The Nobel Memorial Prize for William D. Nordhaus

• Date: 01 July 2019
• Published date: 01 July 2019
• DOI: http://doi.org/10.1111/sjoe.12383

Scand. J. of Economics 121(3), 884–924, 2019

DOI: 10.1111/sjoe.12383

The Nobel Memorial Prize for William D.

Nordhaus*

Lint Barrage

Brown University, Providence, RI 02912, USA

lint barrage@brown.edu

Abstract

William D. Nordhaus and Paul M. Romer received the 2018 Sveriges Riksbank Prize in

Economic Sciences in Memory of Alfred Nobel. This paper surveys Nordhaus’ contributions

on “integrating climate change into long-run macroeconomic analysis”, for which he was

recognized with this Prize.

Keywords: Carbon tax; climate change; climate clubs; DICE model; energy models; integrated

assessment; social cost of carbon

JEL classification:B0; O4; O44; Q5; Q54

I. Introduction

William D. Nordhaus was awarded the 2018 Sveriges Riksbank Prize in

Economic Sciences in Memory of Alfred Nobel “for integrating climate

change into long-run macroeconomic analysis”. The ubiquity of climate

change in modern economic analyses might render it difficult to appreciate

how truly ground-breaking this contribution has been. In the early 1970s,

amidst heated public and academic debates about limits to growth from

energy and resource scarcity, Nordhaus presciently flagged climate change

as the more likely natural constraint on long-run growth (Nordhaus, 1974).

He cautioned about melting polar ice caps as a consequence of misdirected

economic growth almost 20 years before the United Nations released its

first Intergovernmental Panel on Climate Change (IPCC) report in 1990

(Nordhaus and Tobin, 1972). Nordhaus immersed himself in the physical

sciences literature and pioneered the first integration of a carbon cycle

model into an economic linear programming model of global energy

markets (Nordhaus, 1975a). He used this integrated model to produce the

*I am indebted to Kieran Walshfor detailed feedback and suppor t in the writing of this article. I

also thank Ingrid Barrage, Ken Gillingham, John Hassler, Charlie Kolstad,Per Krusell, Christian

Traeger, and Ken Youngstein for their helpful comments, and Jesse Ausubel for sharing his

insights. Finally, I thank William Nordhaus for his invaluable feedback on this article, and for

everything he has taught me. All errors are my own.

C

2019 The Author.The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of F¨oreningen

f¨or utgivande avthe SJE /The editors of The Scandinavian Journal of Economics.

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License,

which permits use and distribution in anymedium, provided the original work is properly cited, the use is non-commercial and

no modifications or adaptations are made.

L. Barrage 885

first ever estimates of global carbon taxes that could maximize economic

welfare subject to constraints on greenhouse gas concentrations (Nordhaus,

1977). This work so clearly defined a new frontier that 1975 Nobel

Laureate Tjalling Koopmans took time to describe the climate problem

and Nordhaus’ efforts in his own Nobel banquet toast at the time.1

After Nordhaus’ pioneering introduction in 1977, it would be years before

other scholars began to study carbon taxes, and the term did not even

appear again in the American Economic Review until 1991. Today, carbon

pricing policies have been adopted by an estimated 46 countries and

24 subnational jurisdictions around the world (World Bank, 2018). As

early as 1980, Nordhaus developed the first climate–economy optimizing

integrated assessment model (IAM) by simultaneously incorporating the

economy’s greenhouse gas emissions, the carbon cycle, and a first

aggregate climate change damage function into an economic g rowth model.

Nordhaus (1980) introduced both a theoretical characterization and the

first ever numerical estimates of optimal climate policy based on an

integrated cost–benefit analysis. This fundamental innovation also came

years before such frameworks became more widely studied, and other

scholars built on Nordhaus’ estimates from the beginning.2The 1980s

saw significant advancements in scientific understanding of climate change

and its potential impacts, and Nordhaus served on the frontlines of early

syntheses of this work, for example, through his service on the National

Academy of Sciences’ Carbon Dioxide Assessment Committee. Building

on this growing knowledge, Nordhaus continued to refine his climate–

economy model (Nordhaus, 1991a), culminating in the introduction of

the Dynamic Integrated model of Climate and the Economy (DICE;

Nordhaus, 1992, 1993a,b, 1994a). Since its inception, DICE has served

as a conceptual and modeling foundation for climate change economics

and its policy applications. DICE is an unequivocal benchmark of the

literature. Because of the model’s transparency and Nordhaus’ persistent

efforts to make its code accessible and understandable to all, countless

scholars have stood on the shoulders of DICE and its multi-regional

variant RICE (Nordhaus and Yang, 1996; Nordhaus and Boyer, 2000) to

analyze the climate implications of everything from scientific uncertainty

to international technology spillovers. In the policy realm, DICE is

one of three models that have been used by the US government to

value the social cost of carbon (SCC; Greenstone et al., 2013). These

1Koopmans received the prize jointly with Soviet scholar Leonid Kantorovich for their

“contributions to the theory of optimum allocation of resources” (see https://www.nobelprize.

org/prizes/economic-sciences/1975/koopmans/speech/).

2For example,Peck and Teisberg (1992) used the damage estimates in Nordhaus (1991a) to build

another early optimizing integrated assessment model.

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2019 The Author.The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of F¨oreningen

f¨or utgivande avthe SJE /The editors of The Scandinavian Journal of Economics.

886 The Nobel Memorial Prize for William D. Nordhaus

SCC estimates have informed regulatory impact analyses of over 70 US

federal rule-makings.3The US Courts have even overturned federal agency

decisions for failing to incorporate these SCC estimates (Metcalf and Stock,

2017). Notwithstanding recent changes in US federal policy, these SCC

estimates continue to inform decision-making across US states and other

countries.4

Alfred Nobel established his namesake prize for “those who ...have

conferred the greatest benefit to humankind”.5Since diagnosing the lack

of a carbon price as key potential source of conflict between economic

growth and the environment in the 1970s, Nordhaus and his collaborators

have integrated research from the physical, natural, and social sciences to

give the world a flexible tool that can quantify such prices for a wide range

of policy objectives. This work remains foundational for modern climate

change economics, and carbon prices are now adopted by governments

around the world to redirect the global economy towards a more sustainable

long-term growth path. Without a doubt, this work exemplifies the spirit of

Nobel’s vision.

This body of work also represents science at its best: integrative across

disciplines, visionary in scope yet incremental in progress, transparent, and

producing knowledge for the benefit of humankind. Nordhaus has always

emphasized the importance of the broader scientific community and the

institutions that enable his (and all of our) work. He began his official

2018 Nobel Lecture in part by noting that:

“I am here today [...] just one person representing what I

think of as an invisible college of people around the world and

over time, not just in economics but in many disciplines [...],

dealing with this broad set of problems having to do not just

3See Table A1 in the Appendix for a listing of federal rules, and also Nordhaus (2014) for a

discussion.

4For example, both New York and Illinois have used this SCC estimate to set zero-

emissions electricity subsidy rates; the New York State Energy Research and Development

Authority (NYSERDA) Clean Energy Standard (https://www.nyserda.ny.gov/All-Programs/

Programs/Clean-Energy-Standard and the Future Energy Jobs Bill, SB 2814, 220 ILCS 5/20-

135). Canada has also adopted this SCC estimate (Policy on Cost–Benefit Analysis, Treasury

Board of Canada Secretariat (see https://www.canada.ca/en/treasury-board-secretariat/services/

federal-regulatory-management/guidelines- tools/policy-cost-benefit- analysis.html).

5While the Sveriges Riksbank Prize in Economic Sciences was not a part of Nobel’s original

will, the Royal Swedish Academy of Sciences “appoints the prize-winner(s) according to the

same principles as for the Nobel Prizes” (see https://www.riksbank.se/en-gb/about-the-riksbank/

the-tasks-of- the-riksbank/research/economics-prize/).

C

2019 The Author.The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of F¨oreningen

f¨or utgivande avthe SJE /The editors of The Scandinavian Journal of Economics.