Economic Analysis Models for Cleaner Production Investments

In recent decades, growing environmental concerns are driving the search for new technologies, policies and projects based on Cleaner Production (CP) in order to accelerate the transition towards Sustainable Development Goals (SDGs). In this context, it becomes increasingly urgent to characterise new decision support models capable of guiding governments towards more sustainable investment choices. These models must implement tools for the economic evaluation of actions and strategies: among them, Cost-Benefit Analysis (CBA) plays an important role. In CBA, giving due weight to the social and environmental effects, also in the long term, of a project is essential. To this end, it is necessary to correctly choose the Social Discount Rate (SDR), a parameter that makes it possible to economically compare costs and benefits that occur at different times. Discountimg procedures based on constant rates are generally used in practice. In economic analyses, such discount rates underestimate long-term impacts. The aim of this study is to demonstrate how the use of alternative economic discounting procedures to traditional models is a necessary step in the economic evaluation of intergenerational projects. Specifically, we propose a cost-benefit discounting approach that is: i) dual, i.e. based on the characterisation of a twofold discount rate, with the purpose of distinctly discounting the strictly financial effects of the project and the social and environmental effects; ii) declining, in order to give greater weight to the socio-environmental effects that are progressively more distant in time. The main novelties of the model concern first the introduction of the environmental quality variable into the mathematical structure of the SDR; but also, the assessment of macroeconomic investment risk. Based on the proposed model, we estimate for the first time declining discount rates, both economic and environmental, for different national economies. The results highlight the ability of dual and declining SDR structures to make more equitable judgments of economic viability for cleaner production investments, with important repercussions in terms of Economic Policy.