Blog Post

The 2018 Nobel Prize: Growth and the environment

The 2018 Nobel Prize in Economic Sciences has been awarded jointly to William Nordhaus and Paul Romer for integrating respectively climate change and technological innovation into long-run macroeconomic analysis. We review how economists reacted to the announcement.

By: Date: October 15, 2018 Topic: Energy & Climate

Kevin Bryan on VoxEU has a recount of how the contributions of this year’s Nobel prize-winners came into existence and how they link to each other. Both Nordhaus and Romer have been running favourites for the award for many years, but the surprise is that the prize went to both of them together: Nordhaus is best known for his environmental economics, Romer for his theory of ‘endogenous’ growth. But on reflection, the connection between their work is obvious.

With Romer, we have a general equilibrium model for thinking about why people produce new technology. The connection with Nordhaus comes in a problem that is both caused and potentially solved by growth. Growth as a policy goal was fairly unobjectionable in 1960, but by the early 1970s environmental concerns had arisen. Nordhaus’ ‘integrated assessment models’ (IAMs) have Solow-type endogenous savings and make precise the trade-offs of lower economic growth against lower climate change, as well as making clear the critical importance of the social discount rate and the micro-estimates of the cost of adjustment to climate change.

J Bradford DeLong has a list of additional optional reading from the two Nobel laureates, and Economist’s View has more links. Timothy Taylor has a discussion of both laureates’ contributions, and was not expecting Romer and Nordhaus to win in the same year. Alex Tabarrok has a video discussing Romer’s contribution. Tyler Cowen has two separate biographic posts, one discussing Romer’s contribution and one discussing Nordhaus’.

Martin Sandbu argues that in our lifetimes, technological and environmental change have transformed how our economies work. Next time we marvel about our favourite smartphone app or worry about increasingly extreme weather, Sandbu argues, we should give a thought to Romer and Nordhaus. Thanks to them, we are in a better place to find good policies to deal with both innovation and climate change. Their prizes are well-deserved.

Peter Dorman wants to talk about the non-recipient whose non-prize is perhaps the most important statement. Nordhaus has been locked in debate for many years with Harvard’s Martin Weitzman, who rejects the entire social-cost-of-carbon approach on the grounds that rational policy should be based on the insurance principle of avoiding worst-case outcomes. His “dismal theorem” demonstrates that, under certain assumptions, the likelihood of tail events does not fall as rapidly as their degree of catastrophe increases, so their expected cost rises without limit – and this applies to climate scenarios.

Weitzman’s work is often invoked by those who believe much more aggressive action is needed to limit carbon emissions. Because of this, whenever economists speculated on who would win the econ Nobel, the Nordhaus scenario was always couched as Nordhaus-Weitzman. The Nordhaus-Romer combo is so artificial and unconvincing – Dorman argues – that it’s hard to avoid the impression that the prize not given to Weitzman is as important as the one given to Nordhaus, and that this is a clear political statement about how to deal with climate change and how not to deal with it.

Timothy Terrell is – unsurprisingly – of a different view, and thinks that the Nobel committee has promoted environmental regulation with its latest choice. Both economists see an expanded role for the State: Romer in his suggestions that government invest in research and development and employ patent laws to foster economic growth; Nordhaus in his belief that government should act to prevent adverse changes in climate. Conversely, Terell claims that free markets have been among the most powerful forces for cleaner technology and new ideas and that innovation, wealth creation, and healthier people are to be found among the most economically free parts of the world.

David Warsh argues that although Nordhaus and Romer, working separately on apparently different problems, were seldom mentioned together, they nevertheless combine to make a compelling point. Having led the effort to plausibly model the interaction of atmospheric carbon, climate change, and economic growth, Nordhaus made it possible to estimate damages caused by rising temperature. A carbon tax (which he and many other economists consider preferable to the emissions-trading system enshrined in the Paris Agreement) might prevent the most serious damage, starting experimentally low, then rising as necessary to meet the damage caused. Romer, in turn, created an analytic framework in which such a tax could plausibly be expected to produce a wave of innovations whose effect would be to lower carbon emissions.

Joshua Gans writes that the real reason Nordhaus and Romer should be linked is because of the way they have made their ideas persuasive – not to the general public or even politicians, but to economists. Back in the 1980s, Gans argues, both climate policy and science/innovation policy faced significant barriers moving forward. In each case, the main constituents who were holding up such policies were economists. In so doing, Nordhaus and Romer became present in every single policy discussion and tipped the balance towards action in cases where there were significant barriers and hurdles. Each thus showed how a careful accounting of economic forces can lead to progress, reduce uncertainty and make the case.

Noah Smith writes that, in addition to honouring two scholars whose contributions have deeply influenced their field, the award points to a crucially important issue to which the world is beginning to give short shrift – economic growth. As growth slows and productivity stagnates in the rich world, Romer’s insights are more important than ever.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event

Upcoming Event

Feb
12
12:30

Is the European automotive industry ready for the global electric vehicle revolution?

How can Europe catch up on the global electric vehicle race?

Speakers: Simone Tagliapietra and Reinhilde Veugelers Topic: Energy & Climate, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic

Blog Post

Ethics and artificial intelligence

Machine learning and artificial intelligence (AI) systems are rapidly being adopted across the economy and society. Early excitement about the benefits of these systems has begun to be tempered by concerns about the risks that they introduce.

By: Valerie Frissen, Gerhard Lakemeyer and Georgios Petropoulos Topic: Innovation & Competition Policy Date: December 21, 2018
Read article More on this topic More by this author

Blog Post

Brexit: Now for something completely different?

The life of Brexit. After a week of ECJ rulings, delayed votes, Theresa May’s errands across Europe and the vote of no confidence, we review the latest economists’ opinions to try to make sense of what has changed and what hasn’t.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: December 17, 2018
Read about event More on this topic

Past Event

Past Event

Investment and intangible capital

This event featured a presentation of the EIB's 2018 Investment Report.

Speakers: Román Arjona, Maria Demertzis, Debora Revoltella and Mario Nava Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 14, 2018
Read article More by this author

Opinion

The UN climate conference in Katowice: A message from the European capital of coal

Following the COP24 climate talks in Poland, Simone Tagliapietra reviews the arguments for and challenges to decarbonisation.

By: Simone Tagliapietra Topic: Energy & Climate, Global Economics & Governance Date: December 12, 2018
Read about event More on this topic

Past Event

Past Event

Emerging Trends in Competition Policy - A Global Perspective

How is global competition policy evolving given the challenges of the digital era?

Speakers: Cristina Caffarra, Antonio Capobianco, Kris Dekeyser, William Kovacic and Georgios Petropoulos Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 11, 2018
Read article More by this author

Blog Post

Les gilets jaunes

For weeks, protesters wearing yellow motorist vests have taken to the streets of Paris to protest against the rising price of fuel. They have since taken on a wider role, and are seen as symbols of the growing popular discontent with President Macron. Silvia Merler reviews scholars’ opinions about this movement.

By: Silvia Merler Topic: Energy & Climate, European Macroeconomics & Governance Date: December 10, 2018
Read article More by this author

Podcast

Podcast

Deep Focus: Balancing distributional inequalities of climate policies

Bruegel fellow Georg Zachmann talks through a Bruegel Blueprint he has co-authored, looking into the potential distributional effects of climate policies, in another episode of the Deep Focus series.

By: The Sound of Economics Topic: Energy & Climate Date: December 7, 2018
Read about event More on this topic

Past Event

Past Event

Environmental and economic effects of the EU ETS

What is the impact of the EU ETS on carbon emissions and economic performance of regulated companies?

Speakers: Sander de Bruyn, Antoine Dechezleprêtre, Beatriz Yordi Aguirre and Georg Zachmann Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 6, 2018
Read about event More on this topic

Past Event

Past Event

Civil society for the digital age

What is the place of civil society in the digital age as well as the role of technology in society?

Speakers: Eline Chivot, Orla Lynskey, Bertin Martens, Georgios Petropoulos, Thiébaut Weber and Glen Weyl Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 4, 2018
Read article More by this author

Blog Post

Green central banking

A few weeks ago, Silvia Merler discussed the rise of “ethical investing”. A related question emerging from the discussion is whether central banks should also “go green”. Silvia reviews the latest developments and opinions on this topic.

By: Silvia Merler Topic: Energy & Climate, Finance & Financial Regulation Date: December 3, 2018
Read article More on this topic

Opinion

What the "gilets jaunes" movement tells us about environment and climate policies

Simone Tagliapietra and Georg Zachmann write on the climate governance lesson European governments should learn from the "gilets jaunes" experience.

By: Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate Date: November 30, 2018
Load more posts