How Much Compensation is Enough? A Framework for Incorporating Uncertainty and Time Discounting When Calculating Offset Ratios for Impacted Habitat

Abstract

Biodiversity offset areas may compensate for ecological damage caused by human activity elsewhere. One way of determining the offset ratio, or the compensation area needed, is to divide the present conservation value of the development site by the predicted future conservation value of a compensation area of the same size. Matching mean expected utility in this way is deficient because it ignores uncertainty and time lags in the growth of conservation value in compensation areas. Instead, we propose an uncertainty analytic framework for calculating what we call robustly fair offset ratios, which guarantee a high enough probability of the exchange producing at least as much conservation value in the offset areas than is lost from the development site. In particular, we analyze how the fair offset ratio is influenced by uncertainty in the effectiveness of restoration action, correlation between success of different compensation areas, and time discounting. We find that very high offset ratios may be needed to guarantee a robustly fair exchange, compared to simply matching mean expected utilities. These results demonstrate that considerations of uncertainty, correlated success/failure, and time discounting should be included in the determination of the offset ratio to avoid a significant risk that the exchange is unfavorable for conservation in the long run. This is essential because the immediate loss is certain, whereas future gain is uncertain. The proposed framework is also applicable to the case when offset areas already hold conservation value and do not require restoration action, in which case uncertainty about the conservation outcome will be lower.

Ecosystems, Ecological Restoration, and Economics: Does Habitat or Resource Equivalency Analysis Mean Other Economic Valuation Methods Are Not Needed?

“…HEA is also used today in several countries to determine the amount of compensatory mitigation that can make an otherwise unattractive-looking project move forward (see Molianen et al 2009). Resource managers try to find appropriate offsets in the form of habitat or resources and this is a parallel to the use of non-market valuation methods in NRDA because prior to HEA, a project's worth may have been decided on the basis of monetary calculation of costs and benefits.…”

“…Recently, Molianen et al (2009) greatly expand on the conventional framework for resource compensation, which is strongly related to HEA models, as noted above. They use an ''info gap'' model that allows for uncertainty, as well as time discounting, where both hopefully contribute toward finding better compensatory mitigation ratios.…”

Moving Targets and Biodiversity Offsets for Endangered Species Habitat: Is Lesser Prairie Chicken Habitat a Stock or Flow?

“…Offset projects often fail to produce habitat that can sustain the target species at the original density, or at all (see wetland examples in [23]). This is often accounted for by offsetting larger areas of habitat than are lost (see [24] and [25] for a discussion of these "offset ratio" multipliers). Little work has studied these issues in the context of habitat offsets; unless habitat restoration or creation for the LPC is particularly easy, treating it as a flow will require consistent expansion of offset area.…”

Spatial Conservation Prioritization in Data-Poor Areas of the World

“…Assume that this loss is to be compensated via offsetting by habitat restoration. At this stage, the examination of uncertainties reveals that habitat restoration is by no means guaranteed to succeed (Suding 2011), that clearing of natural or semi-natural vegetation might be best avoided (Gibbons & Lindenmayer 2007), and that offset measures have frequently failed to successfully compensate for lost habitats (Moilanen et al 2009b;Walker et al 2009). So, what kinds of strategies could be robust?…”