Foley and Taylor win Leontief Prize for Climate Change Research – a Praise

By Daniele Tavani Monday, October 6, 2014 0 , , Permalink 0

Duncan K. Foley and Lance Taylor were named winners of the Leontief Prize for advancing the frontiers of economic thought, awarded by the Global Development and Environment Institute at Tufts University.

Quoting from the GDAE website, “The award recognizes the contributions that these researchers have made to our understanding of the relationships between environmental quality and the macroeconomy.”

This is obviously great news, and a much deserved award for two amazing scholars. The prize is especially timely in light of recent developments in the public discourse regarding climate change. The International Monetary Fund has published a much discussed working paper, also cited by Paul Krugman in a recent NYTimes column, arguing that measures aimed at limiting carbon emissions would have little or no negative effects on economic growth. In fact, they could even be growth-enhancing.

The argument goes contra the standard understanding of climate change policies according to the benchmark framework available, namely the DICE model by Nordhaus and associates. One of the main claims of the DICE model is that a carbon tax or cap and trade schemes would harm growth in the near future, but would put the economy on a path involving higher growth over the long run. The claim rests on the comparison between a “business-as-usual” (BAU) growth path in which no resources are spent on mitigation, as opposed to the “optimal” growth path in which the negative effects of climate change are taken into account. For a while, the BAU path dominates the optimal path. After a certain point, the optimal growth path dominates the BAU scenario. Thus, climate change generates intergenerational conflict: correcting the BAU path to mimic the optimal path would certainly be better for future generations, but comes at a cost to the current generation.

The IMF argument is that recent technological improvements have made carbon policies cheaper than previously thought, and so the cost to current generations is much less than previously thought. I see this recent development in the views regarding climate change as a vindication of a (more neat and compelling) argument made a while ago by, guess who, Duncan Foley and Lance Taylor (and Armon Rezai).

In 2012, Duncan and Lance together with Armon Rezai (a classmate at the New School), published a paper in Economic Theory (subscription required. The paper constituted a building block of Armon’s excellent 2009 dissertation) challenging the standard view. The argument is that, if climate change is a negative externality, there will be no cost to current generations to correct it, even without technological progress. The reasoning gets somewhat technical (in a beautiful Yale-style economics kind of way, for the general equilibrium geeks out there). Basically, the BAU path is not the path involving zero mitigation: it is the path corresponding to zero penalty attached to correcting the negative externalities caused by carbon emissions. Accordingly, Nordhaus wrongly characterizes the BAU path, thus obtaining wrong policy implications. The Rezai-Foley-Taylor argument implies that, even though it is going to cost money, mitigating carbon emissions is a win-win policy, because it puts immediately the economy on a growth path that is better than the BAU path.

This is indeed a moment to celebrate two exceptional scholars, and their legacy (which goes way beyond their contributions to the economics of climate change).



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