The cost of something depends on the factors you choose to include in your valuation. If you take a short-term view and your focus is purely financial, you’re going to come to a different sense of cost than if you have a long-term perspective, and you consider certain non-financial aspects.
If you’re buying a house, you’re probably not only thinking about its value next month. You’re thinking, perhaps, about the 10 or 20 year horizon. And financial factors may not be everything: you might also want to know if the area’s safe, that you can get to work easily, and that there are schools nearby for the kids. Some of what goes into your decision may not be reflected in the purchase price.
It’s not always like that with public budget decisions, according to Chris Nelder, a consultant with the Global Footprint Network (GFN). For a range of reasons, when governments decide where to invest money, they often choose the immediate best price, without considering the long-term ramifications. Since sustainability doesn’t have an economic value in decision-making, it sometimes loses out against other priorities.
But that could change. Nelder is leading an effort to include sustainability in public budgeting, and he’s received support from a high profile figure: Martin O’Malley, a potential Democratic presidential candidate. As governor of Maryland, O’Malley hired GFN to run a series of analyses of public budget decisions because he recognized that social and environmental concerns were often being left to one side.
The accounting method developed by Nelder is called Net Present Value Plus (NPV+) and it’s basically an extension of how most governments currently do cost-benefit analyses. Net Present Value is a way of assessing the future value of something in current dollars, so you can properly compare today’s outlay with the expected future return. The new “plus” bit is an allowance for environmental and social factors.
“We are experiencing a shift in which we measure government not by its input, but by the benefit each service provides to communities. New tools like NPV+ enabled this transition and help make the economic case for sustainable choices in our budget decisions,” O’Malley writes in an email. “In Maryland, NPV+ helped guide critical investments we needed to make–from restoring the health of the Chesapeake Bay, improving mass transit, to reducing our government’s carbon footprint. Government should be utilizing tools like NPV+ so that we can make better, more sustainable choices.”
Nelder looked at four theoretical decisions Maryland might have to make. The first concerned what sort of cars the state should buy for its fleet. The choice was between a conventional 2013 Ford Focus and an all-electric 2013 Nissan Leaf, and, for police use, between a 2014 Chevrolet Caprice sedan and a 2014 Chevrolet Tahoe SUV. Based on its own forecasts for future fuel costs and after including the “social cost of carbon” (a figure produced by the Environmental Protection Agency), Nelder says the state would actually save money over a 10-year period by choosing the Leaf, despite it costing double as much upfront. The more fuel-efficient Caprice would be a better bet within four years.
Nelder also considered a purchase of a coastal wetland area, an investment in 3,000 weatherization projects for low-income families, and the cost of maintaining a bank of publicly owned facilities. In each case, taking a long-term perspective and accounting for factors like carbon and future energy costs significantly changed the calculus. Buying the wetland, for instance, would deliver $6 to $16 for every dollar invested, depending on the exact NPV+ method used.
“The reason we do this is to try to help decision-makers come up with investments that produce more long-term sustainability and resilience,” Nelder says. “What we’re really emphasizing is that you can’t just think about what it costs to buy something. You also have to think about the operational picture over the full lifetime.”
GFN is currently talking with municipalities and universities about adopting NPV+, and O’Malley is championing the idea on the campaign trail. More broadly, there’s a discussion in the economics community about how to treat environmental investments as part of NPV. People who think climate change is a serious problem tend to believe that interventions should be treated more favorably than they are today, because the pay-off could be significant if the costs of climate change are high. People who don’t think climate change is a serious issue tend to discount those investments more quickly over the longer term.
This all has huge implications. If factors that are currently externalized are internalized, that could change the discussion around all kinds of budget decisions.