William Nordhaus: A disputable Nobel [Prize]? Externalities, climate change, and governmental action

Abstract

In 2018 William Nordhaus was awarded the Nobel Prize in economics for his contributions to the macroeconomics of climate change. Nevertheless, Nordhaus since the early 1970s was engaged in an academic struggle to contrast the major supporters of The Limits to Growth. Later, though acknowledging some impact of climate change on economic activity and suggesting taxes on greenhouse emissions, he systematically opposed pessimistic views concerning global warming; thus putting off governmental action. The aim of this paper is to enquire into the Nordhaus’s contributions to the economics of climate change, and their impact on academic and public debates.

Keywords:

• William Nordhaus
• economics of climate change
• cost-benefit analysis
• integrated assessment models
• collective action

JEL CODES:

• B22
• B31
• D61
• E01
• Q54

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 I would like to express my gratitude to three anonymous referees of this journal for their invaluable help in pushing me to focus this work on the relevant features, and for their fruitful remarks on previous drafts of the paper.

2 Public support to Greta Thunberg’s struggle against climate change has given rise to the Fridays for Future manifestations all over the world; and most economists have recently discussed these topics at large, arguing against carbon emissions (e.g. The Wall Street Journal 2019). Recent natural disasters unanimously attributed to climate change are accelerating internationally concerted governmental action again.

3 Here is a more extensive explanation: “Nordhaus’ findings deal with interactions between society and nature. Nordhaus decided to work on this topic in the 1970s, as scientists had become increasingly worried about the combustion of fossil fuel resulting in a warmer climate. In the mid-1990s, he became the first person to create an integrated assessment model, i.e., a quantitative model that describes the global interplay between the economy and the climate. His model integrates theories and empirical results from physics, chemistry and economics. Nordhaus’ model is now widely spread and is used to simulate how the economy and the climate co-evolve. It is used to examine the consequences of climate policy interventions, for example carbon taxes” (Royal Swedish Academy 2018a). In another document, the committee acknowledges that Nordhaus’s contribution is limited to the cost-benefit analysis perspective (Royal Swedish Academy 2018c, 4).

4 As an example of this, Keen (2020, 4–5) writes that: “Nordhaus excludes 87% of US industry from consideration, on the basis that it takes place ‘in carefully controlled environments that will not be directly affected by climate change’ […] All the intervening papers between Nordhaus in 1991 and the IPCC in 2014 maintain this assumption: neither manufacturing, nor mining, transportation, communication, finance, insurance and non-coastal real estate, retail and wholesale trade, nor government services, appear in the ‘enumerated’ industries in the ‘Coverage’ column in Table A1. All these studies have simply assumed that these industries, which account for the order of 90% of GDP, will be unaffected by climate change”.

5 A remarkable exception in this direction being Randalls (2011), who enquired into the intellectual bias provided by approaches linked to cost-benefit analysis in climate change.

6 For an extensive historical reconstruction of the relationship between entropy and economics see Rifkin (1980).

7 Sandbach (1978, 505) suggests that: “The yearning for a mystical reunion with nature reached its zenith at the height of the hippie movement in 1968–69”.

8 In turn following his previous enquiry of 1968, Principles of Systems, Cambridge (MA).

9 The manifesto, titled A Blueprint for Survival and published in January 1972 (Ecologist 1972), was “signed by a number of eminent British scientists [who argued that] unless economic growth was brought to a halt, the world was headed on a course towards destruction on account of environmental pollution, starvation and the exhaustion of raw materials” (Beckerman 1972, 327).

10 On the more technical aspects and implications of such a shift, see Pottier (2014).

11 On the crucial role of the USA in the Kyoto process, see Nordhaus (2001).

12 On their theoretical foundations see Berta (2006).

13 At the same time, it seems he also made mistakes. This is how Turner (2014, 4) commented on his 1992 work: “The US economist William Nordhaus made technically erroneous judgements (in 1992) by focusing on isolated equations in World3 without considering the influence that occurs through the feedbacks in the rest of the model”.

14 For a critical review of the literature on time-discounting, see Frederick, Loewenstein and O’Donoghue (2002).

15 For a comprehensive, convincing and robust enquiry into the distributional effects of taxes on greenhouse emissions, see the book-length working paper by Heal and Schlenker (2019).

16 It sounds ironical that The Committee for the Prize in Economic Sciences in Memory of Alfred Nobel, in a document of October 8, 2018 (The Royal Swedish Academy 2018c, 4) where the reasons for awarding the prize do Nordhaus and Romer are detailed, quotes from The Stern Review “Climate change is a result of the greatest market failure the world has seen”, while explaining the reasons for the choice of Nordhaus.

17 Nordhaus (2013, 205) writes: “a sensible target for climate-change policy would require balancing abatement costs and climate damages”.

18 The fact that US carbon emissions accounted for 36.2% in 2001 and reduced to 14.34% in 2015 (while China skyrocketed to 29.51%) of the global CO₂ emissions, makes it plausible that the game was evolving, and that the US might have serious interest to start contrasting emissions globally, mainly through a global agreement on taxing greenhouse emissions. Nordhaus provided a perfectly fit theoretical framework for this. The commitment of the Obama administration on climate (think of the Clean Power Plan, first proposed in June 2014 to reduce carbon dioxide emissions) presumably helped Nordhaus’s works become popular, although it seems that he and Obama never had the chance to discuss these topics personally (Davenport 2018).

19 The lecture can be viewed online here:

https://www.nobelprize.org/prizes/economic-sciences/2018/nordhaus/lecture/

20 In 1991 he was confident that his studies on climate change “may help clarify the questions and help identify the scientific, economic, and policy issues that must underpin any rational decision” (Nordhaus 1991, 937).

21 Think of the claim, according to which: “His concern was channeled into devising new tools to help us understand how the economy can generate climate change, as well as the societal consequences of climate change” (Royal Swedish Academy 2018b).