Underestimating the fundamental interactions between economic systems and the environment is, in our view, one of the main flaws of contemporary economics – even among environmental economists, even among those who receive a Nobel prize.
And if technology has certainly a role to play in the mitigation of and the adaptation to climate change effects, relying exclusively on it could have disastrous consequences – as it may be observed today already. Prizes may have been distributed, but the climate is far from being settled.
As the final act (or rather addendum) of the Nobel Prize Week, the Bank of Sweden announced its decision to reward two American professors for the 2018 Sveriges Riksbank Prize in Economic Sciences: William D. Nordhaus (from Yale University) “for integrating climate change into long-run macroeconomic analysis” and Paul M. Romer (New York University, former World Bank’s chief economist) “for integrating technological innovations into long-run macroeconomic analysis”.
Nordhaus’ entire work belongs to the field of environmental economics. He was one of the first mainstream economists to take an interest to environmental-economic interactions and to climate change in particular. He was an early advocate for the taxation of carbon emissions and built in the course of the 1990s a model that gained considerable popularity among economists: the Dynamic Integrated Climate-Economy Model (DICE), which aimed to estimate climate change costs. The model has been used notably by the US Environmental Protection Agency.
With this nomination, climate change received an opportune spotlight, right at the moment the IPCC published a new report on the impacts of a 1.5°C-global warming above pre-industrial levels. One can rejoice in the promotion of a discipline that has remained marginal for a long time in economic research, as the environment was viewed as separate from the economy (and secondary, by consequence). Rewarding someone who developed one of the first integrated climate-economy models is appreciable. However, this shouldn’t conceal the fact that, among environmental economists, different sensitivities are running the gauntlet, with economic and political implications that may be radically different at the end … Even his opponents admit that Nordhaus has the virtue of having been a pioneer; but the economist is also largely criticized, his positions being considered by many as insufficient (or, in economic terms, his climate change-related costs as underestimated) with regard to the environmental stake.
For example, according to DICE, a 6°C-global warming was expected to cost about 10% of global GDP; Nordhaus even conducted a rapid survey in the 1990s among a group of economists : the median cost estimation of such a warming reached 5.5%. It is now rather acknowledged that in reality such a temperature increase would be apocalyptic. More generally, Nordhaus’ work falls under the general criticism that applies to mainstream economists, whom it is reproached to conduct simplistic cost-benefit analysis that doesn’t take critical aspects into account, such as non-linear and irreversible phenomena (which constitute the basis of climate and ecosystem dynamics). According to their opponents, it leads to continually underestimated environmental damages, and consequently postpones the actions that should be taken rapidly to prevent aggravation.
The second laureate, Paul Romer, is the father of endogenous growth theory and a determined investigator – as well as a promoter – of innovation and technological development. For some, the association (of climate change and technology) could appear to be symbolic. Indeed, among all alternatives, technological development is probably the most popular pathway to solve the climate issue at present. It is expected that energy source substitution, energy efficiency improvements or carbon capture and storage technologies will allow the economy to eventually overcome the obstacle of climate disruption and continue to thrive. It could be, however, that the obstacle is too high this time, and that limiting global warming to 2°C will notably necessitate strong reductions in energy consumption – something that is reflected in the last IPCC report, which indicates that “limiting global warming to 1.5°C would require rapid, far-reaching and unprecedented changes in all aspects of society”. It could be that ecosystems will not wait for market signals before collapsing.
Hadrien Lantremange, Natural Capital Analyst - Sources: Beyond Ratings, Comment les économistes réchauffent la planète ?