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Last Monday 8th October, the prize in Economic Sciences was awarded. The winners? William Nordhaus and Paul Romer, for “integrating innovation and climate with economic growth” (as declared by the Royal Swedish Academy). The prize this year has been shared between the two American economists for bringing long-term thinking on climate issues and technological innovation into the field of economics. But my focus for this article will be on William Nordhaus – I just happen to enjoy writing about climate and sustainability-related issues.

Born in 1941, William Nordhaus is an American economist and Professor at Yale University. He started to work on the interaction between society and nature in the 1970s, as scientists became increasingly concerned about the combustion of fossil fuels resulting in a warmer climate. He demonstrated back then how a growing economy increases greenhouse gas emissions that are responsible for the warmer temperatures of the planet, and therefore cause economic damages in the agricultural sectors, coastal property, among others. Yet, he observed that the producers of those gases did not pay for the damages they cause.

In the mid-1990s, Nordhaus became the first person to create an integrated assessment model that described the global interplay between the economy and the climate. The model integrated theories and empirical results from physics, chemistry and economics. What Nordhaus did was to incorporate climate change and climate policy into our general equilibrium models of economic growth. He then found ways to quantify the costs that everyone was thus far conjecturing about. He thought there could be some ways in which economies could adapt to climate policy and self-limit the costs that many were worried about. This model, yet actualised with new data, is currently known as the DICE (Dynamic Integrated Climate-Economy) Model and it offers a general approach to estimate the costs of climate change and examine the consequences of climate policy interventions. Up until now, it has been widely used by many institutions such as the United States Environmental Protection Agency.

 

Nordhaus Contribution – The Nobel Prize

In a few words, what Nordhaus’ research suggests is that the best solution to address climate change caused by greenhouse emissions is a global system of carbon taxes enforced by all countries. He shows that raising prices through a carbon tax is a far more effective and efficient way to lower carbon emissions than direct government controls on the quantity of emissions through regulatory limits. The justification for this is that higher prices will encourage firms and consumers to find alternatives to carbon-based products, therefore encouraging new technologies to make those substitutes competitive.

The following diagram shows CO2 emissions for four climate policies, according  to his simulations:

 

 

While progress has been far from what we would want (better said, what we would need), the improvement we have seen can be attributed to Nordhaus’ critical work. Despite the joy of winning the price, Professor Nordhaus stated that he had not succeeded convincing the government of his own country – “The policies are lagging very, very far — miles, miles, miles behind the science and what needs to be done,” he said shortly after learning of the prize.

Personally, I am happy to learn about the motivation of this prize; climate change should be approached in every single possible way, and addressing it with governing policies is indeed essential if we want to prevent its effects. Unfortunately, this insight has not yet been adopted worldwide, and to certain extent, it is not a priority for many governments. As clearly stated by Mr. Nordhaus: “we understand the science, we understand the effects of climate change. But we don’t understand how to bring countries together”.

 

For more information about the prize, you can see the Royal Swedish Academy press release here.