Nobel laureate shows failure on carbon tax policy likely to be costly

A study of the economics profession in the United States, undertaken a number of years ago, found that academic papers in economics rarely referred to the work of other social scientists, while other social scientists quite often referenced the work of economists. This suggested a certain “insularity” in the profession.

However, many of the winners of the Nobel Prize for economics in recent years are notable for their multidisciplinary approach to solving economic problems. The world of economics is changing.

The first non-economist to get the prize for economics was the 2002 winner, psychologist Daniel Kahneman. Last year Richard Thaler, who had worked with Kahneman, won the prize for his contributions to behavioural economics.

Among the insights that this work has brought to economics is the importance of taking account of the way individual decision-making is affected by many different factors, not just relative prices, and that policy needs to take this complexity into account.

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This year's Nobel Prize for economics has been awarded to two economists – Paul Romer for his work on the factors driving economic growth and William Nordhaus for his work on the economics of climate change.

In the case of Nordhaus, much of his career has been devoted to integrating the insights from climate science with that of economics, helping us understand the damage done by climate change and how best policymakers should respond to this threat to humanity.

Unusual career

Early in his career, he worked at the International Institute for Applied Systems Analysis in Vienna, an institution that brings together scientists from varied backgrounds to study environmental, economic, technological and social issues. It was an unusual career move for an economist who sought to climb the academic ladder in the US. However, what he learned in Vienna, working with climate scientists, has allowed him to make a major contribution to economics over his subsequent career.

Nordhaus began researching the problem of climate change in the 1970s, long before most us were aware of the issue. He published an important paper entitled Economic Growth and Climate: The Carbon Dioxide Problem in the top economics journal in 1977. Ottmar Edenhofer, director of the Potsdam Institute for Climate Impact Research in Germany, has said: "Without him [Nordhaus], there wouldn't be such a subject of climate economics."

Where his work has been especially valuable is in how his models explain the way economic growth affects the climate through greenhouse gas emissions and, in turn, how the resulting global warming will impose huge costs on society in the future.

These models are used extensively to assess both the damage done from failing to curb our emissions of greenhouse gases, and also to quantify the cost to the world in the future of every tonne of carbon dioxide that we emit today. As a result, Nordhaus was a very early advocate of using a carbon tax as the best method of changing behaviour and halting the progress towards climate disaster.

Huge contribution

Concern about the environment runs in the Nordhaus family. His late brother Bob, an environmental lawyer, drafted provisions in US legislation of the 1970s that formed the legal basis for the climate change regulation introduced by the Obama administration. This regulation pushed for the closure of coal-fired electricity generators in the US that has subsequently provoked the particular ire of the current US president.

As well as his huge contribution to the academic world of economics, Nordhaus has also been an active participant in developing economic policy. From 1977 to 1979, he was a member of President Jimmy Carter's Council of Economic Advisers. His wide range of articles and books has sought to promote serious action to tackle the threat of global warming.

Writing in 2016, Nordhaus said of his work: “It suggests that it will be extremely difficult to achieve the 2°C target of international agreements, even if ambitious policies are introduced in the near term. The required carbon price needed to achieve current targets has risen over time as policies have been delayed.”

This work also indicated that, when taking uncertainties into account, the strength of policy (as measured by the optimal carbon tax) should increase, not decrease.

The UN Intergovernmental Panel on Climate Change report, published earlier this week, showed us the very serious consequences for humanity from failing to halt greenhouse gas emissions. Nordhaus’s work indicates that, having failed to raise the carbon tax in this week’s budget, the increase in future years will need to be all the greater.