How to Evaluate Capital Projects that Offer Environmental/Carbon Reduction Benefits

Abstract

In many cases, projects that have strong environmental / carbon reduction benefits may be neglected due to biases associated with traditional project appraisal approaches. To reduce the level of rejections for such projects, the authors apply an innovative methodology, the financial appraisal profile (FAP) model. FAP is a normative model that seeks to address some of the issues and limitations posed by standard appraisal and evaluation approaches. By making the right decision in the first place and involving senior managers in the appraisal process, the organisation is better placed to achieve project success. The adoption of a management team approach to investment appraisals will not only enhance the information base but will also result in greater managerial commitment to a project. By adopting the FAP model with the inclusion of an environmental assessment in the form the ‘environmental score index’, will help focus top management on an increasingly important corporate strategy issue. An illustrative case study is used to outline the important aspects of this new approach. The paper concludes that this approach fills a gap in the environmental / carbon reduction investment literature, where there is a paucity of comprehensive, structured, and transparent methodologies that can prove acceptable to management decision-makers from a variety of functions and viewpoints. Keywords: Carbon Reduction, Environmental Score Index, Environmental Sustainability, Financial Appraisal Profile (FAP) Model, Investment Appraisal