Balancing the scales: Intergenerational equity in economic policy
As economic and environmental challenges mount, how can we ensure a fair future for younger generations? Two researchers explore the concept of intergenerational equity and its crucial role in shaping sustainable economic policies.
The Biodiversity Finance Initiative (BIOFIN) is a global United Nations Development Programme (UNDP). Biodiversity refers to the variety of life on earth. Biodiversity finance is targeted at providing effective solutions to protect our biodiversity and allow it to flourish. BIOFIN offers a way for countries to break free from the historical pattern of biodiversity loss. BIOFIN is now in Aotearoa New Zealand. The NZ BIOFIN Assessment will be an independent assessment similar to what has been undertaken in Sweden and Ireland.
The NZ BIOFIN Assessment will be conducted by an expert team, led by Ian Herbert of the University of Otago Business School, between 2024 and early 2026 in collaboration with the public and private sectors. Ian Herbert is pursuing his Doctor of Business Administration at the Business School in the specialist area of biodiversity finance and intergenerational economics. In the last 20 years, Ian has worked in strategic alliances developing over 24 business cases for billions of dollars of investment in New Zealand and the United Kingdom, including the Central Line refresh for the 2012 London Olympics, the first ISO 14000 accreditation in New Zealand, and site selection for the largest control centre on the London Underground.
The economy and the natural world are intrinsically linked. They are two powerful forces shaping the world we live in. How we, as humans, interact with these forces will contribute to the shaping of the world for generations to come. Ian and Simon had a conversation about the economy, nature, and more specifically about biodiversity. They discussed the interconnections between these concepts, and how policymakers can craft sustainable policy that will ensure a better world for future generations.
What is intergenerational equity and why is it important in economic policy?
Simon: In its simplest conception, intergenerational equity means being fair to the generations who come after you. Academics discuss intergenerational equity in two ways: equity between current living generations and equity between current and future generations (those not yet born). Discussions about equity recognise that different people, groups, or communities have different needs to enable them to access the same opportunities.
Economic researchers and policymakers have a role to play in ensuring equitable outcomes for future generations. Whether it is the opportunity to own a house, have a fulfilling job, or observe diverse wildlife, policy decisions of the generations in power can have intended or unintended consequences for the generations that follow.
Ian: Great definition, Simon. My interest is biodiversity - the variety of life on earth. Are we kicking the can down the road? For me, intergenerational equity is about giving our children a common future with nature.
In just 50 years, the living planet index of 32,000 global wildlife populations has collapsed by 70 percent. The United Nations (UN) is calling for urgent action, saying the collapse will continue due to a significant shortfall in wildlife investment. Without biodiversity investment, intergenerational equity falls well short. That’s why I am leading the NZ BIOFIN Assessment, with support from the UN. I will assess what we spend, what we need to spend, and how to finance it.
What are the potential consequences of failing to address intergenerational equity?
Simon: The issues facing young and future generations are multifaceted, encompassing crises in environmental, economic, political, and social spaces. Therefore, it makes sense that the consequences will be multifaceted with wide-ranging impacts.
Environmental harm and failing to adequately address climate change are obvious concerns. Resource depletion, increased severe weather events, rising sea levels, and pollution will change the earth as we know it. The economic consequences may seem less pressing, but include reduced growth, higher costs of living, and fewer investments in government infrastructure and services.
A likely understated consequence of intergenerational inequity is intergenerational conflict. As future generations observe that they have fewer opportunities than the generations preceding them, they may agitate for change. Intergenerational conflict can get heated around the dinner table; imagine it extended to the whole of society.
Ian: Keeping options open for future generations is key. If we don’t, we increase the financial burden on our kids to clean up our environmental mess. If we destroy nature on the only planet we know has life, Mars could be boring. Many of the values we destroy exist over and above commercial values. They include:
- Regulating values (air we breathe, and lands and seas to support life)
- Intrinsic values (the right of nature to exist)
- Option values (our children’s choices to live with nature).
I recently attended the international Convention on Biological Diversity in Colombia, attended by 196 nations, and the youth movement was very vocal about wanting options with nature preserved in the future.
What innovative economic policies can help balance the interests of current and future generations?
Simon: Innovative pension policies are one example of this. Superannuation in New Zealand is funded via a pay-as-you-go model. The taxes of today’s workforce pay the pensions of current retirees. This model is becoming unsustainable due to an ageing population, with retirees (65+) projected to increase from one-sixth of the population in 2022 to one-quarter by the 2050s. This will be an unfair financial burden on future taxpayers.
A new model of superannuation financing will be required to lessen the financial burden on future generations in New Zealand. Collective Defined Contribution (CDC) pension schemes are increasing in popularity as they minimise the financial burden on the future workforce. Currently used in Canada, Denmark, and other countries, a CDC pension scheme entails the working-age cohort paying a proportion of their tax into a pooled retirement investment fund. This fund grows and accumulates over the course of their careers and is paid out in retirement. This means each age cohort pays for their own retirement, which lessens the financial pressure on future generations.
Ian: That’s a great example, Simon. We have the opportunity to extend our investment framework and have a policy that represents savings and investment for future generations. Without this change to the status quo, biodiversity loss is projected to continue at our children’s expense. This would be like the pension model, but investing in our children’s future with nature. Youth cannot compensate or incentivise us to leave them options to nature. Therefore, for orthodox economics to work, economic policy must do this. The Welsh government has a great example of legislation for future generations.
The second example is to deal with the cause of the problem, i.e., this is the barrier at the top of the cliff instead of the ambulance at the bottom. Consumption (and production) is the key driver of global biodiversity loss. A simple balancing loop would invest in biodiversity as consumption increases. The example here is in design stages but not yet available in New Zealand – The Biodiversity Investment Contribution (the BIC). If we are serious about our children’s common future with nature, we need policies that enable enduring investment in nature.
Simon: To summarise, intergenerational equity is unavoidably related to our economic and environmental policies of today. Failing to address intergenerational equity could have drastic consequences for future generations, creating a more challenging and less diverse world. However, there is hope careful policy design can maintain and improve the world for the future.