Blog: Tuesday, 9 October 2018
The 2018 Nobel Prize for Economics was awarded to William Nordhaus ‘for integrating climate change into long-run macroeconomic analysis’ and to Paul Romer ‘for integrating technological innovations into long-run macroeconomic analysis’.
Nordhaus and Romer 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 Nobel Prize Committee has thus awarded this year’s prize to economists who laid the groundwork for the United Nation’s 17 Sustainable Development Goals (SDGs). RSM has endorsed the UN SDGs in its mission statement ‘to be a force for positive change in the world’.
Nordhaus has become famous for his Dynamic Integrated Climate Economy (DICE) Model. This model facilitates an integrated assessment of the impact of economic growth on climate change and also of policies, such as carbon taxes, to mitigate climate change. The carbon tax is the obvious tool to address the market failure of climate change.
Romer has pioneered the idea that technological change is not exogenous (coming from outside), but is determined endogenously (from inside) by our efforts. Earlier this year, one of my students reminded me that the development of renewable energy grows at an exponential rate. If we keep the current rate of doubling the share of renewables each 5.5 years, we can phase out fossil fuels by 2040.
The Nobel Laureates stress the impact of technological and climate change on growth, which is called endogenous growth. The basic idea is we get what we are aiming for in our economy. If we aim only for economic growth, then we get that but with major climate impacts.
What have the Nobel Laureates to tell to policymakers? If we want to reduce carbon emissions, we can easily do so by a serious carbon tax. Sweden has a carbon tax of about €130 per tonne of carbon. The result is a 25 per cent reduction of carbon emissions without loss of economic growth. Taxes have just been shifted from labour and consumption to carbon.
On technological change, John F. Kennedy knew already what to do without reading Romer. He made it a policy goal to travel through space to the moon in 10 years. By his determination and allocation of resources to space research, he managed to accomplish major technological changes enabling the first travel of mankind to the moon within the time set for it.
We learn today that travel, which causes about one third of emissions, does not want to speed up the transition to a low-carbon economy. Traditional carmakers and their governments are slowing down the EU’s climate policy. Why not redirect EU resources for research to the design and roll-out of a commercially viable solar-powered aeroplane by 2028? That could be Europe’s Apollo project. At the same time, we can move the carbon price in our ETS system to €100. That will speed up the phasing out of fossil-fuel powered cars and planes as well as coal-powered utilities.
Again endogenous growth means that we get what we are aiming for. Investors and bankers are entering sustainable finance. That means financing companies are making progress in the transition to a low carbon, inclusive economy. Early empirical evidence suggests that there is a business case for sustainable finance, as these companies in transition show a better financial performance than the laggards.
Students at RSM enjoy the courses in sustainable finance. An increasing number of talented master and PhD students write their thesis on sustainability topics. They will feel inspired by the 2018 Nobel Prize.
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