Both William Nordhaus and Paul Romer are deserving of a Nobel Prize in Economics, but I was not expecting them to win it during the same year. The Nobel committee found a way to glue them together. Nordhaus won the prize ““for integrating climate change into long-run macroeconomic analysis,” while Romer won the prize “for integrating technological innovations into long-run macroeconomic analysis.” Yes, the words “climate change” and “technological innovations” might seem to suggest that they worked on different topics. But with the help of “integrating … into long-run macroeconomic analysis,” Nordhaus and Romer are now indissolubly joined as winners of the 2018 Nobel prize.
Each year, the Nobel committee releases two essays describing the work of the winner: for the general reader, they offer “Popular Science Background: Integrating nature and knowledge into economics”; for those who speak some economics and don’t mind an essay with some algebra in the explanations, there is “Scientific Background: Economic growth, technological change, and climate change.” I’ll draw on both essays here. But I’ll take the easy way out and just discuss the two authors one at a time, rather than trying to glue their contributions together.
Back in the 1970s, the federal government had just recently taken on a primary role in setting and enforcing environmental laws, with a set of amendments in 1970 that greatly expanded the reach of the Clear Air Act and another set of amendments in 1972 that greatly expanded the reach of the Clean Water Act. As far back as the mid-1970s, William Nordhaus was estimating models of energy consumption that explored the lowest-cost ways of keeping CO2 concentrations low in seven different “reservoirs” of carbon: “(i) the troposphere ( 60 meters), (v) the short-term biosphere, (vi) the long-term biosphere, and (vii) the marine biosphere.”
By the early 1990s, Nordhaus was creating what are called “Integrated Assessment Models,” which have become the primary analytical tool for looking at climate change. An IAM breaks up the task of analyzing climate change into three “modules”, which the Nobel committee describes in this way:
