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Tuesday, 22 June 2010
Page: 6157

Mr TURNBULL (7:12 PM) —It is widely accepted that there are considerable opportunities for greenhouse gas abatement through energy efficiency. The IPCC has estimated that by 2030 about 30 per cent of global greenhouse gas emissions from energy use in buildings could be avoided at zero or minimal cost. Locally the Australian Sustainable Built Environment Council has estimated 27 to 31 per cent of emissions from buildings could be abated at zero economic cost. Reductions of this order are not trivial. In the context of Australia’s total carbon emission profile of around 600 million tonnes, they turn out to be close to 10 per cent of our total emissions. McKinsey has estimated that the Australian building sector could by 2020 achieve abatement of close to 50 million tonnes, while the Centre for International Economics has estimated an abatement of about 45 million tonnes of CO2 could be achieved at a low cost or negative net cost—in other words, at a gain.

Unlocking those opportunities is not easy. According to the Green Building Council, 97 per cent of existing buildings are too old to have been built with energy efficiency measures. That means retrofits to the existing building stock are just as important, if not more important, as building new structures to high standards of energy and water efficiency. A key element in achieving this goal is information, and that is the object of the Building Energy Efficiency Disclosure Bill 2010 that is before the House. It will require energy efficiency information to be provided to prospective purchasers and lessees of commercial office space of 2,000 square metres or more. This will be done in the form of a building energy efficiency certificate, which will include an energy efficiency star rating together with information about lighting energy efficiency as well as guidance as to how the building’s overall energy efficiency might be improved.

Another element in the quest for better energy efficiency in the built environment is appropriate incentives, which is why in 2009 I announced that the coalition would introduce accelerated depreciation rates for capital spending on green buildings. This would be a doubling of the depreciation rates normally applicable to investment in buildings or improvements which meet specified energy efficiency standards. Such accelerated depreciation does reduce tax revenues in the short term, although this is offset, at least in part, by higher collections in the future as the net income from the improved buildings increases. The Centre for International Economics has estimated that green depreciation of this kind would lead to a deferral of revenue of approximately $560 million over the first four years of the scheme.

So much of the energy requirement in our built environment is literally built in. Too much of our building stock was created on the assumption that every requirement of heating, cooling, lighting or electricity could be provided with abundant and very cheap power. That assumption is being challenged now with rising energy costs and will be increasingly challenged in the future. ClimateWorks Australia’s Low carbon growth plan for Australia recently identified emission reduction opportunities of 28 million tonnes of CO2 equivalent by 2020, a 28 per cent reduction on business-as-usual emissions. The commercial sector accounts for 77 per cent of this potential, most of which comes through improved efficiency via better technology, including more efficient lighting systems and other electrical appliances and equipment as well as reducing energy loss from refrigeration and ovens. The study argues that one of the biggest obstacles to achieving these efficiencies is gaps in information. It says:

In many cases, homeowners and businesses—in particular those with low energy bills as a proportion of outgoings—may not closely follow how much energy they use, and the savings which could be achieved through improved energy efficiency. Moreover, the equipment needed to estimate and verify energy savings is not readily available and comes with a cost, making it difficult to build traction on energy efficiency measures. Even when energy efficiency measures are pursued, savings are often undermined by a lack of understanding of the proper use of new equipment, or inadequate investment in the skills of auditors and contractors.

The disclosure regime set up by this bill seeks to address this information gap. There are numerous opportunities for energy efficiency at low or negative net cost and especially so with new buildings, of course. Buildings that have appropriate awnings to keep sun away from windows will need less cooling as will buildings with breezeways.

One of the ironies is that some of our oldest buildings are the most energy efficient. An old Queenslander, built up on stilts with big verandahs, is a much more sustainable, energy efficient dwelling than the modern equivalent built on a concrete slab, more often than not with no eaves—in short, no protection from a baking sun and no means to take advantage of a cooling breeze, and consequently only bearable during the height of the summer’s heat by reason of air conditioning.

Another area where we have gone backwards is in the use of water. Imagine if every new building was required simply to do this: plumb the blackwater and the greywater separately, collect the greywater in a tank and recycle it through the toilet cisterns. This greywater could be supplemented with rainwater if it was felt that it was not appropriate to use rainwater for drinking or washing purposes. The cost of this at the outset is very modest—some metres of additional poly pipe—but to retrofit it when the plumbing is encased in concrete floors is prohibitive. There is an important insight to bear in mind here. Water has a very high weight and volume—1,000 litres is a cubic metre and weighs a tonne—relative to value. So moving it around is more often than not the bulk of the cost of water. Hence, being able to use and re-use water onsite not only saves water but saves energy.

Now, I trust it is plain from what I have said that I am an enthusiastic supporter of energy and, indeed, water efficiency. However, gross emission abatement figures cited, including those that I have just cited, often fail to take into account what is known as the Jevons paradox. This paradox was described in 1865 by the British economist William Stanley Jevons in his work The Coal Question: Can Britain Survive? He wrote:

… it is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth … Every improvement of the engine when effected will only accelerate anew consumption of coal.

In 1865 he pointed to the experience of the Scottish iron industry, where the consumption of coal per tonne of iron had dropped by one-third but the consumption of coal, because of the enormous increase in the production of iron, had increased 10 times over.

This paradox has bedevilled the debate about energy efficiency ever since. It was considered in some depth in 2005 by the House of Lords Select Committee on Science and Technology which took evidence from Dr Brookes who, together with another economist, Daniel Khazzoom, had simultaneously published papers elaborating on the Jevons paradox in 1979. The report of the select committee said:

Dr Brookes’ argument is that for any resource, including energy, “to offer greater utility per unit is for it to enjoy a reduction in its implicit price”. Cheaper energy has two effects: the substitution of energy for other factors of production, which are now relatively more expensive, and the release of income which can then be reinvested in new production capacity, and so on. As a result, Dr Brookes argues, developed countries, have since the Industrial Revolution, seen “rising energy productivity outstripped by rising total factor productivity, hence rising energy consumption alongside rising energy productivity”.

The report went on to observe:

… there appears to be no example of a developed society that has succeeded in combining sustained reductions in energy consumption with economic growth.

We can observe the phenomenon of the Jevons paradox in our own homes. A modern refrigerator and a modern television are far more energy efficient. But our modern refrigerator is likely to be larger than the old one and our modern television is likely to be a flat-screen television whose output is vastly greater than that of the old television. And of course there are a range of other electrical appliances that simply did not exist before.

Many studies have demonstrated that increases in the energy efficiency of heating and cooling, for example, by the installation of insulation, have resulted in householders seeking greater comfort and hence using more energy. In The Bottomless Well, Peter Huber and Mark Mills explained how this paradox comes about:

Efficiency may curtail demand in the short term, for the specific task at hand. But its long-term impact is just the opposite. When steam- powered plants, jet turbines, car engines, light bulbs, electric motors, air conditioners and computers were much less efficient than today, they also consumed much less energy. The more efficient they grew, the more of them we built, and the more we used them —and the more energy they consumed overall.

This direct rebound effect, as it is termed—that is, using the same device to achieve greater output than before—has been estimated to be, in many situations, as much as 50 per cent, and the indirect effect can be much greater. Indirect rebound effects can simply involve the savings from energy efficiency being invested in other activities which require the use of energy. An example would be that a person buys a more energy efficient vehicle so they get more miles per gallon—one assumes the price of fuel has not changed—and they take that opportunity to drive more miles and hence use the same amount of fuel, albeit more efficiently. That is a direct rebound. An indirect rebound would be if the fuel savings were then invested in a holiday, to take an aeroplane to a foreign destination and thereby consume fuel or to buy some other good or service in which there is embodied energy. The other form of indirect rebound comes from an economy-wide increase in productivity, which increases economic activity and hence the overall need of the economy for energy. In other words, it increases the demand for goods and services, all of which have an embodied energy component.

In a recent paper in the journal Energy Policy, Steve Sorrell refers to the increase in fuel savings arising from the Bessemer process for steelmaking in the 19th century, which dramatically reduced the cost of steel. My recollection is that it was from around ₤40 a tonne, in the money of the day, to ₤6 a tonne. Not only did this result in much more steelmaking requiring much more coal because it made steel cheaper and more available—notwithstanding the efficiency obtained by the new process—but the new steel was used in building railroads and other infrastructure, all of which had, caused or initiated their own energy demands. In some cases this rebound can be so substantial as to result in what is called a backfire—literally, a situation where the energy efficiency actually results in more energy being required.

It follows that energy efficiency, while very desirable, is not a solution to greenhouse gas emissions or their abatement in and of itself. Because energy efficiency means that for a given amount of energy there will be more output, the energy becomes less expensive in output value terms. In other words, the energy, whether it is a tonne of coal, a kilowatt hour of electricity or a litre of petrol, may have the same price—its price might be changed—but the output, product, service or result that the energy acquires has become cheaper because you can acquire more of it with the same amount of energy. If the price of the energy remains the same then, so long as demand is elastic, there will be more energy consumed.

Another observation worth making in this context is that the object of climate policy is not to reduce the use of energy per se but rather to reduce the emissions intensity of the energy we use—or, to put it another way, to decrease the amount of energy we use generated from burning coal, for example, and increase the amount of energy we use generated from zero- or low-emission sources. When we talk about putting a price on carbon, what we are seeking to do is to make carbon intensive energy more expensive relative to less carbon intensive energy.

As most of our energy in Australia is generated from burning coal and as low-emission generation is—at least in the present state of technology—more expensive, it follows that any policy to cut greenhouse gas emissions, unless it is funded directly from the taxpayer’s purse, will increase the cost of energy. This will offset the impact of the Jevons paradox and result in any rebound in energy usage stimulated by the increase in efficiency being at least moderated to some extent by the price increase.

The Jevons paradox is a reminder that there is no substitute for ensuring that the focus of policy be keenly directed to the objective of the policy. If that objective is, as it should be, the reduction in greenhouse gas emissions then we will need, whether by an emissions trading scheme, a carbon tax or by regulation, to put a price on those emissions and change the price of carbon intensive energy relative to less carbon intensive energy and thereby, over time, transition our economy to a low-emission economy.

Some flaws in this legislation were identified by the coalition and through the Senate committee process. I am pleased that the government has responded constructively to those concerns and, as a consequence, with those amendments agreed to, the bill has the support of the opposition. I commend the bill to the House.