It was founded in its current form by Svein Rosseland with funding from the Rockefeller Foundation in 1934, and was the first of its kind in the world when it opened.

However, rector Sem Sæland of the University of Oslo saw this as a great loss, as Rosseland already had become an internationally renowned scientist at the time.

Sæland coordinated a political effort in which Rosseland was offered to manage an astronomical fund provided by the state, prospects of new university facilities, and was promised a general renovation of the observatory.

He then contacted Niels Bohr in Copenhagen who recently had founded the Institute of Theoretical Physics for inspiration and his level plans.

[4][5] The architectural firm of Finn Bryn and Johan Fredrik Ellefsen designed the building for Rosseland at Blindern campus in Oslo.

In the early days, the institute housed Rosseland himself, his assistant Gunnar Randers, two of the founders of modern meteorology: retired Norwegian dean of science Vilhelm Bjerknes and professor Halvor Solberg, as well as Carl Størmer, a mathematics professor who also studied the northern lights.

The institute contributed to, and made use of, the solar imager High Resolution Telescope and Spectrograph of the Naval Research Laboratory which was launched on rockets and flew once with the Space Shuttle between 1975 and 1985.

The works of the former celestial mechanics research group at the institute were instrumental in determining the path ESA's Rosetta spacecraft would take when approaching its target, the comet 67P/Churyumov–Gerasimenko in 2014.

[11] The institute lead the Norwegian contributions to the Planck mission of ESA until its final release of results in 2018.

Scientists at the institute were instrumental in analyzing the resulting maps of the cosmic microwave background (CMB).

The solar physics group at the institute was granted status as a Norwegian Centre of Excellence in 2017 for the period 2017–2027 under the direction of Mats Carlsson.

The cosmology group is engaged in analysis of data from cosmic microwave background-related experiments such as CORE, GreenPol, LiteBIRD, PASIPHAE, QUIET and SPIDER.

With an allocated amount of 115 million CPU hours in 2018, it also is the most data intensive research group in Norway.