Commentary: Local boy makes good, who can resist such as story. I’m referring, of course, to William Nordhaus, who won the Nobel in economics for “integrating climate change into long-run macroeconomic analysis.” Nordhaus is a New Mexico native, who travels to New Mexico every summer to visit family and friends.
Nordhaus has had a long career as an economist, beginning in the 1970s. Back then, there was considerable concern about running out of natural resources. Oil was most prominent in this regard as the United States, which then as now was the largest producer of oil in the world, suffered peak oil in 1970. Could global peak oil be far behind?
What Nordhaus pointed out is that as resources become scarcer, they become more valuable, leading to discovery and innovation. And as he pointed out, even modest technological progress can result in substantial increases in reserves.
Boy was he right. As we in New Mexico know, technology in the form of fracking has resulted in old fields being revitalized. The once nearly played out Permian Basin is back with a vengeance. The United States is on track, 48 years after previous peak oil, to achieve a new peak this year. While Nordhaus didn’t know it would be fracking, his theories predicted it would be something.
But don’t think Nordhaus is some sort of environmental Polly Anna. Nordhaus pointed out that resource depletion was not the issue threatening human wellbeing, but that didn’t mean we didn’t face problems. The true threat was not peak oil but human demand on the environment. Rather than worry about peak oil, we should be concerned with oil plenty and global warming.
Nordhaus in two papers in the late 1970s laid the ground work for the economics of climate change. He started with a model of economic growth and added to that a “carbon” sector. For the first time, economists were able to study the interaction of the economy and climate change.
Nordhaus work has always had a practical slant to it. In the 1990s, he released the Dynamic model of the Climate and the Economy (DICE) model. This was a detailed economic model that allowed for the dynamic interaction of the economy and climate. This model has been the basis of literally hundreds of papers over the last twenty years. Nordhaus himself used it to study the impact of climate change on agriculture.
Nordhaus’s work has had an important influence on economic policy. For example, Nordhaus calculated the social cost of a ton of carbon. This became the basis for EPA regulation of coal fired electric power generation.
More recently, Nordhaus has turned to the problem of enforcing international climate agreements. A problem with climate change is its global nature. Greenhouse gases emitted anywhere affects global climate. This gives nations the incentive to free ride on the efforts of others, an argument used by the Trump administration against U.S. action. We shouldn’t do anything that disadvantages U.S. business as that will just provide an opportunity for the Chinese or some other noncomplier, say the Trumpistas.
Nordhaus has an answer. His calculations show that relatively small tariff imposed by the climate white hats is sufficient incentivize the environmental black hats take account of climate change. This is the policy currently being proposed by French President Emmanuel Macron to punish countries not participating in the Paris Climate Accord.
Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He teaches growth theory, including the Nordhaus model, in his classes. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu.