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

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.