With The Nordhaus Nobel Can We Finally Get Climate Change Economics Right Please?


William Nordhaus has finally got his Nobel which is good. What is also excellent about this is that we’ve now this official recognition of how to do climate change economics right. This is something that all economists know, of course, but something that near no one else – especially the policy makers – does.

Stick on a carbon tax at the social cost of carbon and we’re done.

Don’t try to plan or strategise through things, don’t insist that the money must be used to fight climate change nor compensate for it. Just crowbar the costs into market prices with a Pigou Tax and leave well alone. The right answer will be the one that those markets come up with now that we’ve adjusted prices appropriately.

Nordhaus was before Stern of course, and he was also one layer of subtlety higher – not difficult. For he pointed out that we should work with the capital cycle, take account of elasticity, consider the normal depreciation and replacement cycle. A low carbon tax now credibly rising higher into the future. This way we get our desire – fewer emissions – but we also get to sweat those assets which have already been built. The influence of our prices isn’t going to be upon sunk costs, but upon future decisions over what to invest in and build. Exactly what we want to be doing anyway.

So, excellent stuff. And that best part is we can now point to his work and say, look, guys, this is the state of the knowledge, this is how we should be doing it. What, you got a Nobel in economics to say you know better then?

American economists William Nordhaus and Paul Romer have been awarded the Nobel Prize for their work on understanding how economies can grow sustainably.

Nordhaus, a professor at Yale University, is best known for his work on climate economics. Romer, of NYU’s Stern School of Business, is a proponent of a theory that examines how the world can achieve sustainable growth.
“This year’s Laureates have designed methods for addressing some of our time’s most basic and pressing questions about how we create long-term sustained and sustainable economic growth,” the Royal Swedish Academy of Sciences said in a statement.

Yep, stick on a carbon tax and we’re done. The right answer is emergent from a properly priced market.

Commenting on the prize, Prof Romer told reporters: “I think… many people think that protecting he environment will be so costly and so hard that they just want to ignore [this].

“[But] we can absolutely make substantial progress protecting the environment and do it without giving up the chance to sustain growth.”

Yep, stick on a carbon tax and we’re done.

Mr. Nordhaus, a professor of economics at Yale University, pioneered the economic analysis of climate change. He is also a leading proponent of the use of carbon taxation to reduce emissions, a policy approach preferred by many economists.

Yep, stick on a carbon tax and we’re done. Unlike what people actually suggest we do about climate change.

Two other fun findings from Nordhaus. One is the foundational reason why this free market capitalism stuff works. Entrepreneurs only end up with about 3% of the value they create. Near all of the rest of it ends up with us punters as the consumer surplus. An empirical reading of that result, sure the Waltons have $150 billion or so as a capital asset. US consumers alone gain some $260 billion a year from the existence of Walmart. That existence creating the competition which means everyone else must get cheaper, more efficient, to compete. Capitalise that over 20 years, as with the stock value, and we get $5 trillion, they get $150 billion. Bargain of the century, isn’t it.

He also dashed off a little paper about automation, AI and so on. Assume that the worrywarts are right. This means that the capitalists will get everything. Those who own the robots will end up gaining more, and more, and more, of the economy. So, what happens to the rest of us?

Well, the capital share of the economy asymptotically approaches 100%. The labour share asymptotically 0%. For that to happen the growth in the economy must be so high that real wages (real, after inflation) rise by 200% a year. We all become three times better off a year as the capitalists become that plutocracy. It’s not a great problem, is it?

Finally, one fun thought. Krugman was a student aide or the like to Nordhaus. Job as a graduate student working for the professor, that sort of thing. So, is this the first time the student has been honoured before the master?