The winners of the 2018 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel are William D. Nordhaus and Paul M. Romer who included important scientific ideas in their modeling of future economic growth.
Professor Nordhaus who works at Yale University won the prize “for integrating climate change into long-run macroeconomic analysis.” He began working on the interactions between energy and the economy in the 1970s and since the 1990s has produced models that have helped economist quantify the impact that climate change will have on the economy.
The Dynamic Integrated model of Climate and the Economy (DICE), in its many iterations, has been used to work out just how much it will cost to curb the effects of global warming, and even extrapolate what are the economic benefits of different strategies. The model has also been very useful in estimating the value of a carbon tax, and the way governments have applied a CO2 pollution levy on industries.
The applications of the model for the carbon tax has been criticized for several reasons, though. The model considers the world as a whole but the release of carbon dioxide is done by certain countries more than others. The social cost of carbon should be spread fairly. There are other limitations to DICE, which Nordhaus admits himself. The model doesn’t include climate tipping points, which have the capacity to be devastating, and it looks at keeping the climate below 3°C above pre-industrial levels, which we're already in line to hit.
The latest IPCC report categorically states that to avoid global catastrophe we have only 12 years to keep the climate below the 1.5°C limit. The time for baby-step carbon taxes should probably be over.
The Royal Swedish Academy of Sciences said the winners had addressed "some of our time's most… pressing questions" on sustainable growth. This includes the relationship between technology innovation and economic growth, which makes the second recipient very relevant too.
Professor Romer from the NYU Stern School of Business won “for integrating technological innovations into long-run macroeconomic analysis.” His models showed how the economic forces, whether they be government decisions or market conditions, affect the development of new ideas and innovation, and that knowledge can drive economic growth. This has important consequences for policy drafting and regulations, which often needs to tread a fine line to guarantee safety as well as prosperity.
“One problem today is that people think protecting the environment will be so costly and so hard that they want to ignore the problem and pretend it doesn’t exist," Romer told New Scientist. "Humans are capable of amazing accomplishments if we set our minds to it.”
The winners will share equally the prize of 9 million Swedish krona, roughly US$1 million.