“In the long-run, we are all dead”, said John Maynard Keynes. Thanks to our obsession with economic growth, the long-run may not be as far as Keynes imagined. Since its inception, the Nobel prize for economics has been awarded to contributions promising economic growth, improving market efficiency or deciphering economic cycles, while the ecological impacts of hyper-competitive free markets on the planet have largely been ignored. So, does this year’s selection of the Nobel laureates for economics bring any hope?
Paul Romer and William Nordhaus share the 2018 prize. Romer’s “integration of technological innovations into long-run macroeconomic analysis[i]”, is about economic growth, while Nordhaus has “integrated climate change into long-run macroeconomic analysis”. This is the part which could bring cheer to ecologists, and yet, the pessimism of an ecologist prevails.
Romer proposes a crucial role for ideas and innovation in long term economic growth. He extends our current understanding of long run growth, which was based upon (among others) Harrod-Domar and the Robert Solow models, with exogenous drivers of growth. 31 years after Solow received the prize, Romer’s explanation of the endogenous variables affecting economic growth hasn’t failed to fascinate the Nobel committee. Continuous economic growth is a proclaimed policy of governments and almost an obsessive compulsive disorder (OCD) for nearly every economist. This OCD infuriates ecologists who value the planet’s carrying capacity far more than a growing economy. Disregarding Simon Kuznet’s warning on the limitations of the GDP, economists have, for long, relied on this single measure of growth. But this is not about Romer.
Perhaps as a long overdue consolation, Nordhaus’s contribution of the impacts of the economy on the biosphere are considered worthy of a Nobel. This is good as it will trigger more debates on the relationship between economics and climate change, but is perhaps too late to excite governments who are throwing scraps at climate change mitigation. Keynes’s long-run could already be around the corner.
William Nordhaus proposed two variants of integrated assessment model (ISM), named RICE (Regional Integrated Climate-Economy Model) and DICE (Dynamic Integrated Climate-Economy Model. They integrate economics with carbon cycles and climate sciences, using chemistry, physics and economics. The models can be used in cost-benefit analysis of policies and interventions aimed at reducing greenhouse gases (GHG). By integrating science with economics, the models can simulate the consequences of a status-quo or policy interventions in climate change. They are intended to “….guide the market economy towards emission levels that properly balance societal costs and benefits.”[ii] DICE has its share of criticism, the obvious one being its sensitivity to assumed discount rates. However, as an ecologist, I have more concerns on Nordhaus and his contributions as the choice for the 2018 Nobel.
- Nordhaus’s early stance on natural resources and climate change – In a chapter written in 1972 and titled “Is Growth Obsolete?” Nordhaus proposed “Taking population developments as given, will natural resources become an increasingly severe drag on economic growth? We have not found evidence to support this fear.” Nordhaus and his team ran simulations to come up with support for this statement. Moreover, the simulations supported the contention that there is a “…high elasticity of substitution between resources and neoclassical factors”[iii] which goes against environmentalists’ warnings that there are no substitutes for natural resources. He further asserts that “If the past is any guide for the future, there seems to be little reason to worry about the exhaustion of resources which the market already treats as economic goods.” Nowhere in the chapter is there any consideration of the degradation of landscapes and associated ecosystems in the process of resource extraction.But he does not stop at natural resources. Since his 1993 paper, Nordhaus has maintained that “…greenhouse warming will have only modest economic impacts in industrial countries, while programs to cut GHG emissions will impose substantial costs” and that “….draconian cuts in GHG emissions by 50% or more were not warranted by the current scientific and economic evidence on costs and impacts.” [iv] Even in his critical review of Stern Review[v], Nordhaus claims “One of the major findings in the economics of climate change has been that efficient or “optimal” economic policies to slow climate change involve modest rates of emissions reductions in the near term, followed by sharp reductions in the medium and long term.” Nordhaus’s research was supportive in the early stages of climate change denial. The ‘business as usual’ lobby in the US has used it to coerce their government to stay away from meddling in businesses. In another publication from 1993, Nordhaus says “…in the long march of economic development, technology has increasingly insulated humans and economic activity from the vagaries of climate.”
- Faith on mathematical models – It is the other OCD of economists – indubitable faith on mathematical models – which some ecologists may not agree with. Economists are comfortable handling numbers and data – after all the economy is about money – something which is measurable. It thus makes economic sense to work with mathematical models which leave out human biases and emotions. Extending this faith, it is economically appropriate to capture environmental degradation in quantitative measurable elements – ppm of carbon and rise in the planet’s temperature. The ecologists’ concern is that economic models do not account for human greed, illegitimate marketplace activities or government lobbying. DICE could never have captured the carbon emissions of the 600,000 Volswagen cars fitted with the illegal defeat device. DICE does nothing to predict the vulnerability of communities displaced by mining and dams, activities which contribute to carbon emission. They are out of the model because tribal displacement is not a climate problem. It neither contributes to carbon emissions nor the temperature. Billions of consumers demanding new phones every day, are exogenous to the model. When an economic model leaves out the voracious consumer appetites, they have lost much of their ecologist audience.
- Predicting planetary level ecosystem behaviors by measuring carbon – A critical concern is that DICE and other economic integrated assessment models are limited by our understanding of how nature behaves, and that does not inspire confidence. To be fair, Nordhaus has employed physics and chemistry with economics, the first climate economist to do so. But history shows that scientists have a poor record of predicting ecosystem behaviors which are subject to rapid change in the rate of change – the second derivative – of multiple variables simultaneously. The inter-connectedness and non-linearity at the planetary level, in ecosystem dynamics, makes it tough, if not impossible, for an economist to make long-term predictions. The Nobel committee awarded the prize in Chemistry to Paul Muller for DDT and years later, the world banned it when its effect underwent a biomagnification in human milk, something Muller’s modeling and lab experiments could not predict. DICE would leave out the socio-ecological costs imposed on farming by the reduction in birds of prey which are killed by giant wind-farms (clean energy – an important factor of climate change economists); or the relation between ocean acidification and loss of marine life and its effect on the planet’s capacity to sustain life. DICE is clearly about policy efficiency in controlling GHG in a growing economy, not on the ‘real’ planetary issues.
- Quantifying the gigantic problem of extending the planet’s capacity to sustain life, by measuring carbon emissions and temperature rise – Unlike humans, nature does not quantify everything into climate change. Natural ecosystems, which form the backbone of the planet’s ability to sustain life, have responded in many ways to human economic activities. Can DICE account for the social discount rates of species extinctions, loss of productivity of watershed areas, decline in the rate of carbon sequestration or reduction in ecological productivity of ecosystems? All these are outcomes of carbon emitting economic activities. Can we rely on policies tested with models which leave out these outcomes?
Not everything about Nordhaus is grim. He has unequivocally said that the 2-degree temperature rise target is ludicrous if major policies are not immediately taken up. Towards this message, DICE is a powerful tool to model impacts of policies. The US EPA has been using it for some time now and the US has seen substantial improvements in its natural environment. However, this has many contributors – outsourced manufacturing of polluting industries, technological sophistication (Romer’s province) and citizen’s increased willingness to pay for a better environment are important ones which have helped the DICE modeled policies.
Al Gore and the IPCC have been awarded the Nobel prize for Peace for their work on climate change, but this is the first time that an economist gets it for climate change. As much as I would like to believe Nordhaus’s contributions will benefit the planet, I remain skeptical.
The real concern is not whether William Nordhaus was a good choice for the prize, but the question whether economics deserves a Nobel at all?
Notes and References:
[ii] As described in the Nobel Citation available here https://old.nobelprize.org/eco-popular.pdf?_ga=2.187239279.6746184.1538983620-661508209.1538983620
Gurudas Nulkar – is the author of ‘Ecology, Equity and the Economy’. He is an adjunct professor at Symbiosis Centre for Management, Pune and a Trustee of the Ecological Society. He has a PhD in environmental management in industrial ecosystems and was the Endeavor Fellow of the Government of Australia.
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