Calculating Cash Flows & Carbon

Parallels between DCFs and development

Recently I participated in a book club about Winners Take All, an eye-opening and often frustrating critique on the global elite’s efforts to change the world. One conclusion of the conversation is still ringing in my ear; in North America, money is our culture. While I believe money can be an enabler of cultural activities, centring society around its use (and misuse) is terrifying.

That said, I think there are opportunities to use this artifact to shape communications and comprehension around initiatives to lessen our negative environmental impact, until carbon footprints replace cash as our obsession. One such financial concept that can be extrapolated to the world of sustainability is the time value of money.

Time Value of Cash

The twenty dollar bill in my pocket is worth the same now as it is twenty years in the future, right? Not quite. According to the time value of money (TVM), a fixed sum of money available now is worth more than that same sum in the future.

This is due to a number of factors: inflation comes into play, so does the utility of being able to meet your needs in the present moment, as well as the uncertainty around whether a given opportunity to consume will still exist in the future. However, the most significant factor affecting the TVM is its capacity to earn interest (once removed from under your mattress and properly invested).

This concept is necessary to decision making, for example when evaluating whether to pursue an investment by valuing it using a discounted cash flow (DCF) analysis. Trying to make such decisions without taking the time value of money into account would result in an incomplete and inaccurate picture of the situation at hand, and is not recommended.

Clearly, not even something as intangible as monetary value is immune to aging. But contrary to a fine wine, this value is greater in the present moment than a few years down the road. Cheers.

Time Value of Carbon

I first learned of the time value of carbon concept in a podcast episode in which Anthony Pak, founder of the Embodied Carbon Network Vancouver, spoke about carbon emissions in the context of our built environment. He advocates for the need to look at embodied carbon (eCO2e) emissions, which involves calculating emissions generated through a building’s whole life cycle. This encompasses the building materials, construction process, and so on.

Seeing as the building sector is responsible for approximately 39% of global greenhouse gas emissions, there are great efforts underway to construct new, hyper energy efficient properties. On the surface this appears to be the more “sustainable” option. However, accounting for embodied carbon reveals an impact that is significantly net negative due to the emissions generated immediately at the beginning of the structure’s life cycle.

Enter, the time value of carbon. In the case of carbon emission reductions, they are more valuable (read: essential) earlier rather than later. This means that whether or not a building is “net zero energy”, the timeliness of its embodied emissions matter since there is no guarantee the opportunity to reduce in the future will exist.

Ah, life in a climate crisis! Time to retreat to the woods.

The Parallel

Cash today is worth more than cash tomorrow, same as how carbon reductions now are more valuable than those in the future. If awareness around the time value of money can empower better investment decisions, awareness around the time value of carbon should enable better development decisions.

To accommodate global population growth, the floor area of our built environment is estimated to double by 2060. As we attempt to develop sustainably it is imperative to account for the time value of carbon, in the same way a DCF would have been used when deciding to construct the building in the first place.

I believe the implications of this parallel are numerous. In relation to the built environment: carbon neutral retrofits should be prioritized over new builds, low carbon building materials used whenever possible, and efficiency in the building process optimized. In general, climate change mitigation solutions could be ranked not only according to emissions reduction potential by volume, but also by the timeliness of each solution.

Time is money, as they say.