Description
Decision-making processes concerning investments in building upcycling vs. building reconstruction of the existing stock involve environmental aspects besides the economic-financial ones. For example, material and energy preservation, waste management, Embodied Energy (EE), and Embodied Carbon (EC) management in construction processes are crucial aspects that concern different scales: from the material/component/system scale up to the whole building, the urban scale, and civil engineering works and infrastructures. As illustrated in previous work, foreshadowing the perspective of a more restrictive regulatory framework on EE (e.g. prohibiting the displacement of materials with residual energy potential), EE and EC should be considered as hidden components of building real estate market value. Thus, these should be internalized into investment decision-making processes under an economic-environmental and circular perspective. Thus, this contribution aims to present the first simulation of a methodology previously theorized, filling a gap in the scientific literature on the topic. The methodology focuses on a joint economic-environmental valuation of alternative investment projects by internalizing environmental components into the conventional financial cash-flow analysis. Assuming the circular economy principles, Life Cycle Costing (LCC) indicators and Life Cycle Assessment (LCA) indicators are modeled in the Discounted Cash-flow Analysis (DCFA). The simulation is conducted with reference to a case study by implementing a data set based on literature and according to the following workflow: alternative scenarios definition, precisely a retrofit intervention (upcycling), and a demolition and reconstruction one; EE and EC monetization for both scenarios; internalization of the environmental components into the DCFA; implementation of the Global Cost and the new ‘Global Benefit’ into the Net Present Value (NPV) calculation; and results interpretation focusing on the residual end-of-life value. The results of this simulation are yet to be explored in a concrete application. Still, they represent the first step of an approach potentially capable of including environmental and social externalities even in the private real estate investment decisions, considering the holistic sustainability of the whole project life cycle.
The necessity to internalize environmental components in the investment decision processes concerning building up cycling vs. building reconstruction of the existing heritage has been explored in a correlated contribution to this Symposium. In that work, a methodological proposal is presented to support the environmental-economic valuation of project options using the discounted cash flow analysis (DCFA). A DCFA simulation shows Embodied Energy (EE) and Embodied Carbon (EC) as hidden cost components influencing the NPVs calculation. According to a life cycle perspective, global cost and global benefit were assumed to formalize the NPV indicator. To complete the reasoning in this contribution, the IRR calculation is simulated through the same operative modality, focusing on the issue of selecting an appropriate discount rate. Assuming the presence of environmental and financial input variables in the DCF model, a “time preference” discount rate seems inappropriate. Thus, centrality is posed on the Environmental Hurdle Rate technique, based on the use of different rates - “green,” “yellow,” and “red” -given the degree of the negative contribution to the environment produced by an input variable and related cost. This is explored as an alternative to the financial (or market) discount rate when in the presence of environmental components. The results are obtained by simulations on two alternative scenarios: the retrofit of an existing residential building and the demolition and reconstruction. These confirm the importance of the discount rate capability to influence the DCF model output by modeling environmental cost components and their expectations given the potential technological development over time. The results can even change the final preferability ranking by the environmental hurdle rate instead of financial rates. With this second part, the methodology can support environmentally responsible investment decisions in the construction sector at different scales.
