Research

Bathtubs, intergenerational fairness and the sustainability end game

Timothy Hodgson

fairness | noun | impartial and just treatment or behaviour without favouritism or discrimination

In this thought piece I explore the concept of intergenerational fairness. For us in the Thinking Ahead Group it is a necessary condition for sustainability. For example, I would argue that the lack of sustainability of the vast majority of defined benefit pension funds was, at heart, a failure of intergenerational fairness – with the current generation taking the credit for the assumed returns and the future generation holding the risk of the returns not being realised. I start with a thought experiment where a bathtub represents an endowment received by a generation and eventually passed on to the next. But before we dive in, a quick note on the language. I am using the word ‘fairness’ and have provided a definition above. I am not using the word ‘equity’. As the father of a child with Down syndrome I do not have the luxury of treating my children equally. I am forced into the squishier and more difficult world of treating them fairly.

The thought experiment

I will use a bathtub as an analogy for intergenerational fairness. But let me begin with my preferred definition of sustainability. A resource or a system can be said to be sustainable when the rate of extraction equals the rate of replenishment. So the level of water in our bathtub will remain constant when the rate of inflow from the tap equals the rate of outflow through the plughole. Clearly, for long term sustainability we should put the plug in and turn off the tap – but that is simply setting both rates of flow to zero. And all analogies are imperfect.

We have created for ourselves a sustainable bathing environment. When we turn to consider intergenerational fairness, however, the waters get murkier. We are now ready to hand the bathtub on to the next generation. The simplest definition of intergenerational fairness would require us to hand over the bathtub with the same depth, temperature and quality of water as we inherited. This would be intergenerational equity. But, if we have used our ‘bathing endowment’ then under reasonable assumptions the depth will be shallower (we splashed, or carried some water with us when we exited), the temperature will be lower, and the water quality degraded. It follows that satisfying an intergenerational fairness test will cost us, in some way.

Regarding the depth, we would need to buy more water to replenish what we lost. If no more water is available, then the proper action is very careful stewardship of the endowment during our period of use. Similarly for the temperature, we will need to pay for the energy required to heat the water to the original level. When it comes to the quality of the water or, in less polite terms, removing the pollution then presumably we are in for significant cost. We either need to build a purification plant next to the tub to keep the quality constant, and/or we need the ability to remove all the water, clean the bath and re-fill with purified or new water. The point of this analogy is to show that when viewed through the lens of intergenerational fairness, the use of endowments are far from free. And just in case it is necessary to spell it out, the endowment we are really talking about here is any natural resource found within the earth’s atmosphere.

From equity to fairness

So far we have used the simplest definition of fairness – like for like. Let’s try something harder in order to introduce a second important point. In this case we realise that the time is approaching for us to hand on the bathtub to the next generation, but we decide that baths are for dinosaurs and the new generation would much rather inherit a shower. Instead of paying to top up and heat the bathwater, and to build the purification plant, we will instead pay to have a shower fitted. Yes, the next generation inherit a degraded ‘bathing endowment’ but they also get a brand new shower. The question is, is this fair? And the answer, I will argue, lies along a spectrum.

To simplify things, I will consider the analogy through two scenarios. In the first scenario our generation is virtuous, and the second we are the opposite. Therefore in the first scenario we can presume that we have strong cause to believe that the next generation genuinely would prefer a shower, and I will assume that we spend at least as much on providing the shower, as we would have done on restoring the bathtub to its original condition. This seems fair.

In the second scenario we are lacking in virtue, and so our motivations are cynical. In effect, we realise how much it will cost to restore the bathtub, decide we are not willing to make ourselves that much poorer for the sake of the following generation, and so spend the least amount possible on fitting a shower – and the PR campaign to convince the inheritors that they really do prefer showering. This is the unfair end of the spectrum.

Now we place ourselves in the shoes of the new generation. We know the previous generation only had a bathtub, and we know that we have a bathtub and a shower. We don’t know, but we might suspect, that their water was warmer and cleaner. How are this generation meant to decide where to place us on that spectrum between fair and unfair? This is the second important point about intergenerational fairness[1]. Because of the multiple factors involved, and the changing of the conditions, it is extremely difficult – I suspect impossible – to definitively assess fairness. It will be a subjective and nuanced judgement most of the time. Unfairness will occasionally be obvious – and we will now get to that as we consider the sustainability end game.

The link to sustainability

I started this piece with my preferred definition of sustainability, but I need to qualify it slightly. We need to distinguish between the cases where unsustainable practices don’t matter, from those that do. For example, we might completely exhaust a natural endowment. If we convert that endowment into a better set of assets or capitals for future generations (eg a shower!) then the unsustainable use of that endowment arguably doesn’t matter. This connects to our point immediately above – how do you tell, in a complex, adapting system, whether your ‘package of stuff’ is better or worse than a different package at a different point in time?

Where sustainability does matter, and where intergenerational unfairness is obvious, is the ‘end game’ of this piece’s title. Along with endowments of fossil fuel and rare earth elements, we also received an endowment of ecosystem services. These services are quite literally life support systems for us – and all other animal life. If we do not hand on intact ecosystem services to subsequent generations then we raise the prospect that there will be a final generation at some point. The hard logic of this, and I am sorry to go here, is the extinction of all customers at that point. And so the terminal value of all businesses within our portfolios is zero. The investment game is then about the horizon over which we can still expect to receive cash flows. If sufficiently long, we can leave the end game problem to a future generation and carry on as before. However, this looks a bit like a game of chicken to me.

The alternative is to change the investment game. To grapple with sustainability and intergenerational fairness and, as a consequence, seriously change our stewardship efforts. Quality foundations for the thinking are being laid by the likes of Johan Rockström, Kate Raworth, and the Future-Fit foundation to name three highlighting the importance of planetary boundary conditions. It is now up to us to build on these foundations and work out if we need to change our portfolios, or how we steward our assets.

 

[1] There is a third important, but more technical, point. With intergenerational fairness there is no external arbiter of the fairness – you can’t take the previous generation to court. Therefore the ‘impartial and just treatment’ required by the definition at the top of this piece has to be exercised by the current generation, over itself. In game theory terms, future generations are always under-represented at the bargaining table and therefore always disadvantaged. Your belief in the primacy of greed or altruism within human nature will affect your optimism or pessimism about the sustainability end game.

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