Paul Samuelson is the first person in the United States' Nobel Prize in Economics. His classic textbook "Economics" has been hailed as the most practical and best-selling economics textbook in the world since its first edition in 1948, and has had a huge impact on the public.

[ Nobel Prize Special Topic] William Nordhouse and Economics of Climate Change - Potential Nobel Prize Net Economics Winners' Review

Financial Street Telecommunications/Nobel Prize Album 018-10-1318:32

Paul Samuelson is the first person in the United States' Nobel Prize in Economics. His classic textbook "Economics" has been hailed as the most practical and best-selling economics textbook in the world since its first edition in 1948, and has had a huge impact on the public. On the eve of the 50th anniversary of the book's reprint, the old Samuelson decided to find a collaborator with perfect talents and opinions. As a result, "William Nordhaus in reality was discovered." Many people may feel a little unfamiliar with the name Nordhouse . When introducing him in the 16th edition of "Economics", he only mentioned in general that "his economic research scope is very wide" and "is a member of the economic advisory team of President Carter ". Economic researchers can see the political and economic cycle model in Jiang Zhongyi's "Basics of Dynamic Optimization", which is Nordhouse's genius work. But this model alone doesn't seem to be enough to make him a collaborator for Samuelson. In fact, Nordhouse's main contribution occurred in a relatively unpopular but now quite popular branch of economics - Economics of Climate Change . This article attempts to introduce the academic achievements of this founder of climate change economics to help everyone understand that he is indeed one of the many stars.

. Climate change and economics

Traditionally, climate change belongs to the research field of natural sciences. This issue stems from the fact that greenhouse gas produced by human economic activities is too much and too fast, exceeding the speed at which the earth's ecosystem absorbs them, so that greenhouse gases continue to accumulate in the atmosphere, which may cause the earth's surface temperature to rise, which will have immeasurable impact (Cline, 1991). Greenhouse gases mainly include carbon dioxide , methane , chlorochloride, and nitride. Their flow in the earth's ecosystem will have an impact on the atmosphere, oceans, polar glaciers, forest vegetation, crops, energy, environment, etc., and trigger corresponding research. The principle of greenhouse effect comes from the physics of thermal radiation . All of these fall into the category of natural science. The special reports released from time to time by the United Nations Intergovernmental Panel on Climate Change (IPCC) are compiled based on the latest literature in natural sciences.

So, as a humanities and social discipline, economics is the reason why it enters the issue of climate change? Nordhaus (1982) gave two reasons: on the one hand, policy measures aimed at reducing greenhouse gas emissions must be effective through the economic system; on the other hand, climate change will also affect the production process and final output of the economic system, such as food harvest failure caused by drought. Mendelsohn et al (1994) expressed a deeper reason, that is, when natural disciplines make predictions, they often use simple extrapolation methods, such as linking CO2 emissions to GDP. Such a treatment method ignores the ability of micro-subjects to adapt to changes in the economic environment. If the climate becomes drought, farmers can instead plant wheat and instead plant corn with less water requirements. Similarly, if the government introduces carbon tax , enterprises can seek alternative energy, so that while CO2 emissions decline, GDP growth will not necessarily slow down. It can be seen that although the natural discipline plays a fundamental role in exploring the laws of the earth's ecosystem, economics cannot be avoided if it involves policy practices to curb climate warming.

Nordhouse's 1982 paper is considered to be the pioneering work of climate change economics. Although this article is short, it discusses the characteristics of CO2, international cooperation in emission reduction, policy means, uncertainty and other related issues.Many of the worries expressed in the article have gradually appeared in reality in the past 30 years, such as the difficulty of international cooperation and the uncertainty in analytical research. However, what is little known is that Nordhouse experienced a transformation in research focus for about 15 years before publishing this article.

967, 26-year-old Nordhouse obtained a Ph.D. in economics from MIT , and in the same year he received a teaching position at Yale University . In the following six years, his papers covered relatively broad research areas such as economic growth, technological changes, taxes, price levels, and labor wages. Judging from more than ten papers and one book at this stage, Nordhouse focuses on growth theory and expands and explores other fields. Influenced by , the club of Rome, , he began to study resource economics (Nordhaus, 1992) and published papers in this field since 1973. Nordhouse remained a prolific researcher between 1973 and 1982, publishing 24 papers and 3 books, of which only 4 papers and 1 book were on resources and climate change. He gradually formed the understanding that although the number of resources is limited on the surface, the scientific and technological potential can provide nearly unlimited energy, and the greenhouse effect with global externalities is the greenhouse effect with global externalities among several major greenhouse gases, CO2 has the strongest inertia and the largest stock, so it is the most difficult to control (Nordhaus, 1974, 1977, 1982).

Since 1982, Nordhouse has shown a tendency to focus on climate change research. For an economist who is almost omnipotent in the macro field, his choice is naturally because he believes that this research direction is more research-worthy than other directions. However, this is destined to be a difficult road. On the one hand, few people in the economics community are trying to explore climate change, and Nordhouse will open up a path from a place without a road while fighting almost alone. This contains great research risks. On the other hand, whether climate change is a question, whether the climate is developing in the direction of warming, and even so, whether the reason is caused by human economic activities has always been controversial in the field of natural sciences. This division weakens the credibility of the natural science community in persuading the public to take action to curb global warming on . Both factors have made climate change economics an unpopular branch in economics for a long time. It was not until 2006 that the Stern Report successfully attracted widespread attention from the world on climate change issues that people discovered that the latest literature on climate change economics was constantly citing the same name: Nordhouse.

2. Comprehensive assessment model of climate change

As the saying goes, it is easy to know and difficult to do. It is one thing to recognize the importance of climate change issues; it is another thing to truly cut economics into this wilderness. 1982-1991 was a period of relatively quiet in the academic field of Nordhouse. Although his papers are still published in a large number, close to 30, there are only one paper published in " American Economic Review ", which is far lower than the level before 1982. Why is this happening? This should be a reflection of the huge difficulties encountered in the process of exploring a new path. Nordhouse is trying to integrate the economic system and the ecosystem into a model framework, that is, the economic system produces CO2 during operation, and CO2 causes the ecosystem to change, and this change then affects the economic system and forms a circulation flow; among which, the economic system is based on the neoclassical growth model. Today, the mainstream tool for studying climate change, the Integrated Climate Change Assessment Model (IAM), adheres to this framework. The publication of the paper by

Nordhaus (1991) marked the beginning of IAM. Several previous papers were preparing for its emergence in model architecture and numerical calculations. With Nordhouse's foundation, it is not difficult to incorporate the impact of ecosystems into the general balanced framework. He creatively introduced marginal analysis in economics into the study of climate change issues. As shown in Figure 1, the horizontal axis represents the percentage of greenhouse gas drop, and the vertical axis is the actual currency value.

[ Nobel Prize Special Topic] William Nordhouse and Economics of Climate Change - Potential Nobel Prize Net Economics Winners' Review

Financial Street Telecommunications/Nobel Prize Album 018-10-1318:32

Paul Samuelson is the first person in the United States' Nobel Prize in Economics. His classic textbook "Economics" has been hailed as the most practical and best-selling economics textbook in the world since its first edition in 1948, and has had a huge impact on the public. On the eve of the 50th anniversary of the book's reprint, the old Samuelson decided to find a collaborator with perfect talents and opinions. As a result, "William Nordhaus in reality was discovered." Many people may feel a little unfamiliar with the name Nordhouse . When introducing him in the 16th edition of "Economics", he only mentioned in general that "his economic research scope is very wide" and "is a member of the economic advisory team of President Carter ". Economic researchers can see the political and economic cycle model in Jiang Zhongyi's "Basics of Dynamic Optimization", which is Nordhouse's genius work. But this model alone doesn't seem to be enough to make him a collaborator for Samuelson. In fact, Nordhouse's main contribution occurred in a relatively unpopular but now quite popular branch of economics - Economics of Climate Change . This article attempts to introduce the academic achievements of this founder of climate change economics to help everyone understand that he is indeed one of the many stars.

. Climate change and economics

Traditionally, climate change belongs to the research field of natural sciences. This issue stems from the fact that greenhouse gas produced by human economic activities is too much and too fast, exceeding the speed at which the earth's ecosystem absorbs them, so that greenhouse gases continue to accumulate in the atmosphere, which may cause the earth's surface temperature to rise, which will have immeasurable impact (Cline, 1991). Greenhouse gases mainly include carbon dioxide , methane , chlorochloride, and nitride. Their flow in the earth's ecosystem will have an impact on the atmosphere, oceans, polar glaciers, forest vegetation, crops, energy, environment, etc., and trigger corresponding research. The principle of greenhouse effect comes from the physics of thermal radiation . All of these fall into the category of natural science. The special reports released from time to time by the United Nations Intergovernmental Panel on Climate Change (IPCC) are compiled based on the latest literature in natural sciences.

So, as a humanities and social discipline, economics is the reason why it enters the issue of climate change? Nordhaus (1982) gave two reasons: on the one hand, policy measures aimed at reducing greenhouse gas emissions must be effective through the economic system; on the other hand, climate change will also affect the production process and final output of the economic system, such as food harvest failure caused by drought. Mendelsohn et al (1994) expressed a deeper reason, that is, when natural disciplines make predictions, they often use simple extrapolation methods, such as linking CO2 emissions to GDP. Such a treatment method ignores the ability of micro-subjects to adapt to changes in the economic environment. If the climate becomes drought, farmers can instead plant wheat and instead plant corn with less water requirements. Similarly, if the government introduces carbon tax , enterprises can seek alternative energy, so that while CO2 emissions decline, GDP growth will not necessarily slow down. It can be seen that although the natural discipline plays a fundamental role in exploring the laws of the earth's ecosystem, economics cannot be avoided if it involves policy practices to curb climate warming.

Nordhouse's 1982 paper is considered to be the pioneering work of climate change economics. Although this article is short, it discusses the characteristics of CO2, international cooperation in emission reduction, policy means, uncertainty and other related issues.Many of the worries expressed in the article have gradually appeared in reality in the past 30 years, such as the difficulty of international cooperation and the uncertainty in analytical research. However, what is little known is that Nordhouse experienced a transformation in research focus for about 15 years before publishing this article.

967, 26-year-old Nordhouse obtained a Ph.D. in economics from MIT , and in the same year he received a teaching position at Yale University . In the following six years, his papers covered relatively broad research areas such as economic growth, technological changes, taxes, price levels, and labor wages. Judging from more than ten papers and one book at this stage, Nordhouse focuses on growth theory and expands and explores other fields. Influenced by , the club of Rome, , he began to study resource economics (Nordhaus, 1992) and published papers in this field since 1973. Nordhouse remained a prolific researcher between 1973 and 1982, publishing 24 papers and 3 books, of which only 4 papers and 1 book were on resources and climate change. He gradually formed the understanding that although the number of resources is limited on the surface, the scientific and technological potential can provide nearly unlimited energy, and the greenhouse effect with global externalities is the greenhouse effect with global externalities among several major greenhouse gases, CO2 has the strongest inertia and the largest stock, so it is the most difficult to control (Nordhaus, 1974, 1977, 1982).

Since 1982, Nordhouse has shown a tendency to focus on climate change research. For an economist who is almost omnipotent in the macro field, his choice is naturally because he believes that this research direction is more research-worthy than other directions. However, this is destined to be a difficult road. On the one hand, few people in the economics community are trying to explore climate change, and Nordhouse will open up a path from a place without a road while fighting almost alone. This contains great research risks. On the other hand, whether climate change is a question, whether the climate is developing in the direction of warming, and even so, whether the reason is caused by human economic activities has always been controversial in the field of natural sciences. This division weakens the credibility of the natural science community in persuading the public to take action to curb global warming on . Both factors have made climate change economics an unpopular branch in economics for a long time. It was not until 2006 that the Stern Report successfully attracted widespread attention from the world on climate change issues that people discovered that the latest literature on climate change economics was constantly citing the same name: Nordhouse.

2. Comprehensive assessment model of climate change

As the saying goes, it is easy to know and difficult to do. It is one thing to recognize the importance of climate change issues; it is another thing to truly cut economics into this wilderness. 1982-1991 was a period of relatively quiet in the academic field of Nordhouse. Although his papers are still published in a large number, close to 30, there are only one paper published in " American Economic Review ", which is far lower than the level before 1982. Why is this happening? This should be a reflection of the huge difficulties encountered in the process of exploring a new path. Nordhouse is trying to integrate the economic system and the ecosystem into a model framework, that is, the economic system produces CO2 during operation, and CO2 causes the ecosystem to change, and this change then affects the economic system and forms a circulation flow; among which, the economic system is based on the neoclassical growth model. Today, the mainstream tool for studying climate change, the Integrated Climate Change Assessment Model (IAM), adheres to this framework. The publication of the paper by

Nordhaus (1991) marked the beginning of IAM. Several previous papers were preparing for its emergence in model architecture and numerical calculations. With Nordhouse's foundation, it is not difficult to incorporate the impact of ecosystems into the general balanced framework. He creatively introduced marginal analysis in economics into the study of climate change issues. As shown in Figure 1, the horizontal axis represents the percentage of greenhouse gas drop, and the vertical axis is the actual currency value.If the market is allowed to operate spontaneously, so that the greenhouse gases do not decrease, the damage to society is the height value of point Z. When society invests resources to reduce greenhouse gases, the marginal cost is increasing; but the marginal damage to the greenhouse effect will gradually decrease with the decrease in the greenhouse gas stock, which can be regarded as the marginal benefit of emission reduction . Point E is the equilibrium point of MR=MC. At this time, the total social cost is the area of ​​Region B and the total social income is the area of ​​Region B+C. Therefore, emission reduction will bring about the net social income of Region C area. The above analytical idea is the principle of the cost-benefit analysis method that is often mentioned in the economic literature on climate change.

Nordhouse faces two main difficulties: on the one hand, he needs to understand a lot of knowledge about the operation of the ecosystem and make judgments on how to choose to put it into the model system. For example, the marginal damage curve of the greenhouse effect in Figure 1 is theoretically easy to assume that it is tilted to the lower right, but it will be difficult to estimate the specific drop path and the specific value of the marginal damage. Moreover, for those who only have the basic knowledge of natural science, they must have a keen sense of smell and extremely high efficiency so that they will not be submerged in the ocean of knowledge. On the other hand, numerical simulation of the cross-period optimization equations of dynamic general equilibrium systems, there were many difficulties at that time, both in programming, algorithm and hardware equipment. Even the doctoral students in economics trained with today's training program are mostly laymen in programming. Not everyone can do it if a full professor of economics is over forty years, but he has to find the right program and learn it from scratch. The competitor of

Nordhaus (1991) was the first climate change assessment report released by the IPCC in 1990. Compared with IPCC experts using supercomputers to simulate changes in global systems, Nordhouse only uses an ordinary computer with a chip of 486-66 processors. However, the latter is better in philosophy. IPCC only focuses on changes in the purely physical world and ignores people's ability to adapt to changes in the economic environment, which makes the IPCC's results much higher than Nordhouse's in the cost estimate of carbon emission reduction. In its third climate change assessment report released in 2001, IPCC recognized the advantages of the IAM model and began to embed more micro-foundation modules of economic system in its own framework.

After Nordhaus (1991), other researchers followed up. However, since the existing knowledge is still quite limited in both the economic and ecological fields, IAM needs to integrate them together, and overly complex systems are difficult to analyze and study, so different researchers often have to choose to put some factors into the model system. The greater autonomous selectivity makes the development history of IAM show diversified characteristics. Some IAMs focus on ecosystems, while others focus on economic systems. In more than ten years, more than 20 different versions of IAM models have appeared, among which the more important ones are MERGE (Manne et al, 1995), DICE (Nordhaus, 1994), RICE (Nordhaus Yang, 1996), FUND (Tol, 1997), and PAGE (Hope, 2006). Behind the famous "Stern Report" has a basic technical work that is the PAGE model. By 2001, the development of the situation also gave birth to a new journal called "Integrated Assessment Journal". This reflects that research done based on IAM has formed a discipline field.

As a pioneer of IAM, Nordhouse was not satisfied with the achievements it has been made, but was constantly improving his work. Based on Nordhaus (1991), he successively developed the DICE and RICE models. Among them, DICE is a way to judge effective carbon emission reduction plans for treating the entire world as a whole. RICE goes further to the point of being close to reality, dividing the world into 10 regions. Carbon emissions countries like the United States and China are an independent region, while other regions include multiple countries. Each region is an independent decision-making subject, and they make choices in a certain gaming environment. There are three basic game environments, namely BAU (no carbon emission reduction commitment), non-Nash equilibrium solution, and full cooperative solution, which correspond to three situations: complete non-cooperation, limited cooperation, and full cooperation.This calculates the corresponding carbon tax and carbon emission trajectory, providing a reference for judging the future situation. Afterwards, Nordhouse continued to modify and enrich the DICE and RICE models, and successively launched different improved versions such as RICE-1999, DICE-2007, and RICE-2010. The latest RICE-2010 has added the sea level rise module based on the previous version of the model. Nordhaus (2010) used RICE-2010 to predict the results of Copenhagen protocol and found that even if countries promote carbon emission reductions in their respective promises, it is not enough to achieve the established goal of controlling the rise of global average temperatures within 2°C.

Nordhouse published more than 80 papers and 12 books between 1991 and 2011, most of which were about climate change. The journals published in the paper cover top academic journals in different disciplines, namely "American Economic Review", "Science", " Proceedings of the American Academy of Sciences ", and the number reaches as many as 17; there are countless other first-class journals. Due to his outstanding academic contributions, Nordhouse has won many honors and halos, the most dazzling one is the member of the National Academy of Sciences and the list of candidates for the Nobel Prize in Economics predicted by "Top-Reuters".

3. Academic debate

There is no smooth road to academics. To make any innovation, you need to overcome difficulties that outsiders cannot imagine; not only that, different researchers often have different opinions on the same issue, which inevitably leads to academic debate. The competition between Nordhouse and IPCC in research methods was unfolded silently, and finally IPCC clearly claimed to accept IAM methods; of course, Nordhouse itself also strives to move closer to the IPCC direction in the ecosystem module. This development of combining economics with natural science can be said to be no losers, and is a win-win result. However, the other two debates Nordhouse participated in were involved in, which helped subsequent researchers avoid academic reefs.

The first debate was about the pessimistic view of the economic growth of the club at Rome. As early as 1972, a book called "The Limits of Growth of " argued that limited resources would eventually stagnate the economy. Nordhaus (1974) gave an indirect rebuttal. He listed scientific data to illustrate that although fossil energy reserves can only support 520 years of use, if nuclear energy is developed and utilized, the energy consumption at that time can support 53 billion years of use. This does not include the development and utilization of solar energy. Therefore, concerns about resource finiteness are unnecessary. However, to Nordhouse's surprise, the Club of Rome published "Beyond the Limits" in 1992 to commemorate the 20th anniversary of the publication of "The Limits of Growth", again warning of the global resource crisis.

This time, Nordhaus (1992) deeply analyzed the technical methods of the previous and last two books and found that the model system they used was basically the same, with only minor changes. They both ignore the role of the two factors of technological change and market mechanism, and predict the future completely from a static perspective. Nordhouse shows historical actual price sequences of multiple resources, illustrative of the fact that they appear as a downward trend over the long term, and the concerns of the club Rome are not consistent with real-world data. He further pointed out that the ultimate threat we may have overlooked is the limited capacity of the earth to accommodate industrial waste, and signals of renewable resources such as warming climate and the disappearance of species are more worthy of concern and attention.

The second battle is an urgent battle for carbon emission reduction. The global nature of the greenhouse effect means that a country's carbon emission reduction has a great positive externality. Under the mechanism of decentralized decision-making, this will lead to weak carbon emission reduction efforts. To effectively curb climate warming, an international cooperation framework is needed to coordinate the actions of countries.International cooperation involves political struggle, and important questions include: Are all countries reducing emissions with the same efforts or can they be treated differently? Should we forcefully reduce emissions from the beginning or can we gradually strengthen our efforts? The 2006 "Stern Report" believes that if emission reduction is delayed or emission reduction is insufficient, a huge price of 20% GDP will be paid in the future. Therefore, it advocates that countries take firm and powerful actions immediately to reduce the probability of future disasters. From this point of view, the degree to which developed countries and developing countries are treated very little, and the immediate strong carbon emission reduction is obviously not conducive to the economic catching up of developing countries. The "Stern Report" has a wide impact and has played a theoretical role in strengthening the pressure on developing countries at the Copenhagen Climate Summit. Another view that

is the climate policy ramp theory (Olmstead Stavins, 2006), that is, the short-term emission reduction efforts can be relatively small, and the emission reduction efforts will be gradually increased in the medium and long term, and the developed and developing countries will be treated differently. This claim is roughly the same conclusion drawn by many different IAM models. If the macro carbon tax is used to represent a country's efforts to implement carbon emission reduction, then from the recent period to 2100, the amount of carbon tax will roughly rise from more than ten US dollars per ton of carbon to more than one hundred US dollars. Not only is Nordhouse's calculation result, but many other researchers' results are similar. The carbon emission reduction efforts of the "Stern Report" will be subject to a carbon tax of approximately US$360 per tonne in the near future (Nordhaus, 2007). Since the "Stern Report" is also based on an IAM analysis, why are there such a big difference?

Nordhaus (2007), Weitzman (2007), etc. believe that the conclusion of the "Stern Report" is based on parameter settings that do not conform to the tradition of economics. Economic literature usually sets the one-year preference rate ρ at about 3-5%, while Stern sets it to 0.1% from the perspective of equality among people in different eras, which greatly strengthens people's attention to the future, so that in order to offset future risks, the current price is much greater. More importantly, although the values ​​of a single parameter have certain flexibility, the values ​​of several parameters in the neoclassical growth model must meet the cross-period optimization equation - the Ramsey rule, namely: r = ρ + σg. Among them, r is the net capital rate of return, which is about 6% in the United States; g is the per capita economic growth rate, which is about 1.3%; σ is the risk avoidance parameter in the CRRA utility function, and the value is usually between 1-2. According to Stern's setting, ρ=0.1%, σ=1, then under the empirical fact of g=1.3%, there will be an estimation result with an actual return of capital of 1.4%, which is obviously different from the mainstream estimation result, or the Ramsey rule does not hold true; if the value of the parameter σ is calculated from r=6%, then σ≈4.5, which is significantly higher than the commonly used settings in the literature. It can be seen that the rationality of the "Stern Report" claim is based on the setting of ρ=0.1% and its rationality does not conform to the tradition of theoretical literature.

In addition to the confrontation of the above academic views, Nordhouse also expressed his own opinions on the design of carbon emission reduction mechanism. There are three common carbon emission reduction methods: administrative control, quantity license and corresponding trading markets, and price mechanism represented by carbon tax. Because administrative controls are prone to cause efficiency losses, they are generally not recommended. , the Kyoto Protocol, , adopted the second method. Nordhaus (2006) believes that a quantitative control framework like the Kyoto Protocol cannot avoid the problem of lack of efficiency. To achieve efficient results, it is still necessary to rely on the price mechanism. However, adopting a carbon tax scheme will also bring many problems. For example, should the carbon tax levels in different countries be the same? If the requirements are the same, it will be difficult for developing countries to accept; if there are differences, the differences will be as much as possible and how to make dynamic adjustments to differences will be politically difficult to reach consensus. Therefore, the disputes in this area still need to be studied in depth.

. Independent economist Du Meng concluded

Transformation calmly when it succeeded and transformed successfully is the most unique thing about Nordhouse.He received his Ph.D. degree and teaching position in prestigious American universities at the age of 26, and became a full professor at the age of 32, making his mark in the field of macroeconomics. When he achieved such enviable results, he began to focus on resource economics. In the following years, there was a gradual change in understanding, and more and more attention was paid to carbon emissions and climate change issues. After the 1900s, Nordhouse, who had gained a lot in the field of mainstream economics, began to turn to climate change economics with difficulty. After nine years of relative silence, he finally pioneered the construction of the Integrated Climate Change Assessment Model (IAM). This analytical framework quickly became the mainstream tool for analyzing climate change from an economic perspective, and even the IPCC, which originally focused on the field of natural sciences, gradually absorbed Nordhouse's analytical ideas. After 1991, other researchers have successively constructed many different IAM models, making IAM gradually become a branch of the discipline. However, Nordhouse's DICE and RICE models are always the two most competitive in IAM. Less than two months after the Copenhagen Climate Summit, he used RICE-2010 to give an academic judgment on the summit agreement. Today, no researcher trying to cultivate in the economics of climate change cannot ignore Nordhouse's papers and works. His perspective on problems, the models he constructed, the data he used, the programs he wrote, the long-term persistence of the past 30 years, and even his tactful and pertinent writing style were rare treasures for later people. In the view of many industry insiders, it may only be a matter of time before Nordhouse wins the Nobel Prize in Economics.

(Source: Economics Dynamics 2022)