Nobel Prize-winning economist says carbon taxes are the solution to climate change

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Just hours before William Nordhaus and Paul Romer won a Nobel Prize on Monday for their work on the economics of climate change, the UN issued a dire warning about global warming. 

The report from the Intergovernmental Panel on Climate Change says that an extra single degree of heat could make a life-or-death difference in the next few decades for multitudes of people and ecosystems on this fast-warming planet. 

But Romer — whose work focuses on adapting economic theory to take better account of environmental issues and technological progress — says this crisis can easily be averted through economic policy.

The economist from New York University's Stern School of Business spoke with As It Happens host Carol Off. Here is part of their conversation.

I always hate to ask this question, but in a nutshell, can you describe your life's work?

A lot of economics is about stuff. You know, like more wheat or more corn.

And in that world, you're always facing tradeoffs. 

Bill and I are both focused on something very different, which is if we make the right discoveries, we can get more and more wheat and more of everything else. And that the real win is the discovery of better ways to do things.

[Nordhaus] started to work on some specific questions related to climate change. I've been working on things related to development and urbanization.

But, you know, for both of us there's just this conviction that if we create the right nudge in this direction and get this amazing economic system trying to solve an important social problem, it will make huge progress. You know, much more than most people think.

What does your work tell us we could do or must do more to help avert this crisis that has been described by the IPCC?

People systematically underestimate the potential to discover better ways to do things.

I believe, and I think Bill believes, that if we start encouraging people to find ways to produce lower carbon energy, everybody's going to be surprised at the progress we'll make as we go down that path. 

All we need to do is create some incentives that get people going in that direction, and that we don't know exactly what solution will come out of it — but we'll make big progress.

We just need to get busy and solve this problem.

But why is it so difficult? Because it's not happening, is it? I mean, in our own country in Canada, we're seeing the three steps forward, two steps back on this.

The policy is very simple. If you just commit to a tax on the usage of fuels that directly or indirectly release greenhouse gases, and then you make that tax increase steadily in the future ... people will see that there's a big profit to be made from figuring out ways to supply energy where they can do it without incurring the tax.

The problem is not knowing what to do. The problem is getting a consensus to act.

Our political systems seem to be paralyzed these days. They can't make decisions. And the fighting over the paralysis could drag scientists in and we could even lose this kind of objectivity of just presenting the facts.

I don't know how to solve the political impasse and get to a point where our political processes can make decisions again. But I do know it would be a terrible mistake for scientists to jump in and try and become political actors, because we would just undermine what's special about what we can contribute.

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But if your ideas make sense from a business point of view, from a growth point of view, why do governments have to intervene at all to make it happen? Why can't it happen through market forces?

We know that the market system doesn't guide people in the right direction when their actions impose costs on others.

So what we need to do is not just, like, preach or exhort, but we need to just say, "Look, we're going to start to put a tax on this."

And that will mean that the people who were thinking about using carbon-based fuels will ... have an incentive to switch, and others will have an incentive to discover new solutions. 

Some years ago, you said, "A crisis is a terrible thing to waste." ... So is this a crisis that could spur action?

I think as more and more evidence accumulates about rising temperatures and changes in the climate, eventually, at some point, the political systems will start to move.

We just have to, you know, do our best to ... present the facts to people. You know, try to kind of tone down some of this emotional back and forth that's making it hard for people to think clearly and just be confident that at some point, we'll be better. We'll be ready to intervene.

Written by Sheena Goodyear with files from Associated Press. Produced by Richard Raycraft. Q&A has been edited for length and clarity.