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Divya Datt
Rakesh Kacker

ENSURING the well being of future generations is a natural human instinct. Parents invest in the education and upbringing of their children, and save so as to leave behind assets for them. At the national level, communities save to ensure higher capital stock and income in the future. How should the interests of the future generations be balanced with those of the present in the case of exhaustible natural capital such as minerals?

The first condition is that exploitation of the resource should be techno-economically efficient — overuse today can lead to loss of production. This optimal rate of extraction is determined by the mine's technical characteristics and the prevailing technology. Even if techno-economic efficiency is maintained, how can inter generational equity be ensured? A simple answer could be that all generations are treated equally important. If this were the premise (and it seems hard to justify any alternative), then the exploitation of the mineral resource should yield a constant income for all generations.

The economist, Mr El Sarafy, developed the principle of "user cost" — the amount that needs to be reinvested to compensate for the depletion in the asset stock in order to ensure a constant level of income in the future.

The user cost is sensitive to prices, costs, rate of return and the lifetime of the balance reserves. The higher the lifetime, the lower the user cost.How can the "user cost" principle be actually applied to promote a more equitable use of finite resources? First, national income accounts can be adjusted to capture the "user cost element" so as to reflect sustainable income from the sector. Second, royalty levels can be adjusted to capture the "user cost" or "rent" component of income from the sector. The proceeds from the royalty can be re-invested in other income generating assets in order to compensate the future generations for the loss of economic benefits.

There are obvious limitations in the use of the user cost methods. The use of market prices to value an exhaustible resource can be questioned. Similarly, the possibility of alternative investment channels is debatable. Despite such limitations, the user cost method offers a valuable conceptual argument for a more accurate estimation of sustainable national income.

(The authors are with TERI. The views expressed are personal.)

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