Financing Transport Projects: Why integrating externalities matters for decision making

Transport is a crucial part of modern society, connecting communities and fostering development. However, the impact of the transport sector on the planet is huge, causing over 20% of global carbon dioxide emissions. It is therefore one of the main drivers of climate change while also having significant impacts on human health.

Financial decision-makers have the power to use investment to build better, greener transport. However, conventional financial analysis is inadequate in capturing the intricate dynamics of the modern world, as demonstrated by the surge in environmental challenges, social inequalities, and cyclical financial crises.

When assessing transport projects, non-financial considerations should be integrated, including the positive or negative externalities arising from the project. These are either the costs or benefits impacting third parties, including individuals or society.

For example, if a sustainable transport project improves air quality in a city, the resulting health benefits for the residents would constitute a positive externality. Conversely, negative externalities are costs that are similarly borne by third parties, such as pollution caused by vehicle emissions, which can have adverse effects on public health.

The persistent neglect of integrating these externalities means that investment continues to be driven toward carbon-intensive road transport, at the expense of sustainable transport alternatives. In this paper, we hope to encourage a more holistic approach to evaluating sustainable transport projects, enabling financial decision-makers to have a more comprehensive understanding of the project’s overall value and promote the development of more sustainable projects.