On 8 October 2018 the Swedish Academy awarded the economics Nobel to William Nordhaus and Paul Romer for integrating climate change and technological innovation into macroeconomic analysis. What it means for companies.
On 8 October 2018, the Royal Swedish Academy of Sciences awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, known as the economics Nobel, to William Nordhaus of Yale University and Paul Romer of New York University’s Stern School of Business, formerly the World Bank’s chief economist. The prize, worth 9 million Swedish kronor (about $1.01 million), is shared between the two.
What the Academy rewarded
According to the Academy, both have significantly broadened the scope of economic analysis by building models that explain how the market economy interacts with nature and with knowledge. Their shared question is how to achieve long-term growth that is sustained and also sustainable. Nordhaus approaches it through the climate; Romer, through technology.
Nordhaus, 77, was, according to the Academy, the first to create a quantitative model describing the interplay between the economy and the climate. His integrated assessment models link economic growth with climate change and make it possible to compare the cost of curbing emissions with the cost of the damage they cause. Key inputs include the social discount rate, that is, how much value is placed today on future damage, and estimates of the cost of adapting to climate change. He has argued for a carbon tax that starts low and rises with the damage caused by emissions.
Romer, 62, is known for endogenous growth theory: growth does not arrive from outside but arises from the decisions of people and companies to create new technology. The Academy stresses that he showed how economic forces govern companies’ willingness to produce ideas and innovations. He argues that governments can foster growth by investing in research and development and through patent laws.
There is a common thread between them. According to analysis by the Bruegel think tank, growth is a problem, because it contributes to warming, and at the same time part of the solution, because the innovation it generates can reduce it. Romer’s framework also suggests that a carbon tax could spur innovations that lower emissions. A detail of timing: hours before the announcement, the UN climate panel had warned that, without a radical change, there will be more heatwaves, floods and droughts and loss of species.
What a company can learn
Both themes reach companies’ accounts. In Europe, large industrial and power installations are already subject to a carbon price through the EU emissions trading system, and a company that uses a lot of energy can build that cost, and its possible evolution, into its forecasts. Others can ask how much energy they buy, from which suppliers and under what contracts, and how much room they have to use less.
Romer’s lesson is that innovation is a decision that can be encouraged. In Spain, Corporate Income Tax provides for deductions for research and development and technological innovation activities, which a company can assess with its tax adviser, taking care to document projects and expenses. A family business can ask what share of its budget goes to improving products and processes and what share, quite simply, to maintaining what it already has. Ask your adviser how it applies to your case.
Climate and innovation are no longer separate topics: they enter the calculation of growth.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
