William Nordhaus. The legacy of the Nobel laureate who studied how to reconcile economic growth with environmental protection

On Friday 30 October, William D. Nordhaus, winner of the 2018 Nobel Prize in Economics for his research into the economic impact of climate change, passed away. Although this was the subject to which he devoted most of his work, his academic output was wide-ranging: from growth theory to innovation, and from energy economics to public choice theory.

Born in 1941 in Albuquerque, New Mexico, he graduated from Yale in 1963 and obtained his PhD from the Massachusetts Institute of Technology in 1967. There, he studied under some of the leading economists of the time, including Nobel laureates Paul Samuelson, Robert Solow and Kenneth Arrow. In the same year, he returned to Yale, where he would spend the rest of his academic career. Initially, his work focused on growth and innovation. In 1972, together with James Tobin – also a Nobel laureate – he published a study on the limitations of GDP as a measure of well-being. A key aspect was the drastic fall in costs made possible by innovation, which national accounts do not always capture. In a famous paper from 1996, he estimated that the real cost of lighting had plummeted by 99.9 per cent between the pre-industrial era and the present day. He returned to the subject in 2004, estimating that innovators retain just 2.2 per cent of the social surplus generated by their inventions. The lion’s share goes to consumers, in the form of lower prices and better products. The other major idea concerns the ‘political-economic cycle’ (1975). Nordhaus helps to make the analysis of government behaviour more realistic: in order to be re-elected, politicians have an incentive to stimulate the economy in the run-up to an election, promoting growth and employment even at the cost of fuelling imbalances that will manifest themselves later on.

Armed with these insights, Nordhaus was among the first economists to systematically address climate change. Having begun to study the economics of energy resources, in 1977 he published "Economic Growth and Climate: The Carbon Dioxide Problem", a pioneering work that would give rise to a vast body of research. For him, climate change is not merely an environmental issue: it is also an economic problem, because it links today’s decisions to costs that will be borne by others in the future.

This marks the start of a long research journey. The first step is the development of integrated models that link economic activity, fossil fuel consumption, emissions, rising temperatures and their effects on the economy. The best-known of these is ‘DICE’ (Dynamic Integrated Climate-Economy model), introduced in 1992. The model allows the costs of reducing emissions to be compared with the economic damage caused by global warming.

The consequence, according to Nordhaus, is that one cannot set a climate target without considering the costs involved in achieving it: it is not enough for a target to be desirable from an environmental point of view; one must weigh up the benefits against the sacrifices it entails. Hence his reservations about particularly ambitious temperature targets, such as limiting global warming to 1.5 degrees, and about international agreements that fail to address the issue of incentives that leave the burden of reducing emissions to others. His proposal is a carbon tax, set at a level that balances the costs of mitigation against the climate damage averted. To overcome the deadlock at international summits, he suggests ‘climate clubs’: groups of countries with common rules and consequences for those who opt out.

This approach exposed Nordhaus to criticism from both those who downplayed global warming and those who regarded it as an issue beyond the scope of economic assessment. Of course, his conclusions are open to debate, and he himself has revised them over time. But the lesson is that the fight against climate change cannot be framed as a purely political objective: costs and benefits must be systematically weighed up.

Nordhaus has also written several books on the subject. But his name is also linked to a hugely successful publishing venture: since 1985, he has been co-author, alongside one of his mentors, Paul Samuelson, of the most famous economics textbook of the twentieth century. First published in 1948, Economics reached its nineteenth edition in 2009. Following Samuelson’s death, Nordhaus continued his work. It will now be up to others to carry on his legacy.