effects felt farther in the future are worth less in today’s terms than those that occurred earlier in time. Thus, i f two policies have identical current costs and the same amount of benefits in the future except that one produces these benefits earlier in time, the policy that offers earlier benefits will have a higher social value. ”

o Discounting non

- monetized effects might not be appropriate when:

**•** An analysis stops far short of the physical effects that are good proxies for damages, the relationship between harms and emissions...might be poorly understood.

o “...the impacts of climate change may depend not only on the absolute levels of these effects, but on the rat e at which they occur.”

o “...even when benefit estimates are based on linkages from emissions to other physical and biological endpoints, often these benefit measures are still not close enough to the endpoints of ultimate concern to allow discounting.”

**•** Disc ounting actually conceals information of value to policymakers

– if there is time element to contend with, or differences in ultimate environmental benefits.

**•** Analysts have an incomplete understanding of the relationship between emissions...and the actual har m to human health or the environment that result

– discounting in these cases masks important information by implicitly assuming that a unit of benefits in one period has an identical effect on the ultimate benefit consequences of concern as a unit of the same benefit in another period.Discounting a s it pertains to the Leak Repair Rule:

o Although the emissions are averaged over a ten year time period, discounting these emissions reductions would imply that the unit of benefits in a given year is equal to the unit of benefits in a later year. Because of the dynamic nature of ozone depletion and climate change and the cumulative effects of reducing emissions including additional health benefits, EPA would be masking the future benefits by even implying that these numbers should be discounted.

Discounting as it pertains to the 2002 Nonroad Spark Iginition Rule RIA, the 2004 Nonroad Diesel Rule RIA, 2007 Mobile Source Air Toxics Rule RIA, and the 2008 Locomotive / Marine Diesel Rule RIA:

o It appears that dis counting emissions likely was not consistent with EPA Economic Guidelines because in all cases, the emissions are not steady over time but discounting these emissions implies that there is no variation between emissions from year to year.

o 2007 MSAT Rule

- emissions are not directly discounted, instead, they display the discounted $/ton.

o 2002 Nonroad Spark Iginition Rule RIA, the 2004 Nonroad Diesel Rule RIA, and the 2008 Locomotive / Marine Diesel Rule RIA

– emissions tons are directly discounted

– howeve r, as mentioned above, it is not appropriate. Another reason it is inappropriate to discount non

- monetary benefits is based on the dynamic nature of emissions benefits and the unknown future impacts /benefits

.