The academy announced that the two economists have "significantly broadened the scope of economic analysis by constructing models that explain how the market economy interacts with nature and knowledge". His "endogenous growth theory", developed in the 1990s, opened new avenues of research on how policies and regulations can prompt new ideas and economic innovation.
The awarding of the prize proved timely, given it coincided with the release of findings from a United Nations panel warning of ominous consequences of climate change and calling on world leaders to respond with greater urgency.
Nordhaus has called for a worldwide tax on any activities that produce the waste gas carbon dioxide.
Romer, New York University Stern School of Business professor, shares the honor with William Nordhaus of Yale.
His economic approaches to global warming include modelling to determine the efficient path for coping with climate change.
"One of the problems with the current situation is that many people think that dealing with protecting the environment will be so costly and so hard that they will ignore the problem and deny it exists", he said.
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"Humans are capable of wonderful accomplishments if we set our minds to it", Romer added.
U.S. President Donald Trump has repeatedly called climate change a hoax, and previous year announced that he would withdraw the United States from a global pact to combat it reached in 2015, calling the deal's demands for emissions cuts too costly.
Romer teaches economics at New York University, where he founded the Stern Urbanization Project, which researches how policymakers can harness the rapid growth of cities to create economic opportunity and undertake systemic social reform.
Hours before the award, the United Nations panel on climate changed warned of the risks of more frequent heat waves, floods and drought in some regions as well as the loss of species without a radical rethink in how societies operate. Many Republicans in Congress have also expressed skepticism about whether or how much human beings are contributing to global warming and whether the USA government ought to take steps to address it.
Scientist Alfred Nobel's will, which established the Nobel awards, only mentions the field of physiology (or medicine), literature, physics, chemistry and peace.
Per Stromberg, head of the Nobel economics prize committee, said the award is "about the long-run future of the world economy". Romer and Nordhaus "had similar views about economic policy and market failure, even though superficially they looked different". Last year's prize went to American Richard Thaler for studying how human irrationality affects economic theory.