The 2018 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

Nobel Foundation

Nobel Prize for the economics of innovation and climate change stirs controversy

Often, the awarding of a Nobel Prize triggers a round of carping about who else should have shared in the prize. This year's prize for economics—officially, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel—has sparked a rarer controversy. Some economists argue one winner's work is wrongheaded and has compromised humanity's ability to deal with the existential threat of climate change.

Half of this year's $1 million economics prize honors Paul Romer, 63, an economist at New York University's Stern School of Business in New York City for his work "integrating technological innovations into long-run macroeconomic analysis." The other half goes to William Nordhaus, 77, an economist at Yale University, "for integrating climate change into long-run macroeconomic analysis."

The awards came the same day that the United Nations’s Intergovernmental Panel on Climate Change (IPCC) released its latest report, which emphasized the increased environmental damage that will occur if humans do not limit the rise of global average temperatures to 1.5°C, but let it climb 2°C. The IPCC report also says people have about a decade to cut their carbon emissions in half before the lower goal slips away. "I am very, very pleased that somebody working on climate change got the Nobel Prize," says Katheline Schubert, an environmental economist at the Paris School of Economics. "Certainly, it is well deserved."
 

It's entirely possible for humans to reduce carbon emissions. There will be some trade-offs, but once we try we will find that it wasn't as hard as we thought it would be.

Paul Romer, New York University Stern School of Business

However, some economists objected to the citations because both laureates’ work emphasized growth as the ultimate measure of an economy's success—an approach they argue has contributed to the climate crisis. "I would say [this prize] is the last hurrah of a certain old guard of the economics profession that want to preserve the idea of growth at all costs," says Julia Steinberger, an ecological economist at the University of Leeds in the United Kingdom.

In the late 1980s, Romer focused on the economic value of ideas. Until that time, economists had largely treated them as an external, or exogenous, factor in the economy. Instead, Romer asked what economic conditions spawn moneymaking ideas, an effort that came to fruition in 1990 when he published what has become known as endogenous growth theory.

In an economy dominated by tech companies such as Apple and Google, investment in ideas and knowledge may seem like a no-brainer, says David Reiner, a political scientist at the University of Cambridge in the United Kingdom, "but in the 1980s and ’90s maybe it was less obviously the fundamental driver of long-term economic growth." Although abstract, Romer's theory has had an impact on governments around the globe, Reiner says. Romer himself has also played a role in setting economic policy, serving as chief economist and senior vice president of the World Bank from October 2016 until January.

Everybody agrees that in the 1970s, Nordhaus pioneered the economic study of climate change. "He really invented climate economics," Schubert says. In his integrated assessment model (IAM), Nordhaus explored how economic activity affected carbon emission, how emissions affected the environment, and how the environment then fed back to affect the economy. "Linking economics to the natural sciences is a big breakthrough," says Dabo Guan, an environmental economist at the University of East Anglia in Norwich, U.K.

Nordhaus's model was relatively crude, but the IPCC relies on four newer, far-more-detailed IAMs to make its predictions about how emissions and the global economy will respond to various policy measures. Crucially, Nordhaus's work suggested carbon emissions would plummet if governments could place a price on carbon dioxide emissions. The European Union has tried to implement such a scheme in its EU Emissions Trading System.

However, this is where some economists object to Nordhaus's work. The debate underscores a rift between environmental economists on one side and ecological economists on the other. As does Nordhaus, environmental economists apply the tools of mainstream economics to the climate problem, so their models focus on economic growth as the measure of a policy's success. That approach is problematic, ecological economists say, because it leads to trade-offs to increase growth in the short term on the assumption that it will make it easier to deal with the increased environmental damage in the long term.

But, instead of spurring governments to take action against climate change, Nordhaus's approach has been used to justify putting it off, Steinberger argues. "His kind of analysis has been used to delay, delay, delay," she says. In 1992 Nordhaus published an analysis in which he identified 3°C as the optimum temperature increase for the growth of capital, although he has since modified that position.

Even when carbon pricing has been tried, it hasn't had much effect, says John Barrett, an ecological economist at the University of Leeds. Referring to the European Union's emissions trading scheme, Barrett says, "I think it's fair to say that most people think that's a disaster." A better general approach, Barrett says, would be to define the environmental damage that cannot be endured and then, through regulation, shape economic activity to fit within the implied limits. "I'm not against pricing carbon," he says. "I just see that as part of a more complex picture."

Environmental economists counter that Nordhaus's work was just a first step toward confronting climate change. "Environmental economists put a big emphasis on a carbon tax, but they don't say, 'You don't need anything else,'" Schubert says. "That would be crazy."

Romer sounded an optimistic note at the press conference announcing the prize. "It's entirely possible for humans to reduce carbon emissions," he said. "There will be some trade-offs, but once we try we will find that it wasn't as hard as we thought it would be." However, as the IPCC report makes clear, time is running very short.