Why Turnbull knows better than Abbott: Part I

Malcolm Turnbull's command of the detail runs rings around Abbott's homespun logic on Direct Action.

*For part II of 'Why Turnbull knows better than Abbott', click here.

Yesterday I touched on how Tony Abbott may be missing some of the complexities involved in an emissions reduction scheme based around reducing businesses’ emissions intensity (Abbott's base level logic, September 4). But in many respects it is Abbott’s fellow Coalition colleague Malcolm Turnbull that has inadvertently delivered the most incisive critique.

On Monday Abbott, in all his homespun wisdom, optimistically told the National Press Club:

... it is in everyone's economic interests … to try to reduce its costly inputs and often the most costly inputs apart from labour are fuel and power, and a sensible business wants to cut its costs as far as it reasonably can and normally that means using as little fuel and power as possible. So please, never underestimate the ordinary economic imperative to emit less.

But Malcolm Turnbull knows better. Turnbull in a speech to parliament in 2010 explained, in all his knowledgeable nerdiness, why energy efficiency by itself was unlikely to reduce our overall emissions:

I am an enthusiastic supporter of energy … efficiency. However, gross emission abatement figures … 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…. 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.

And, of course, Turnbull went on:

… the increase in fuel savings arising from the Bessemer process for steelmaking in the 19th century ... dramatically reduced the cost of steel … 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.

And after quite a few more academic references, he concluded:

It follows that energy efficiency, while very desirable, is not a solution to greenhouse gas emissions or their abatement in and of itself.

Yep, good old Malcolm, he may not be much good at humouring his less intelligent and less well-read colleagues but he is right.

You see, the problem Turnbull was outlining is that while human beings have been great at improving the efficiency with which we turn inputs into outputs, we’re rarely content with keeping the number of outputs we consume constant. Instead, we take the gains from this increased efficiency and use it to produce more outputs and therefore consume the same or even more inputs.  

Over the period of 1990-2010, while the Australian economy achieved a 20 per cent improvement in converting energy into economic output, guess what happened to overall emissions growth in energy producing and consuming sectors?

The chart below provides the answer:

Percentage change in Australian greenhouse emissions by sector since 1990
Graph for Why Turnbull knows better than Abbott: Part I

Source: Australian National Greenhouse Accounts – Quarterly update of Australia's National Greenhouse Gas Inventory (December quarter 2012).

A lot of people underestimate the potential for energy efficiency to make it easier for us to substantially reduce emissions at moderate economic cost. But while businesses have an incentive to improve efficiency, they also have a very keen interest in growing their revenue, too.

*For part II of 'Why Turnbull knows better than Abbott', click here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles