CSR: Sending out the wrong message on climate change


Olivier Holmey
Published on:

A prestigious award in economics could encourage complacency, rather than forceful action, on fossil fuel consumption.


William Nordhaus, a prominent economist and the former chair of Boston Federal Reserve Bank, won the most prestigious prize in economics on October 8 for a lifetime of research integrating climate change into long-term macroeconomic analysis.

That the Sveriges Riksbank Prize in Economic Sciences – sometimes known as the Nobel Prize in Economics – would go to Nordhaus may at first seem like an encouraging sign that the scholarly economic community is waking up to the monumental environmental challenges ahead, and is prepared to support those who research how the economy and climate affect each other.

After all, Nordhaus decided to devote his work to this area of research as early as the 1970s, when climate change studies were still in their infancy.

As the awarding committee recognised, his models have allowed us to assess different economic growth paths and their implications for the climate that future generations will inherit.

Carbon taxes and emission quotas are among the practical applications of his model. These can majorly contribute to keeping global warming in check.

As Cesar Purisima, formerly the secretary of finance of the Philippines, told Euromoney last year: “Coal is considered cheap because we don’t tax carbon. If you do, economic decisions and feasibility decisions will change.”


Still, Nordhaus’s win sends out the wrong message.

It suggests that he is the preeminent economic voice on how to adjust human activities to counter the rise in global temperatures, when in reality his once revolutionary research now appears outdated, in view of scientists’ latest assessments of the risks we face.

William Nordhaus, sterling professor of economics at Yale University

The United Nation’s latest report on the impacts of global warming, produced by the Intergovernmental Panel on Climate Change (IPCC) and published the same day as the announcement of Nordhaus’s win, indicates the need to limit global warming to 1.5°C above “pre-industrial levels”.

Failing to meet that target by only 0.5°C would mean the loss of virtually all coral reefs by 2100, to relay just one example given by the IPCC. The effects on human populations would also likely be dramatic.

Hans-Otto Pörtner, a biologist and climate researcher who worked on the report, was quoted in the IPCC’s statement as saying: “Every extra bit of warming matters, especially since warming of 1.5°C or higher increases the risk associated with long-lasting or irreversible changes, such as the loss of some ecosystems.”

With that in mind, Nordhaus’s approach appears complacent. Indeed, the economist considers a fall in carbon emissions from 35 gigatons in 2015 to about 15Gt in 2100 to be an “optimal” trajectory, even though that would entail warming 1°C to 2°C above the risk ceiling determined by the IPCC.

That is because, in Nordhaus’s view: “Efficient emissions reductions follow a ‘policy ramp’, in which policies involve modest rates of emissions reductions in the near term, followed by sharp reductions in the medium and long term.”

Nordhaus may have been early to this area of research, but he now looks out of step with its latest developments 

While one may see the rationale in easing governments and corporations into more responsible emissions, the already dire effects of global warming described in the IPCC’s report, and the expected worsening that lies ahead, preclude such a response, and undermine the credibility of Nordhaus’s approach.

As Tanguy Claquin, a climate scientist who now works on green finance at Crédit Agricole, told Euromoney’s CSR editor Helen Avery last month: “Most people don’t realise it’s already too late – the world in 2050 is going to be very different, and there will be places that are not pleasant to live in. The social consequences will be huge. Air and water quality are already a challenge – and that will worsen.”

Nordhaus’s model contemplates, by 2050, only a 25% reduction in carbon emissions compared to a baseline where no significant emissions reductions are imposed – hardly the sort of change that would mitigate the catastrophic scenario laid out by Claquin and many others. And far below the 45% cut from 2010 levels, by 2030, needed, according to the IPCC, to reach carbon neutrality by the middle of the century.

Nordhaus may have been early to this area of research, but he now looks out of step with its latest developments.

It is a lost opportunity for this prestigious award, which might instead have gone to Nicholas Stern, an economist who has called climate change “the greatest market failure the world has ever seen”, and promoted immediate and forceful action to tackle the issue.

“There is still time to avoid the worst impacts of climate change, if we take strong action now,” he wrote in an influential report commissioned by the British government in 2006 – and criticised by Nordhaus. (Stern proved gracious to Nordhaus, however, issuing a statement to congratulate him on his win.)

If one had to pick a source of inspiration for banks between the two, Stern would be the obvious candidate.


For too long, financial institutions have been complacent on the issue of climate change, and while they increasingly devote time, capital and energy to green and blue finance, their approach is still much closer to the Nordhausian ‘policy ramp’ than to Stern’s more radical recommendations.

And banks can even fall short of Nordhaus.

As a report by BankTrack into 36 of the world’s largest private banks revealed earlier this year, financing for what the organization calls “extreme fossil fuels” – meaning the most environmentally damaging fuels, such as tar sands, Arctic and ultra-deepwater oil, and coal – actually increased in 2017, from $104 billion to $115 billion.

In this context, we can ill afford to send out the message that there is still plenty of time to act. Such a view undermines those in banks making the case for a swifter transformation of their institution’s economic models.

That the timing of Nordhaus’s win coincided with the publication of the IPCC’s report simply serves to highlight the enduring chasm between scientists and economic actors. That should give us pause.