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Environmental Economics Seminar Series
Department of the Environment, Sport and Territories, 1996
ISBN 0 642 24878 8
In this paper I would like to focus on the question of intergenerational equity because it seems to me that this issue - that of how we ensure equity from one generation to the next - is really the central issue in the environmental debate that has washed over the world. At the broadest level, environmentalism in the West can be thought of as the process in which societies begin for the first time to give serious consideration to what the world will be like for future generations and how to plan in their interests. It is a process of stretching our time horizons.
The more I think about the issue of intergenerational equity the more I see it as a philosophical and political question rather than an economic one. The standard economic response would be to concede that economics is concerned about efficiency only and that equity issues are quite properly left to politics. In practice, however, the construction and use of economics has enormous implications for equity. We only need to consider the implications of the economic arguments used in the recent greenhouse policy debate to see the truth of this.
In taking the idea and desirability of intergenerational equity seriously, the conservation movement is providing some very profound challenges to some little discussed assumptions about our society and ourselves. It challenges our beliefs about what makes us better off and it challenges our perceptions of responsibility for others.
We should at the outset define what we mean by intergenerational equity. This is not so easy to do formally, although we all have an intuitive idea of what it means. One broadly acceptable definition (based on Harding et al p. 3) is this:
The principle of intergenerational equity means that decisions taken today should ensure that at least an equivalent set of opportunities for human welfare is available to succeeding generations.
The fact that this principle is being articulated is significant because in the 20th century sustained economic growth has led to the idea that future generations can look after themselves because they will be richer than we are. Since in pursuing growth we leave a bigger capital stock for future generations from which they can derive a growing income our obligation is only to look after ourselves. The environment movement has introduced a dramatic challenge to this belief, and argues that in order to look after future generations we need to change what we do now. The argument takes two tracks. The first is that the process of growth is transforming the biophysical environment in ways that will make continued economic growth impossible. The second is that, even if growth continues, the rate of measured economic growth is an increasingly inaccurate indicator of welfare, so that measured growth may rise while welfare is falling.
The belief that future generations can look after themselves has grown out of three assumptions, each of which have been quite fundamental to the way economics operates. These are:
Underlying these assumptions is a deeper one and that is that the purpose of life (at least of economic life) is to see the volume of consumption goods grow. This has meant that the key measure of welfare has been the growth in the value of the consumption basket. This implies a particular way of thinking about intergenerational equity.
The key point is that social values and individual preferences are changing and this means that the composition of the 'consumption basket' is changing. Economics can accommodate the observed fact that, in rich countries at least, people are placing a greater relative value on the environmental amenities which are in the consumption basket. The standard economic framework might explain it as a resource allocation decision in the following way.
Imagine we have a fixed area of old-growth forest of area A, say one million hectares, that is valuable both for its timber and for its natural beauty, ecological integrity and wilderness value. A decision must be made on how much to log and how much to preserve for current and future generations. The figure shows demand curves for the alternative products of each hectare of forest and the fixed supply of forest area. For logs and preservation the curves show the relationship between price and quantity demanded, where quantity produced is constrained by the fixed maximum supply. As more hectares are logged, the price of logs (p 1) remains constant because it is fixed in world markets. But as more hectares are logged, the supply of preserved forests declines and more is demanded at each price, driving the price (p p) up. The figure also shows a new demand curve for preservation (Dp 1) that might result from a shift in preferences towards the environment. Equilibrium is achieved when the marginal costs of each use are equal, with area A * devoted to logging and A - A* devoted to preservation.
There is a time element implicit in this, since as a greater proportion of forest is logged over, the remaining areas are valued more highly for preservation. Thus future generations will apply higher valuations of remaining forests. This sort of argument lies behind the Krutilla-Fisher method of analysing projects with environmental impacts. Krutilla and Fisher constructed a simple simulation model that took into account growth in demand for preservation benefits over time as a function of increases in population and income and a shift in preferences towards the benefits of environmental preservation compared with traditional consumer goods and services. At the Resource Assessment Commission, a colleague and I applied this method to the preservation values of the old-growth forests of the South East (Streeting and Hamilton 1991 Appendix VI). Modest assumptions about growth rates of preservation benefits have a big impact on the relative desirability of logging as opposed to preservation.
I don't believe that the economic framework is the right one in which to think about intergenerational equity. By characterising the environment as a collection of economic goods that can be put into the consumption basket, economics plays its favourite trick, that of assuming that everything can be compared to everything else using the yardstick of consumer preferences expressed through markets.
The idea of substitutability between environmental and other goods presupposes a particular philosophical position, one that most people simply do not share. There was no evidence of it at the rallies against woodchipping around Australia earlier this year; they certainly were not calling for financial compensation.
The same idea underlies the substitutability between built and natural capital. This assumption actually refers to a very specific attribute of natural capital, that is, its ability to contribute to the creation of economic wealth. So when environmental economists question the substitutability of built for natural capital they are questioning whether built capital can match the productive capacity of natural assets.
These are very significant for the assumptions that economic growth is inevitable and that built capital can be substituted for natural capital.
The idea of substitutability is questionable not just because substitution may not be physically possible, but because it assumes that built and natural capital are of the same nature so that they can be regarded as substitutes. The idea of substitution subtly characterises the natural environment as a set of economic goods that have alternative uses according to technology, individual preferences and scarcity. But most people do not think of things in this way, they regard the economic values that are appropriate to built capital as incommensurable with the ethical values by which the natural environment is judged. Exactly the same point arises in the vexed question of discounting. The problem lies in the assumption of economics of smoothness, substitutability, commensurability. As soon as we allow for discontinuities the whole philosophical position changes.
Economics and the market system think about the future in terms of rates of time preference leading to discounting of future costs and benefits. The process of discounting has plagued ecological economics because on the one hand it seems fundamentally inimical to the interests of the natural environment to discount the value of environmental assets that occur in the future while on the other discounting does seem to reflect actual market behaviour.
It seems to me that the dilemma has been solved, at least in principle, by the argument of Norgaard and Howarth (1991). They argue that the distribution of economic assets between generations is prior to the rate of interest. We need to clearly distinguish between decisions concerning the efficient use of the current generation's resources and decisions regarding allocation of assets between generations. It's a reassertion of the old distinction between equity and efficiency. Norgaard and Howarth comment:
Though every student learns at the outset that the efficient allocation of resources in static general equilibrium models depends on the initial assignment of property rights, this principle is quickly forgotten as students learn ever more sophisticated ways of thinking about efficiency alone. (1991, p. 99)
They might have added that the political debates that put an inordinate emphasis on the economic efficiency of alternative policies - as has been the case with Australia's greenhouse policy - will almost certainly result by default in an intergenerational distribution of resource rights that damages future generations.
One way of interpreting the Norgaard and Howarth solution is that while discounting from one year to the next 'within a generation' allows for a smooth transition of asset valuation and investment, there is a sharp discontinuity when it comes to valuing assets from one generation to the next. Within a generation transfers are executed through market processes which determine relative prices, but between generations transfers are not economic transactions but gifts.
While discussion of intergenerational transfers sounds like a very abstract process, in day-to-day practice transfers from one generation to the next demonstrate this discontinuity very powerfully. In practice intergenerational transfers are effected by way of inheritance, that is, gifts. In the case of privately owned assets, for someone who has followed all of the economic rules of utility maximisation, discounting of the future, and the gains from trade, impending death makes all of the economics texts and investment advisers irrelevant. There is no point in trading assets in order to get them into some form that will maximise utility, because after you are dead it does not matter what form they are in. There are only two possibilities: destroy the assets or give them to someone else.
As an aside, it might be observed that Pharoahs who converted some of their wealth into objects that could be buried with them to thence be taken to the next world were pursuing the logic of economics more consistently than the Rockefellers, for instance, who put much of their wealth into philanthropic trusts.
In the case of publicly owned assets, we pass them on collectively. We do not need to make an individual choice because there are others of one's own generation who can look after them (or otherwise). The question of transfer of publicly owned assets is a more difficult one, but I have not explored it in this paper.
So when we are thinking about intergenerational equity the fact of death is paramount. We must abandon all of the economic theory of individual human motivation based on maximisation of utility and shift to a completely different psychology, that of gift exchange, the traditional domain of anthropologists. There is a vast literature on this and I do not have any expertise in the area except as a member of a society in which gift exchange remains fundamental to much of its operation. As exchanges, gift exchanges imply reciprocity and in the case of intergenerational gifts the return to the giver can only be indirect and anticipatory. There is also some uncertainty about who will benefit from the gifts in the longer term. Gift exchange normally involves the keeping of accounts, although usually these are: 'informal social accounts that are kept through memory, stories, a shared sense of identity and belonging, and so on' (Muetzelfeldt 1994 p. 142).
This is all a bit dry in the abstract so let's see if we can make it more operational by reference to a very current and controversial example, logging of native forests.
Perhaps the crux of the political dispute is a difference in perceptions about the values of forests. The industry sees the forests as a source of timber. The industry says that the forests are a renewable resource and therefore, with proper management, there is no running down of assets. and indeed the question of substitutability of built for natural assets does not arise. If forests were being logged at a rate faster than their sustainable yield, then according to the traditional approach there is no inherent problem if enough of the income from forests is saved and invested in built capital that can substitute for forest products, let us say the steel industry which can provide alternative building products. This substitution will ensure intergenerational equity.
Conservationists would argue that the great majority of ordinary citizens see it quite differently. They see forests as having environmental values as well as timber values and the harvesting of timber diminishes and perhaps destroys irreversibly the ecological values. The point is that the ecological and aesthetic values of native forests are not renewable and there are no substitutes for them. Building a theme park that realistically creates the conditions of the Tarkine Wilderness just will not do. As a thought experiment, imagine that Bob Brown is kidnapped by NAFI, blindfolded, flown around on a plane long enough for him to be completely confused and then led into the middle of the theme park's artificial eucalypt forest. Bob Brown is then asked: 'Where are you?' and he replies: 'In an old-growth native forest'. Is this a great victory for NAFI? No, because it is not enough to judge the natural environment by the perceptions of humans. The NAFI ruse would only reveal the fundamentally anthropocentric viewpoint whereby the forests have value only to the extent that they contribute to human desires.
From the conservationist's perspective the question of how to ensure intergenerational equity becomes quite a different one. If either there is no substitution or ecological values are irreversibly lost as a result of logging then the only way to enable future generations to have at least an equivalent set of opportunities is to preserve the forests.
However, there is one remaining problem. If logging is an economically efficient activity then ending logging will mean that the growth of income will be lower than it otherwise would be. So we need to ask whether future generations of Australians will thank us(see note 1 below) because, although the ecological and aesthetic values of the native forests are lost, their money incomes are a little higher due to logging, or whether they will thank us for preserving native forests even though their money incomes are a little lower. In order to start to think about intergenerational equity from a policy perspective we need to start to ask what future generations will value. At present, policy operates on the economist's assumption that because they will be richer they will be better off.
1 A questionable assumption if reported subsidies are correct.
As an aside let us imagine the lives of our great grandchildren, in 100 years from now. Let's assume that the economy grows on average at four per cent per annum and that the population stabilises at around 25 million. How rich will the average person be? The answer is 40 times richer. So a person with a current income of $40,000 will have an annual income of $1.6 million. Can you imagine a society in which most people have an annual income of more than $l million in current dollars? A society of Geoffrey Edelsteins? Would we be happier? Are there other changes to society and the way we live our lives that could have a greater impact on our welfare?
So here is a vital question. In pursuing intergenerational equity we must have some idea of how future generations will value things. I have suggested that private markets are incapable of adequately providing for this and that intergenerational equity can only be assured through social and political decision making. We should not imagine, of course, that political decision-making processes are fool-proof. They can reflect all of the short-sightedness of a society, the mentality of development and of course they can be captured or unduly influenced by sectional interests.
The present Federal Government has demonstrated this year that it is prone to all of these failings. I refer to the truly appalling position the Australian Government has taken with respect to greenhouse policy. In the face of figures that show that on a per capita basis Australia is probably the worst greenhouse gas polluter in the world, the Australian Government, under intense pressure from the fossil fuel lobby and economic rationalists in the Canberra bureaucracy, has adopted a greenhouse policy that will have almost no impact on the growth of our greenhouse gases. Its latest set of measures, announced in March under the catchy title 'Greenhouse 21C', were everything the coal industry could have hoped for, including reliance on voluntary agreements with industry to reduce emissions. In arguing that voluntary agreements are the best way to reduce emissions, the fossil fuel industry did to the truth what Uri Geller did to the spoon.
The largest component of the $63 million package was $25 million allocated from Australia's foreign aid budget to be spent on promoting clean-coal technology in India. Thus 40 per cent of the funding of 'Greenhouse 21 C' will be used to develop the market for Australian coal technology in India. It has since been pointed out that the use of 'clean-coal' technology does not in fact reduce emissions of greenhouse gases from the burning of coal, it reduces sulphur emissions. Its only likely greenhouse impact is to increase the use of coal.
In its greenhouse policy, the Australian Government has violated every one of its declared principles of sustainability. The policy:
The tragic saga of Australia's greenhouse policy suggests strongly that one of the things we must do much more seriously and explicitly is take account of the impacts on future generations of our resource use decisions today. We must be compelled to ask: What will this decision do for the conditions of life of future generations and the planet as a whole? We are artless when it comes to thinking about the state of the Earth in 100 or 200 years time. Yet if we look back on the environmental history of this continent over the last 200 years, we can see that massive changes have been wrought on the biophysical environment and that if our forebears had known some of the implications of their decisions they would have behaved differently.
What can we do to encourage ourselves and our political representatives to think more seriously about the interests of future generations? The stark fact is that only the current generation can make the decisions. The question then is how do we change our attitudes and our institutions to allow more strident expression of the interests of future generations.
First we must ask what is in the interests of future generations? When we think about this issue we actually think in very vague terms. When we ask what is in the interests of future generations we tend to have a lot of ill-defined images of a cleaner environment which uses resources more carefully. But this is not enough. We need answers to questions like these:
These are visionary questions. They are also intensely practical, not least because what we do now will have a very big influence on all of these questions. My point is that if we are serious about how our decisions will affect future generations then we need to have much better methods and institutions for thinking about them. They should not be hived off into some Commission for the Future which is seen to be an airy-fairy irrelevance - a diversion for eccentrics like Barry Jones. They should be worked out and argued tooth and nail in each major decision - greenhouse, building regulations, forest management, land care, water pollution, and koalas in Coffs Harbour.
Given that future generations cannot voice their interests, the present generation must somehow do it for them. I would like to take up a proposal that has been suggested in one or two places, the idea of an Ombudsman for Future Generations (see especially Weiss l990).(see note 2 below)The role of the Ombudsman for Future Generations would be to act on behalf of those who will inherit the planet. The functions would include the following:
2 I am informed that after a fierce debate the word 'ombudsman' has been declared politically correct. In Swedish it means simply a legal representative.
The Ombudsman would carry out investigations, prepare reports and submissions, talk to the most forward-looking people in the community and constantly remind us of our obligations to the Earth.
Governments might claim that they already take account of the impacts of decisions on future generations. But I think most would agree that they do not do it adequately, perhaps because they are responding to many differing constituencies. The Ombudsman for Future Generations would have a specific, institutionally defined responsibility to represent the interests of the citizens of the future. This is a form of 'bureaucratic capture' that one could endorse.
I think we would see the new Office of the Ombudsman for Future Generations over time develop concepts and procedures that would be unique to its functions and would start to change the way we all think about the impacts of decisions. In particular, the broadest role of the Ombudsman would be to lengthen our time horizons and make us think very concretely about the effects of our decisions now on our great grandchildren at the end of the next century.
Harding, Ronnie, Young, Michael and Fisher, Elizabeth 1994 'Sustainability: Principles to practice', Background paper for the Fenner Conference on the Environment (ANZECC, Canberra)
Muetzelfeldt, Michael, 'Contracts, politics and society' in John Alford and Deirdre O'Neill (eds) The Contract State (Centre for Applied Social Research, Deakin University, Geelong)
Norgaard, Richard and Howarth, Richard 1991, 'Sustainability and Discounting the Future in Robert Costanza (ed.), Ecological Economics (Columbia University Press, New York)
Streeting, Mark and Hamilton, Clive 1991, An Economic Analysis of the Forests of South-Eastern Australia, Resource Assessment Commission Discussion Paper Number 5 (AGPS, Canberra)
Weiss, Edith Brown 1990, 'In fairness to future generations', Environment Volume 32 Number 3, April