NEWS Joint with fellow American Paul Romer

William Nordhaus, 2017 Frontiers of Knowledge laureate, wins the Nobel Prize in Economics

The Royal Swedish Academy of Sciences has awarded its Nobel Prize in Economics to William Nordhaus, winner of the 2017 BBVA Foundation Frontiers of Knowledge Award in the category of Climate Change. Nordhaus shares the prize with Paul Romer for their respective contributions to “integrating innovation and climate with economic growth.”

9 October, 2018

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William Nordhaus

William Nordhaus “became the first person to create an integrated assessment model that describes the global interaction between economy and climate,” remarked the Swedish academy in the statement announcing the award. A model “now widely spread,” the release continues, “to examine the consequences of climate policy interventions, for example carbon taxes,” a measure Nordhaus himself supports.

Fellow American Paul M. Romer shares the prize, “for integrating technological innovations into long-run macroeconomic analysis.” His work, the committee says, “demonstrates how knowledge can function as a driver of long-term economic growth.”

The contributions of both men have, in the view of the Academy, broadened the scope of economic analysis, integrating the variables “nature” and “knowledge” into their models to address some of the main challenges of our time: long-term sustainable growth and the welfare of the world’s population.

The father of climate change economics

William Nordhaus received the BBVA Foundation Frontiers of Knowledge Award in Climate Change in its tenth edition, for founding the field of climate change economics by “pioneering a framework,” said the jury’s citation, “that integrates climate science, technology and economics to address the critical question: What should the world do to limit climate change?”

Nordhaus (New Mexico, USA, 1941) began studying the economic impact of climate change in 1975, just as climate scientists were issuing their first, tentative warnings about a rise in global temperatures due to greenhouse gas emissions caused by the burning of fossil fuels. He stumbled on the problem quite by chance, through sharing an office with climatologist Allan H. Murphy during a research stay in Vienna. The complexity of the challenge and the dearth of information on the variables involved meant it took Nordhaus over fifteen years to develop his model. By then an active community of climate researchers was already in existence, but the climate change issue had yet to garner the attention of economists.

Today, Nordhaus’s DICE (Dynamic Integrated Climate-Economy) model, and its regional variant RICE, are “widely used,” the Frontiers citation affirmed, to estimate the costs and benefits of curbing emissions. And numerous economists around the world are constructing and comparing their own assessment models, with similar conclusions. This growing community draws its inspiration from Nordhaus’s groundbreaking work, without which, said the jury, we would have no reliable handle on the socioeconomic consequences of continuing emissions or to decide which counter-measures to apply.

“Nordhaus used his models and economic insights to illuminate such considerations as the role of discounting future climate damages, the risk of catastrophic damages, and the role of technological change in the energy system,” the citation concludes. “Owing to the transparency and simplicity of his approach, his models are used worldwide to analyze climate policy options.”

Nordhaus himself explained these models after hearing of the Frontiers award: “They are an attempt to represent all the key linkages between economics and climate in the simplest possible manner: variables like population, GDP, use of carbon fuels and climate change. I had to come up with equations to represent the linkage between, say, population and economic growth, on the one hand, and emissions, on the other, and then on to climate change. It took me a long time to develop DICE because it required finding the different pieces then putting them together in a form that could be operated on a computer to get results.”

Among his constant preoccupations has been the quality of statistical information and the integration of data drawn from varied disciplines. And it was this which led him to propose incorporating environmental factors and non-market activities into a new system of national accounts.

More expensive carbon

For Nordhaus, the crux of the matter is to set a realistic price on carbon. This, in his opinion, is the right way to go about limiting climate change: “The key insight of my work was to put a price on carbon in order to hold back climate change. The main recipe to alleviate climate change is to make sure governments, corporations and households face a high price on their carbon emissions. Today it is virtually zero. If the price were higher people would have other choices, like renewable energies. It’s not a recipe that tastes very good, but it’s the one that will work.”

After decades championing the taxation of carbon emissions, Nordhaus has his reservations about the effectiveness of the Paris agreement: “The Paris Accord has good points, but it is purely voluntary, and the measures taken are insufficient to slow emissions of CO2 and other gases. For a start, the price put on carbon emissions is far too low, I would guess just 10% of what is needed right now if we want to curb emissions. The Paris effort is worthwhile, because it is a good thing to bring countries together, but is much too little to reach the goal of reducing emissions to contain temperature rises at under 2ºC.”

Taxing emissions would boost investment in clean technologies and renewable energies. In carbon emission rights trading in the European Union, the price of carbon is around 7.5 euros per ton, when according to Nordhaus it should really stand in the interval of 30 to 40 euros.

He declines to define himself as either optimistic or pessimistic about our ability to limit climate change. He is adamant however, that “we have to be realistic”. To denialists and skeptics, “I would say that this is a very important problem that is getting worse, with a major impact in terms of sea level rise, wildfires, the consequences for human health… This is something that is real. If we care about our country, not just today and tomorrow, but in the long run, we have to take this seriously and work with other countries to stop it. Here in the United States, we take all kinds of steps to protect our national security, making investments on a major time scale, and we should do exactly the same with the challenge of climate change. It is not something that will harm our economy, it will help our economy.”

For Nordhaus, the skeptics who still cast doubts on the science of climate change are “like the people decades back who refused to accept the evidence that smoking causes cancer. But today all the evidence suggests that climate change, like smoking, is dangerous in the extreme.”

The Frontiers laureate is aware that his work has yet to translate into practical policy measures: “So far virtually nothing has been done at the global level to slow climate change. We are moving in the right direction, but for every two steps forward we take one step back. This is one of the most difficult political processes we are currently facing, because it forces us to impose costs now in order to protect the distant future, and that is a hard sell.”

His latest book, released in 2013 with the title The Climate Casino, addresses the risks and socioeconomic uncertainty of a world threatened by climate change. “Climate,” he says, “is a casino in the sense that we are taking serious risks with our planet and ourselves. But we don’t need to walk into that casino, we can take steps now to mitigate and reduce the risks.”