Planetary Economics: Energy, Climate Change and the Three Domains of Sustainable Development Michael Grubb with Jean-Charles Hourcade and Karsten Neuhoff. Routledge: 2014.

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Michael Grubb's provocative Planetary Economics claims to be about the “grand challenges of energy and environment”, but is really about the relationship between energy and climate change. Grubb briefly notes the scale of the problem: for atmospheric levels of greenhouse gases to be stabilized, net emissions must fall to zero. His focus, however, is on reducing energy consumption and carbon emissions, irrespective of the need to meet any particular target for greenhouse-gas concentrations. It is unclear how much emissions would fall if the book's ideas were actually implemented.

Written with input from fellow climate-policy researchers Jean-Charles Hourcade and Karsten Neuhoff, this is a long and at times repetitive book; but there is something interesting on every page. It reflects a wealth of accumulated wisdom: Grubb has engaged with these issues for more than two decades.

He is critical of dominant theories, such as the assumption that economic agents are rational and optimize every decision. He says that this approach fails to capture the complexities, overestimating the costs of reducing emissions and underestimating the benefits. He rejects the cost–benefit framing and its estimates of the “social cost of carbon” — a concept that puts a monetary value on the damage associated with a 1-tonne increase in carbon dioxide emissions. Instead, Grubb seems to endorse the political target of keeping global temperature rise below 2 °C, as agreed at the 2009 meeting of the United Nations Framework Convention on Climate Change (UNFCCC). Yet the economist Nicholas Stern has supported the same target, in part with reference to the social cost of carbon. It is true that greenhouse-gas concentrations have continued to creep up, threatening any possibility of achieving the target. However, there is no evidence that economic theories are to blame for the failure to cut emissions.

What is the solution? Grubb's thesis is that reducing energy consumption and its associated emissions requires policy changes in three domains: satisficing, optimizing and transforming. In satisficing, people and firms overlook cost-effective ways to save energy, such as investing in insulation that promises a reduction in energy bills. Policy can help by nudging an economy closer to the energy-use efficiency frontier, for example by introducing standards for appliances, production processes, buildings and cars. In the second domain, optimizing, people and firms respond to price signals; this ushers in an argument in favour of carbon taxes and cap-and-trade schemes, which allow participants to trade emissions allowances under an overall cap. Transforming involves revolutionizing technology through innovation and investment in infrastructure such as improved electricity transmission.

Grubb argues that advancement demands progress in all of these mutually reinforcing domains. This argument is compelling, but the real questions are how far policy should go in each domain, and precisely how such policy should be devised. How should decisions be made about setting standards, designing cap-and-trade schemes and choosing strategic investments, if not through a cost–benefit rule? How should a carbon tax be chosen if not with reference to the social cost of carbon? Grubb challenges the idea that the price of carbon should be the same everywhere, supporting instead a “base level” price for developing countries, with others setting higher prices. He backs this in part by appealing to basic welfare economics. But that, as he notes, assumes that financial transfers from rich to poor countries are infeasible, which sits oddly with the fact that rich countries have pledged billions of dollars to the UNFCCC's Green Climate Fund to help poorer nations to mitigate emissions and adapt to climate impacts.

The book's greatest weakness is its lack of an overarching framework. The introduction acknowledges the importance of global collective action, but states that the problem is beyond the book's scope. Grubb concludes that the “next phase of the global effort ... is a question of investment and returns”. But which nations are to make the investments, which to earn the returns? Countries care about the answers. That is why so much effort has gone into climate negotiations.

Such answers will not be central to how countries address most of the issues in Grubb's first domain. Measures to increase energy efficiency must satisfy mainly domestic criteria, although international trade links will be important for setting technology standards. However, global questions and answers are key to the other domains. They will matter when a country sets a carbon price. They will matter in relation to the investment that countries are willing to give to decarbonization, not least because such investments will pay off only if the carbon price is high.

Despite the criticisms, the book's thesis is relevant to current climate negotiations, which seem to be focusing on what countries are willing to do individually: a kind of enhanced 'business as usual' approach. But for the immense scale of action needed to stabilize concentrations of greenhouse gases — even at a level allowing global temperatures to rise by more than 2 °C — collective action is essential.