2018 Nobel Memorial Prize in Economic Sciences(1)
Reason for Award
for integrating climate change into long-run macroeconomic analysis
Laureates
United States of America
Explanation
If Earth gets too hot, people and animals suffer. Mr. Nordhaus created a system that puts money flows and Earth’s temperature changes in the same chart. It shows with numbers how cars and factories release carbon dioxide that warms the planet and even predicts future temperatures. His work says that a “carbon tax” is a useful tool to cut emissions and keep Earth safe. It gives us clues on how to live comfortably in the future.
Related Keywords
Integrated Assessment Model
A model that simultaneously analyzes economy, climate, and energy subsystems, allowing numerical comparison of future scenarios. Nordhaus’s DICE/RICE pioneered the field, which now includes multi-region and stochastic-climate IAMs. They are used to simulate policies, compute optimal carbon-price paths, and calibrate damage functions. IAM outputs are referenced in IPCC assessment reports and inform national long-term decarbonization strategies. The framework visualizes bi-directional feedbacks between human society and the climate system, making it a key tool for policy analysis.
Carbon Tax
A price signal imposed per ton of CO₂ emissions that internalizes the social cost of carbon. It is an application of a Pigouvian tax: the higher the price, the stronger the incentive to cut emissions. In Nordhaus’s model, the “optimal carbon tax” is computed as the level that maximizes welfare. Real-world examples exist in the UK and Canada, where reduced fossil-fuel use has been observed. Recycling tax revenues toward low-income rebates or R&D can yield a double-dividend effect.
Social Cost of Carbon
The present value of the total damage to society—including future generations—caused by emitting one additional ton of CO₂. Estimated with IAMs such as DICE/RICE and used by the U.S. government for regulatory appraisal. The value is sensitive to discount rates and damage-function specifications, influencing perceptions of climate risk and policy stringency. Nordhaus’s early estimates placed it at several tens of dollars per ton, sparking academic and policy debate. Recent studies that incorporate stochastic catastrophes and extreme events tend to revise the value upward.
DICE Model
The Dynamic Integrated Climate-Economy (DICE) model treats the world as a single region and links greenhouse-gas emissions, atmospheric concentration, temperature, and economic growth through coupled equations. Proposed by Nordhaus in the 1990s, it is computationally light and widely used for policy analysis. Implemented as an optimal-control problem, scenario comparisons can be run in minutes. While its simplicity limits representation of regional and sectoral heterogeneity, it serves as a benchmark for conceptual validation. Extensions now include uncertainty, multiple gases, and climate thresholds to yield more realistic outcomes.
Emissions Trading Scheme
A system in which a government sets a total emissions cap and allows firms to trade allowances within that limit. The market determines the carbon price, reallocating reductions from low-cost to high-cost emitters. Nordhaus’s work shows that, with an appropriately tight cap, the scheme can achieve the same efficiency as a carbon tax. The EU ETS and California’s program are leading examples, and discussions on international linkage are intensifying. Allocation methods and price-volatility management are critical design issues.