An Economic Model to Assess the Long-Term Implications for Investments Aimed at Urban Sustainability

Abstract

The long “life” of investments aimed at the sustainable development of the urban and built environment generates benefits, costs, and risks over a longer period than that of the generations that evaluate them. In this regard, reference should be made to environmental externalities, such as greenhouse gas emissions, which must be taken into account in the studies. This requires the use of logic that allows attributing the right weight to inter-generational effects in economic analyses. For this reason, the paper focuses on the choice of the Social Discount Rate (SDR) to be used in Cost-Benefit Analysis (CBA) of projects with long-term implications. In fact, social discounting is generally carried out using time-constant discount rates. Nevertheless, the resulting excessive contraction for Cash Flows (CFs) progressively more distant in time, leads to employing time-declining discount rates. Thus, the aim of this work is to propose an innovative model for the estimation of Declining Discount Rates (DDRs) based on probabilistic logic algorithms. The model, which is easy to implement in practice but always anchored to the theoretical principles of the reference literature, can become a determining tool for decision-making purposes since it leads to a good dimensioning of the long-term effects that sustainable urban development projects determine.