2015 Leontief Prize

2015 Leontief Prize
Awarded to Duncan Foley and Lance Taylor

Dr. Foley’s talk refuted the idea that policies to control climate change will require significant sacrifices on the part of the current generation. In fact, as greenhouse gas emissions represent an uncorrected negative externality, continuing along a business-as-usual path is inefficient. Correcting this externality, such as through a carbon tax or tradable permit system, will create large net gains that can be distributed amongst current and future generations in a variety of ways. Thus while policy debates regarding climate change typically focus on the problem of distributing costs, the actual challenge is how to distribute an economic benefit. Dr. Foley noted that while policies to address climate change will be costly, perhaps 2% of world output, investments to address climate change are ultimately welfare-enhancing. Losses to the current generation can be offset by an increase in consumption of low-carbon goods and services, financed by borrowing. Future generations would pay the interest on this debt, effectively compensating the present for the bequest of a stable climate. With effective compensation schemes, the large available net gains imply that no one need make any sacrifices to address climate change. Thus there is reason to believe that politically viable climate policies are possible.

Dr. Taylor centered his presentation on the long-term economic impacts of rising greenhouse gas emissions. He discussed the results from a demand-driven model of growth and climate change to show the benefits from reducing greenhouse gas emissions. The model he presented was adapted from a traditional predator-prey model and adjusted to allow output to be determined by effective demand along Keynesian lines. It integrates several facts left out of mainstream models, such as persistent unemployment and the link between productivity growth and labor energy consumption. Dr. Taylor presented a simulation for the business-as-usual scenario showing that a macroeconomic output crash caused by the damaging effects of climate change in the second half of the twenty-first century would result in substantial unemployment. He then looked at growth when the price of carbon is set at $44/ton of CO2 and a mitigation outlay of 1.25% of world output in order to stabilize the atmospheric CO2 concentration. In the mitigated solution, the economy would stabilize with high wages (per unit of labor) and high employment in the long-term.