In my ongoing research, I argue that Paul Romer's work provides a framework for re-evaluating the Nordhaus core model. I explore this theme in this 2018 paper with Zhao.
Bill Nordhaus made a major contribution when he explicitly wrote out equations positing that economic growth causes climate change (through creating more GHG emissions) and the feedback equation that climate change (in his model a warmer earth) lowers economic growth. This second equation is his "damage function".
For example, take a look at page 23 (equation 2.16) of the Boyer and Nordhaus book. I will soon submit a 300 page book to Yale University Press that solely focuses on this one equation. My book argues that this equation is not a "stationary law of physics". When a process is "stationary", the key coefficients (i.e the thetas in his equation) never change over time. Endogenous innovation is such that these coefficients do change over time and the key to making scientific progress is to investigate this often messy process. Due to rising human capital, innovation and free markets, each day we become better at adapting to the ambiguous risk that climate change now poses for us as individuals, firms and governments.
As a microeconomist who works on environmental and urban issues, I argue that that we are now an urbanized people and we live in many different cities that are continually reorganizing themselves to cope with new risks. This "evolutionary process" is hard to mathematically model but Hayek would appreciate that this evolving approach means that no one set of "fixed" theta parameters exist (see the Nordhaus equation 2.16 again). The impact of climate change on our economy is actually shrinking over time due to adaptation. The rate of this adaptation is determined by the ideas embodied in Paul Romer's work but these ideas are missing in the Nordhaus work. Thus, there is a slight irony to the 2018 Prize. Bill Nordhaus has given us an excellent foundation but to make real progress on thinking about our future, we must incorporate Romer's insights into the Nordhaus model.
For a preview of my book, let me point you to my writing from back in 2010 related to my popular press Climatopolis book. My new book is much more academic than my Climatopolis book and does a good job sketching out what I have learned about adaptation over the last 8 years and where the academic literature has gone.
Here is my co-authored piece relating Romer's Charter Cities idea to climate change adaptation.
Finally, my friends at PERC published my piece back in 2016 that takes a fresh look at the urban economics of climate change adaptation.
Endogenous technological change is "messy" and it is difficult to predict the direction it will go. In Nordhaus' core model, there is no endogenous technological adaptation change. This simplifies the math but it has major implications for the inference and relevance of the model. It also zeroes out millions of behavioral margins of adjustment. Take a close look at that equation 2.16 that I point you to above and tell me if the rise of new ideas and human capital really have no impact on attenuating that "damage function"? What would Paul Romer and Robert Lucas say?