With Bill Nordhaus, climate studies win the Nobel Prize in Economics
Environment — di Valentina Neri
The Nobel Prize in Economics awarded to William Nordhaus concerns a topic that affects us all: climate change.
With Bill Nordhaus, climate studies win the Nobel Prize in Economics
The Nobel Prize in Economics awarded to William Nordhaus concerns a topic that affects us all: climate change.
After Richard H. Thaler's behavioural economics in 2017, the 2018 Nobel Prize in Economics was awarded to two scholars, William D. Nordhaus and Paul M. Romer, who dedicated themselves respectively "to integrating climate change and technological innovation into long-term macroeconomic analysis".
From the outside, non-specialists might imagine that theories so complex are inevitably far removed from our daily lives. The reality, however, is very different. Never before, in fact, has the Swedish Academy wanted so clearly to shine a light on those who work hard to give scientific weight to issues that are decisive for the development of our societies. First among them, the question of the climate.
Read also: Who are the 2018 Nobel Prize winners, the list and the reasons
William D. Nordhaus and the links between climate and economics
William D. Nordhaus (known as Bill), a professor at Yale University, is now 77 years old and was one of the very first economists to work on environmental issues. In the 1990s he created the first quantitative model describing the mutual interactions between the economy and the climate, quantifying the economic costs of action and, conversely, of inaction.
From this first version, progressively enriched and refined, the Dice model was born. The latter – as lavoce.info points out – is entirely open source: this means that the equations, the code, the calibration and all other elements are published online, available to any researcher who wishes to study, apply and improve them.
Nordhaus is a firm advocate of public policies to tackle climate change. First and foremost, the carbon tax — that is, assigning a price to CO2 emissions.
Yay! Paul has done great work, but I'm especially pleased to see Bill get this hugely deserved honor -- because he was my original economics mentor 1/ nytimes.com/2018/10/08/bus…
The Nobel Prize in Economics for a supporter of the carbon tax
The carbon tax is precisely the meeting point between Bill Nordhaus and the United Nations.
By a remarkable coincidence, this Nobel Prize in Economics was awarded on the very same day as the publication of the alarming Special report 15 (Sr15), in which the Intergovernmental Panel on Climate Change (Ipcc) issues a stark and unequivocal warning: if we continue on this path, as early as 2030 the global average temperature could exceed pre-industrial levels by 1.5 degrees. With dramatic consequences for the planet.
This report confirms what the distinguished economist has been arguing for decades — namely, that setting a price on greenhouse gas emissions is an indispensable step in attempting to keep climate change under control. The World Bank's monitoring counts around fifty initiatives of this kind, adopted by 45 jurisdictions. In practice, the mechanisms vary enormously: they range from direct taxes on fossil fuels to "cap and trade" emissions markets. The latter assign each party (a state or a company) a certain quota of greenhouse gas emissions, giving them the option to sell unused carbon credits and to purchase more if they need them.
According to the New York Times, however, all these experiments have proved only partially effective. Because, in order to incentivise a tangible reduction in emissions, it would be necessary to set a fairly high price on emissions — a choice that runs into serious political difficulties.
Suffice it to say that, according to the OECD (Organisation for Economic Co-operation and Development), the carbon tax across the 42 largest economies averages 8 dollars per tonne of CO2. The United Nations considers it necessary to reach, by 2030, a figure of between 135 and 5,500 dollars per tonne. Otherwise, it will be impossible to contain the rise in global average temperatures to within 1.5 degrees Celsius above pre-industrial levels.
"We must remember how much is at stake"
At the press conference held after the Nobel announcement, Nordhaus expressed his hope that this prize would serve as a spur for all those who will have to work to counter the damage caused by climate change. "It's always useful for bodies like the Nobel committee to remind us how much is at stake," he said.
Nordhaus, Bloomberg recalls, has repeatedly drawn attention to how difficult it is to meet the objectives enshrined in the Paris Agreement. Precisely for this reason, in his view, the market must play a role, in two ways: "Raising the prices of carbon-intensive goods and services or, conversely, lowering the prices of those that involve lower emissions".
When asked to comment on Donald Trump's environmental policies, he replied by describing as "truly anomalous this degree of hostility on the part of the United States towards environmental policies". "All I can do," he continued, "is hope that we will manage to get through this phase without too much damage".
What did Bill Nordhaus do after learning he won the Nobel? Went to class to teach intermediate macro. news.yale.edu/2018/10/08/che…
Paul M. Romer and technological innovation
Alongside Nordhaus, the Nobel was also awarded to Paul M. Romer, a professor at New York University and the World Bank's chief economist until January, when he resigned in open disagreement with the institution.
His research focuses on technological innovation. Until the 1990s, lavoce.info explains, advances in technology and productivity were considered exogenous — that is, external to the ordinary workings of the economic system. Romer helped overturn this view by developing (and, perhaps more importantly, formalising) what is known as endogenous growth theory.
His article Endogenous Technological Change, published in 1990, starts from one premise. Private goods are rival in consumption: a piece of bread, for example, can only be eaten by one person, who in doing so "takes it away" from another. A recipe, on the other hand, is an idea, and as such it can be reused countless times and by everyone, giving rise to new outputs in more than proportional quantities. It is for this reason that technological progress increases productivity over the long term and, with it, wealth and prosperity.
Left to their own devices, however, individuals and companies do not produce a sufficient number of new ideas, because no one compensates them for the benefits they generate for society as a whole. This is why, according to Romer, governments should encourage innovation in various ways, such as public investment in research and the patent system.
An economics that concerns us all personally
The editorial with which Bloomberg comments on this choice has an eloquent title: "This Nobel rewards the right kind of economics". The purpose of economic science, the American publication argues, can indeed be summed up in a simple question: "What factors make people's lives better, and how can we increase them?" The two newly crowned Nobel laureates have not only sought to find an answer, but have also explained how to put it into practice.
Nordhaus and Romer, in different ways, have also taken a stance on a hotly debated topic: should the state intervene in economic dynamics? Both have distanced themselves from the idea that the market can self-regulate in every respect, emphasising the importance of receiving proper guidance from public policy.
According to Bloomberg, in recent years the academy has been almost monopolised by studies of a completely different kind — that is, models that are absolutely perfect from a scientific standpoint, but disconnected from what is actually happening in our society. Proof of this is the fact that no one was able to predict the global crisis that erupted ten years ago. This 2018 Nobel Prize in Economics, the editorial concludes, reminds us of the mission of economics: to study the evidence, use it to build verifiable theories about how the world works, and in so doing provide guidance for real-world policy. And, when those theories do not match the facts, to have the courage to change them.