 Thank you, everyone, for coming out on a cold Washington morning. Really appreciate it. We're really excited to be here today to talk about a really important subject with a really extraordinary national leader. But first, let me introduce myself. I'm Patrick Doherty. I'm the director of the Smart Strategy Initiative here at the New America Foundation. We're looking at a lot of the questions that McKinsey is digging into at a very granular level here, but recognizing that America is facing some great strategic challenges. They don't look like the strategic challenges that we've faced in the past. Resource productivity is part of it. What we're saying is that there's an incredible challenge that we call global unsustainability. It's four components. It's this component that we're talking about today. It's the process of including three billion people into the middle class, the global middle class. It's the process of ecological depletion, not only climate but other ecosystem services. It's the process of deleveraging the macro debt cycle that is so dominating our politics and our economic life. And it's the process of diminishing resilience. Our systems, our supply chains, our structures, our fundamental networks are brittle, prone to shock, disruption and capture. We're living at the intersection of these four great challenges and our politics needs to be really focused on addressing them and moving us into a brighter 21st century. And I'm extraordinarily pleased that we can have, I think, the foundation piece of that conversation and start that here today with you. You know, it's also our greatest opportunity. And as I think you'll see in the extraordinary presentation from McKinsey and when you read the report, capturing the resource productivity revolution is an extraordinary opportunity for the United States and for the rest of the world. Three billion people coming into the middle class is an extraordinary market. It's an extraordinary opportunity to align the next generation of U.S. productivity and production to meet the global demand out in the marketplace. And I think the McKinsey work here is really showing a roadmap on how to get there and what we need to do. So it's good for jobs. It's also good for communities. Communities like the great state of Indiana used to work for another Hoosier, Tim Romer, and was raised in a Rust Belt city called Buffalo, not unlike Gary, Indiana, that needs some productive, a return to productive manufacturing and economic life. And really jumping on this opportunity is going to be how we're going to get there. So we have a great day today. First we're going to listen to the opening remarks from Senator Luger. We'll introduce in just a moment. We'll then go into a presentation of the findings from the report with Scott Nyquist and Frazier Thompson from the McKinsey Global Institute. Then we'll have a panel conversation about this extraordinary report that's going to be moderated by Ed McBride from The Economist. So what I want to do now is just introduce the Senator. He is the U.S. Senate's most senior Republican and the longest serving member of Congress from the state of Indiana. He's the Republican leader of the Foreign Relations Committee and the former chairman of Agriculture and Nutrition and the Forestry Committee. He's sitting at the intersection in his own intellectual and leadership life of these issues that we're dealing with today. He won a sixth term in 2006 with 87% of the vote. Not surprisingly, he was a Rhodes Scholar and served as an intelligence briefer for Admiral Arleigh Burke, Chief of Naval Operations. He's also very practical and pragmatic. The Senator manages his 604-acre Marion County farm with corn, soy, and trees, if I'm right. But he was also the mayor of Indianapolis. He knows it's just an extraordinary confluence of the life experiences that can lead a public intellectual to, I think, the same conclusions that so many of us are coming to about the great challenges facing the country. But he's also a reformer. Senator Luger was as chairman of the Agriculture Committee. He built bipartisan support in 1996 for federal farm program reforms ending 1930s-era federal production controls. And it's that type of experience, that type of vision to recognize what we need to change so that we can adapt successfully for the future. That is the kind of leadership that this country needs on both sides of the aisle. So I'm extraordinarily pleased to introduce the Senator. And thank you again for everyone for coming today. Patrick, I thank you for that very kind and generous introduction. I'm pleased and I'm honored to be a part of this discussion today with these opening remarks of a kickoff of what I know will be a very important and lively discussion of some of the most important issues obviously facing our country and our world today. I congratulate especially the McKenzie Global Institute and the McKenzie In Company for taking such a comprehensive look at the implications of growing demands on resources, not only from the increase in population numbers, but even more importantly from the increase in population wealth. As the report you will discuss today suggests, the addition of three billion new middle class consumers over the next 20 years will place enormous challenges on our resource base and on our environment. It will also create great opportunities for countries and companies that can help meet those challenges through innovative technologies. I'm particularly pleased to see this work because I've long been interested in the impact of resource shortages on America's national security and our economy. I have been especially concerned with food security and energy security. I commend McKenney for highlighting these issues in the report. And a piece that I co-authored some time ago with the late Dr. Norman Borlaug, the father of the Green Revolution. We estimated that considering trends in population growth, economic growth and most especially improved diets, the world would have to at least double its food production by the year 2050. And we recognize that given environmental, climate and other constraints, we would have to produce this doubled harvest on roughly the same amount of land that is now under cultivation today and probably with less water. A meeting these increased demands for food is of course a humanitarian imperative. But it also has significant national security and economic implications for the United States. As former Defense Secretary Robert Gates once noted, the poverty and despair that often accompany hunger in developing countries can breed instability and sometimes terrorism. Famine and chronic food shortages can lead to mass migrations that can destabilize entire regions. Governments that cannot feed their own people invite their own downfall, as we have seen so dramatically in the recent Arab Spring situations. In recent years, we have seen two clear examples of how hunger can lead to instability and conflict. The first was in 2008 when a spike in global food prices sparked distribution in many countries around the world. At one count, there were food riots, sometimes quite violent. In 15 countries, as a matter of fact, in Asia, Latin America and Middle East and Africa. And more recently, as some have argued, the upheavals in the Middle East have their roots in high food prices. Following the self-immolation death of a Tunisian-produced vendor, the subsequent pro-democracy demonstrations included protesters waving baguettes because grain prices had reached intolerably high levels. I believe it's more than a coincidence that in December 2010, when the Arab Spring began, an index of global food prices had reached a record high, even higher than 2008. An article in Foreign Affairs Magazine earlier this year noted that a list of the world's major wheat importers in 2010 included a number of Middle Eastern countries where governments are fragile or have already fallen. They include Egypt, Algeria, Morocco, Yemen, Libya and Tunisia. So the importance of meeting the world's future food needs is high. It is a complex undertaking requiring technological advances as well as wise government policies. American farmers can do their bit to help feed the world. I recently introduced legislation, the Refresh Act, to help unleash the productivity of U.S. agriculture and save billions of taxpayer dollars in the process. But other countries, particularly in Africa, must do much more to grow their own food. And this will involve many changes across a broad spectrum. These include vastly expanded infrastructure, innovative water management, an aggressive research agenda, and difficult but vital policy changes in rich and poor countries alike. These range from taxes and investment rules to land tenure arrangements to trade negotiations. Also, an absolutely necessary ingredient to any sustainable increase in food production is raising crop yields. As a farmer who has seen agricultural yields more than triple during my lifetime on my family's farm in Marion County, Indiana, I'm convinced that improved seed technology is vital. Given the challenges of altered weather patterns, future water scarcity, new pests and diseases, and the need for more nutritious plants, we must use all the technology in our toolbox, including bioengineered seeds. America is a leader in biotechnology, and American firms can make important contributions to preventing a long-term food shortfall. But to take full advantage, Europeans must drop their opposition to the use of safe genetic modification technology. Today, bioengineered plants are largely banned in Europe and sharply restricted in Africa due to European pressure. The opposition to biotechnology contributes to African hunger in the short run. In the long run, it will make it virtually impossible to achieve what the McKenzie report calls the productivity response necessary to meet future global demand. The McKenzie report also notes the importance of stretching existing energy supplies through greater efficiency. I've long been concerned about America's over dependence on imported oil to run our economy, and I've called it the albatross of U.S. national security. To feed our oil addiction, we send billions of dollars overseas, much of it to regions that are hostile to American interest or subject to instability and terrorism. And we spend billions more to defend our access to these foreign supplies, with global oil prices far above historical norms and primary energy demand projected to increase by a third in 20 years. It is imperative that we find more, increase efficiency, and develop alternatives. Now talking about ending America's over reliance on foreign energy is far easier than achieving it, as the record of 40 years of American energy policy has demonstrated. That's why earlier this year I introduced a new approach, the practical energy plan that seeks to achieve significant energy efficiency in America by emphasizing policies and programs that help American consumers save money, improve the competitiveness of American businesses, and have minimal impact on our strained budget situation. I am pleased to see the McKinsey recommendations echo many of the proposals in that legislation. My bill calls for more energy efficient buildings, appliances, and machinery. It proposes a number of ways to cut our foreign oil imports, from allowing greater access to domestic oil resources, to predictably increasing gas mileage standards. It also offers more cost effective ways of promoting use of advanced biofuels. Similar to the McKinsey reports emphasis on strengthening market signals, it favors flexible frameworks to address specific energy market failures. If enacted, the practical energy plan would reduce the need for foreign oil by more than 50% by the year 2030, and cut overall energy consumption by 4% in that time. Independent analysis conducted by the Climate Works Foundation, working with McKinsey, found that it would save Americans $33 billion annually in energy costs. Achieving these goals will come through enabling the deployment of many existing and new technologies, which would be a plentiful source of good-paying American jobs. The increased competitiveness of American business should enable them to hire more workers across a broad front. And still, even the most optimistic scenario can see we remain reliant on imported oil for some time. In my view, it is best if we get as much of that foreign oil as possible from friendly, secure sources here in North America. That's why last month I introduced a bill to move forward on the construction of the Keystone XL Pipeline, which would bring oil from Canada down to America, refineries on the Gulf. Besides enhancing trade ties with a reliable and very friendly ally, the project would create 20,000 American jobs right away and would encourage more American oil production from the Bakken area along the pipeline route. The administration's recent move to delay the permit for this pipeline is contrary to the United States' national security interests. Oil piped in from Canada, a trusted friend, is not subject to anti-American embargoes or threats to the sea lanes. The pipeline could reduce our reliance on oil from Hugo Chavez's Venezuela, a country hostile to U.S. interests, but which last year was the fifth largest supplier of oil imports to the United States. Money paid to Canada for oil is more likely to be recycled back into the U.S. economy than funds sent to countries far from our shores. I hope that the report you were discussing today will be widely read, and its findings and recommendations should be carefully considered by policymakers here in Washington and also by businessmen and entrepreneurs around the world. Increasing productivity will require investments and innovation, and no nation is better at producing either. Bringing American know-how and ingenuity to bear on the problems of soaring resource demand offers the opportunity to create new jobs and hundreds of thousands of firms and scores of industries. It is an opportunity I hope we will seize. I thank you for your thoughtful attention. I wish you the best in the discussion today. Thank you very much. So we have a few moments for questions from the audience, and I will take anyone who's got a question. Ready? Okay. For the Senator, I'll start off. In your remarks, you focus on, I think, what a bit important real finding from Clive Works in McKinsey around the amount of $33 billion in savings that would come as a result of your plan. Could you talk a little bit more about that and the real opportunity you see around energy efficiency technology and the American economy? What's the opportunity for us there? Can you describe it a little bit more and describe your hopes for the future of energy policy in the United States? Well, our practical energy plan really came as it was apparent that the so-called cap and trade debate in the Senate at least was not going to happen, or it was not going to be successful. There may be many in our group today who would argue that that was misfortune, but at the same time it really came about because of the politics of what I would call red states and blue states, and this is not Democrats and Republicans. It's states that have coal and states that don't have coal. And the effects upon those who had coal were so disastrous that all sorts of compromises were made in the text of the legislation that began sort of to give away the purpose of the whole production. But in any event, it was not going to happen and as opposed to simply being one of the naysayers, I thought we would try to offer something that made sense to American business even more importantly to each American citizen. So we start on the business side. I was struck by the drama of the Empire State Building and the extraordinary renovation of that building for energy purposes. I know I can't quote off the top of the head precisely what they paid, but I recall it may have been in the order of $20 million to renovate the whole building. And the savings were so dramatic that they paid off the loan in a three-year period of time and are sort of home-free with all the millions of savings subsequently. I mentioned that building because it's conspicuous and because it was conspicuous, others were intrigued with this. So this is to say in industrial buildings, office buildings, those buildings of government including the federal government here and state governments and so forth, there are enormous savings in the case of the government savings for the taxpayer quite apart from just a feeling of efficiency. For ordinary homeowners, starting with the most modest farm house, we've had hearings before the Agriculture Committee and there are in most states groups that are prepared to do an audit of different modest farm houses to see whether a loan could be paid off in a ten-year period of time through the savings in that house. In most times that is an affirmative answer and so loans are made sort of starting with some of the most modest farm rural houses all the way upward. There have been wonderful opportunities for students. We cited in Indianapolis the war on township system where students began working with teachers to turn off the lights, to turn off the computers. Before long the system was turning off buildings and areas that were not used. The students were racing home to turn off all the lights in their houses as to the consternation of their parents who wondered what was being taught there in the school and so forth. The net effect of this was in a five-year period of saving three million dollars to the property taxpayers of war on township, which was so dramatic that this was recognized in the state capitol and the thought was that about everybody ought to do that at a time, great problems for public schools in our state. So I meant this is where all the accumulated savings came from, but they make sense because they save people money. The householder, the Empire State folks, taxpayers, governments, they make sense at least in a market solution situation and the abilities to do this are abundant and are being perfected as there were more customers. One final question that will turn over to the floor. As a farmer you must be really concerned about the state of America's soils. As we're looking at some of the resource productivity challenges and how do we get to a point where we're putting less resources into our soils, improving the quality of our soils and increasing yields as you talk about, what are some of the great opportunities and requirements that we face on the farming side of America's heartland that can really help us kind of win the future and engage this resource productivity opportunity, but really with the focus recognizing it's not just about yield, but it's also making sure that that yield, as we say, is sustainable. Can you talk a little bit about that? Well, imperative here obviously is the work being done by our great universities that have schools of agriculture and others. All of this doesn't come naturally to farmers and there have to be some resources available. Frequently the resources are the younger generation who attend Purdue University or some comparable situation and come back to the family farm and often they come back with ambitions to grow the farm in the sense that they don't have very much money, but they realize that they need better equipment, better seed, better fertilizer, other things and that's going to require some time to pay off so they acquire more and more rental ground of older farmers who really are maybe not in the game in the same way. I like to consider myself one of the older farmers who still is thinking about these things, but I appreciate that a good number of folks have rented their land a long time ago. Some moved to other states, so we're coming into a new generation of people who are excited about these changes. That's how I emphasize the educational aspect because that's highly technical, but very, very important. But there's more in my state of consolidation of agriculture, not so much in the ownership, but in the larger and larger amounts that are managed by one farmer, often a young man or woman who's now farming 2,000 or 2,500 acres may not own more than five, but is applying these new techniques to a much broader scope. Thank you, sir. Right, we'll open it up to the floor. Sir in the back. Right in the middle, yeah. Is there a microphone? Jen? Right there. Robert Chirada with International Investor. Senator, when you presided over the Senate or at least served there, we saw a number of bills passed where we gave substantial credits to oil companies for their developments around the world. I'm glad you're concerned about imports. My question really is, in some cases, we see nation states who allow their oil companies to sell their oil domestically for a low tax rate. But if they try to export their oil or gasoline or refined products, they're levied a very high tax on that. Shouldn't we treat our own precious resources with our nation the same way? In other words, allowing companies to sell and allow them to enjoy their tax credits if they sell it domestically. But levy attacks if they push it outside. And we do know that, surprisingly, the United States actually exports a good deal of its refined energy products abroad, because it's so profitable. Would you be in favor of such a system that levied taxes on oil companies and those that exported those products? Well, at first glance, I don't have a favorable view toward that. And my reasoning is essentially that the United States hopefully always will be the leader in terms of trying to promote foreign trade, the most efficient use of resources around the world. For example, to take the farming thing we were just talking about, I'm excited by the fact that there is high demand all over the world for soybeans and for corn. The two things that I'm producing, this is double the price of those commodities. It also creates the problem that I cited in the Middle East with Arab Spring. If you are a major importer, as I recall, Egypt imports 72% of their wheat from the United States, and the price is doubled. Hosni Mubarak had a hard time getting enough subsidies out to the people to make certain that everybody was fed. I would just say that again and again, as we work with the World Trade Organization or tried to do the Doha round or whatever, the whole situation is bollocksed up by a scheme such as the one that you described, which sounds reasonably benign, but countries protect during shortages what they have, and don't let it out, or they defend domestic suppliers against trade. I believe in the course of the world, it would be best as a matter of fact if we had simply prices, markets, and movement in those regards. Finally, I would just say that in our case in this country, as a matter of fact, we are benefiting from the export of refined products. All of you have read headlines and papers in recent days, sort of a revelation that although we really have a problem in terms of imported basic oil, the refined product, we have now enough of an advantage that we are exporting more of it than picking up dollars and whatever around the world. So there's another complication there. If we were husbanding all this in the United States, that this new burst of speed in terms of our own export situation would be obvious. Okay, another question. Sure, Scott. We'd love to hear more thoughts that you have on what it would take to unleash the U.S. on agriculture and the water side of that. And from a government point of view, what policies do you see in place that you might want to put in place to help unleash that? What barriers do you see at the moment that might be holding back a kind of agricultural productivity increase in the U.S.? Well, I think that the productivity is still held back by the lack of knowledge of many farmers, many producers. I've talked about the new breed coming out of the colleges who know a lot, and there are some folks older than they who know a great deal. But trying to get that applied to more acres in America is still a major objective. And I think we're making headway there. I think on the water question, we really don't know, I suppose, how the great aquifier in the central plains is going to work and for how long. We pray for quite a long while, but if you're a farmer in that area, you have some hopes and prayers about all that situation. And so the whole water conservation business, how we are going to get water to maintain at least the acreages we now have in the country, is less certain perhaps. Also, and this really introduces a complex subject into the discussion today, but I go to conferences, the Aspen Institute gives for members of Congress. And we discuss, if not climate change, something akin to this almost annually. Now again and again, people are coming to us with charts which would show in my state of Indiana that somehow it's getting warmer in the northern part of the state. And furthermore, that this sometimes implies more drought and a real water problem, but not one that's created by the old time situation, one by maybe a new time predicament. This particular year was dramatic in that respect. And that we had a normal corn crop, if you look at the whole picture nationwide, but at the same time I know on my farm we had unusual periods of droughts or excess rain or even a terrible sort of tornado wind that flattened all the corn in one field and so forth. So as a result, our corn yield was down about 45%, our soybeans down 33%. Nothing really changed in terms of the technical aspects. We had plenty of water too much on some occasions. So that we were not really able to predict ahead what the implications of this are for agricultural production. And that really is a big question mark. Sure. One more question and then I think we have to let the good senator get on to his daily business. Senator, I just came back from Durban and I'm sure other people in this room did also. Obviously what this report tries to do is to show resource scarcity in terms of its opportunities and not just its costs. Now the United States agreed at Durban that four years today there would be negotiated a global deal. This is going to be difficult to do. In the light of this report, in the light of what you've said about the opportunities, the jobs and so on, what advice would you give to those of us who will be working in the next four years to make such a global deal possible? Well, first of all, I would say as a veteran of Durban, you appreciate that you need to get more sleep all the time. That the delegates had to work diligently to get any agreement at all. But reports have come forward that at least something occurred. In 2015, as mentioned, I had environmental reporters yesterday as I was trying to do my duty, getting to the floor and what have you. Asking me, does this mean that the United States in 2015 is likely to pass legislation if not ratifying the cumulative protocol or some other protocol and what have you? I said, well, not exactly. I don't think United States quite came to that position. As a matter of fact, the United States and the European countries that stayed in Brussels throughout this entire conference were fairly quiet about it, especially on the political front here. Almost nothing was heard about it at all. Those of us were curious, read the papers, knew somebody was in Durban. But aside from that, there was no repercussion whatever at this point. I think it still remains to be seen as you have observed whether the Chinese, the Indians, others who are large contributors of CO2 and other emissions sort of step up to those responsibilities as opposed to hiding behind the developing nation business. With regard to monies given to the developing nations, sort of in recompense for the fact that the developed have had a good time for a long while and the others really have been denied this and so that's going to take really some explaining to do. As I look at what we're going to be looking at this week in the Senate floor, the thought of American taxpayers subsidizing somebody with regard to all of this seems so far out of reach that maybe by 2015 we have a different perspective, but I somehow doubt it. So these are just quick observations. I thought it was important, however, and I admire you for staying in the course, and I hope that the conversation will continue. And on that, please help me thank the good Senator Luger. Thank you once again, Senator Luger. Okay, now it's my pleasure to invite Scott Nyquist and Frazier Thompson up to the panel to present on their findings on the Resource Revolution. Well, first I'd like to thank you all very much for coming here today. We appreciate the opportunity to share the results of our research and very much look forward to the panel discussion and questions and issues you have on your mind. I'm just going to spend a minute or two giving a bit of background on why we did this work and provide some overall summary and that I'll hand over to Frazier who will show you a few of the key charts from the work just to warm up for the discussion with the panel. The McKinsey Global Institute is McKinsey's think tank. It's funded by our partners and it does work of interest of our clients. And for many years it's been doing research on the topic of productivity and in 2007 did a piece of work on energy productivity. And since then we observed in our work around the world that many of us were spending our time working in our silos of various industries, the oil and gas industry, water, working on electric power. And what we observed is that while we were working in the silos we were never really looking at the system effects across all these particular areas. And so MGI thought it would be a good time to try to pull all these ideas together in a slightly more comprehensive system view. And this report is I think a first attempt at least for us to try to integrate all these resources into one kind of global perspective. And I think the work is actually optimistic. The notion of three billion people entering the middle class is an optimistic view of the world and it's an exciting view of the world. It does have some consequences of pressure on our resource system. As Senator Luger mentioned, 33% increase in global energy demand by 2030, 80% increase in steel demand. We can see pressures on the water system with demand growing by some 40%. An enormous productivity needed if we're going to really able to meet the food requirements and maybe 10% to 15% more land needed if we're going to meet our resource demand along with some significant productivity improvements. So the good news is that we can see our energy system and other resource systems being able to provide the supply needed for these new middle class customers. But I would say even better news as we looked around the world. There are many opportunities to use these resources in a far more efficient and productive way. If we get organized, we can reduce the overall demand for resources by some of 30%. And this would reduce a lot of the pressures in the systems, particularly on the environment. It would get us halfway toward a goal that we want to achieve to get to the 450 ppm pathway and have many other environmental benefits as well as just alleviate some of the price pressures that we'll no doubt see on the supply side. So we are optimistic in terms of the solutions. I think from the perspective of the US, this is in many ways a very good news story as well. We are a resource rich country. We have lots of opportunity, as Senator Luger mentioned, on land for us to use our food production in a different way. We have lots of other natural resources. So on the supply side, this is good for us. And then on the demand side, since we've been such a highly inefficient user resources in the past, we have lots of opportunities to invest in energy efficiency and other resources efficiently in the future. So from that point of view, it's optimistic of you for the US. So let me just stop there and hand over to Fraser and you can take us through just a few of the charts. Thanks, Scott. The starting point for this research was when we looked at the historical trend of commodity prices, we saw this extraordinary change over the last 10 years. And just to give you a bit of a sense of this, what we have here is the average commodity prices across a range of different natural resources. And this includes everything from food to metals to agricultural raw materials and to various forms of energy. And the most extraordinary thing is that if we forget about this last 10 years, over the course of the last century, despite the fact that population increased more than fourfold and that GDP increased by more than 20-fold, commodity prices actually declined. And they didn't just decline by a small amount, in many cases they halved. And we cut this in lots of different ways. We looked at exchange rate effects, we looked at different weightings of resources, but none of that got away from the central fact that we've been living in a world of declining natural resource prices. And the extraordinary thing is that if we look at this last 10 years, those past declines over the last century have more than been reversed. And not only that, the volatility of natural resources, which is a real concern for governments as Senator Lueger mentioned with these food prices, but also for firms as they try to think about how they compete and how do they manage their cost in this environment, this volatility is at an all-time high, high at any point in history. And the real central question we're faced with today is that what's going to happen next? Is this entering a period of sustained high and volatile resource prices, or is this kind of 1970s revisited? And we'll eventually see a stagnation and an eventual decline in resource prices. Of course, we don't have a crystal ball on this one, but what we do see is some structural factors that we think that this time could well be different from these past episodes. And the central point is around these 3 billion middle class consumers that we've been talking about. So over the next 20 years, these 3 billion middle class consumers, most of them in India and China, will be added to the global economy. There's a lot of talk today about the fact we have 7 billion people on the planet. We actually argue that that's the wrong number to be focusing on, because these middle class consumers that drive resource demand. And just to give you a sense of this, over the next 20 years, the global car fleet will double. China is going to be adding the equivalent of two and a half Chicago's every year in terms of residential and commercial floor space. India is going to be adding a further Chicago. So that's three and a half Chicago's been added every single year from just these two countries. And the pace of this transformation is historically unprecedented. It took the UK 150 years to double incomes during the Industrial Revolution. It took India and China roughly about 14 to 16 years to achieve the same thing. And I always like to make this joke because I'm Australian, I can make jokes about English being slow and different things. The other fact is that not only was this pace of transformation 10 times faster than anything we've seen in history, it's the scale that's also unprecedented. So whereas the UK started the Industrial Revolution with a population of just 9 million, in China and India they started with a population of roughly a billion. So this transformation is happening at 10 times the pace and at 100 times the scale of anything we've seen in the past. And this would be, we would be able to cope with this if it wasn't for some more complicating factors. And that's the fact that access to resources is often becoming increasingly difficult and expensive. And what we don't say in this report is that we're forecasting the absolute shortages of resources in the near term. But what we are saying is that in many cases they are becoming more expensive to extract. And just to give you a few examples of this, in the past 10 years the cost of building an oil well has more than doubled. And despite exploration spend increasing fourfold, the actual discoveries has basically been flat. And beyond just that cost, the other contributing factor which Scott referred to is that the linkages between resources is becoming more apparent. And let me talk you through briefly this wave of different arrows and connections. The critical thing to focus on is the size and the width of these arrows. If you look down here, it's interesting to note that roughly 70% of water gets used in agriculture. So central urology as we increase agriculture has a huge dependency on our water supplies. But not only that, there's a number of other linkages. And what's interesting is that those linkages are in many cases strengthening over the past 10 years. And let me give you just one example of that. As we shift to unconventional oil, horizontal drilling uses roughly four times the amount of steel as conventional oil production. And we look at where that still comes from as a critical component is iron ore. And that iron ore, roughly 40% of iron ore production is in areas with water stress. And when you look at the supply of water, a lot of the new supplies of water are requiring additional energy consumption to produce because of a lower groundwater table because the shift to desalination and also because of the creation of mega projects like China's North Sea pipeline, sorry, North to South pipeline. And so these linkages are becoming more apparent. And so in the report we talk about the risks that this could present both from an economic viewpoint, the fact that higher oil prices in particular have such a detrimental impact on economic growth. From a welfare point of view, the fact that the recent food price increases put an additional 44 million people into poverty. From a public finance standpoint, the fact that so many subsidies in the world are directed to natural resources, over 1.1 trillion today. And also from a resource security standpoint, as Senator Luger referred to, a lot of the oil consumption in place like the US come from countries that are hostile to the United States. And just four countries, Iran, Iraq, Saudi Arabia and Venezuela hold roughly 50% of the world's known oil reserves. So there's a huge amount of risk factors here. And so the next question we asked was, well, how do we meet this demand? And we looked at different ways of how we could do it if we increased supply. And we definitely could do that. However, the pace of transformation supply would be historically unprecedented. And to give you a sense of this, I think Peter Vossa, the CEO of Shell, put it best, that over the next 10 years, just to stand still in the world's oil production, so just to meet today's current supply, we would have to find the equivalent of four Saudi Arabias and or 10 North Seas. So a huge amount of new production just to stand still because of declining existing reserves, let alone meet this incremental demand. So we also looked at that case, but we also looked at the productivity opportunity. And we found that there's opportunities to address roughly 30% in some cases of 2030 demand across food, water, energy and steel. And when we looked at what the big opportunities were, we found that there were 15 opportunities that really mattered. And as Senator Luger referred to earlier, building energy efficiency was actually the biggest opportunity we found in terms of its total benefits globally. And in the US, to give you an example of this, roughly 45% of homes were built prior to 1970. And a lot of those homes were built were very low at energy efficiency standards. So in many cases, just from a basic retrofit, there's a huge opportunity to improve their energy efficiency. And some areas of the US have gone after this. Boston, for example, insulated 30% of public housing, and this had a reduction on the energy costs of these houses of roughly a third. So we do see pockets of movement there. What's also interesting is the third biggest opportunity we find is food waste. And what we're not talking about here is consumer food waste, which is a huge opportunity in the US. Roughly a third of fruit and vegetables get wasted after they go to consumers' households. What we're talking about here is food wasted in the supply chain. And there's a huge amount of food that's wasted post-harvest in developing countries, but also in the packaging, processing and distribution in developed countries. And in many cases, it requires a more collaborative approach to get after this. The third one I would highlight is municipal water leakage. So these are the leaking pipes. And what's interesting is that Germany wastes 5% of its water from leaking pipes, which seems like a lot, until you consider the UK wastes 25%. And then the US, many states, wastes around 30%. Huge amount of water wastage, which really is sort of money on the table. And we look at why these things aren't happening. And there's lots of reasons. Partly is the fact that businesses aren't rewarded to go after these opportunities. So in the case of water, often rates that pay for these water have remained flat. So there isn't that sort of driving mechanism for businesses to go after this. The last one I want to briefly highlight here is urban densification. And here we look at how we can change the format of our cities to encourage more use of public transport, something that the New America Foundation is also looking at. What's interesting is that it takes roughly seven households per acre before public transport becomes viable. And many American cities already meet that threshold. But there's a huge opportunity to do more to redesign cities to encourage more public transport use. The EPA has recently come out and found that households in highly urbanised settings use roughly a third of the energy of households in more urbanised settings. So there's a huge opportunity here of how we think about the way we live. Also it's interesting to find out where these opportunities are located. Roughly 70% or more of the opportunities are located in developing countries. And this is primarily because of these huge new demands coming online. So those three and a half Chicago's every year will create huge demand and huge opportunities to improve the productivity of those resources. But if you look here, there's also a huge opportunity in North America. 13% of the total global opportunity in energy is in the US and Canada, similar amounts are in the other resources. And by going after this, this could have a transformative impact on the US, both in terms of national security, in terms of environmental impact and in terms of job creation. And to give you a few numbers on this, we found opportunities that could reduce US oil demand to almost half the levels of today by 2030. This would have a huge impact on the current account. So the savings in 2030 account for roughly a third of the US's current account deficit today. It would also have a huge impact on energy security naturally. And finally, it has a huge impact on job creation. And it's always difficult to get at this job's estimates in any robust manner. But to use some basic proxies that were found for the US and elsewhere, that the investment associated with these resource productivity opportunities could create more than one million jobs. So there's kind of a triple win in many respects here of better energy security, improved growth and improved environmental outcomes. In the report, though, obviously this sounds too good to be true and in some cases it is because there's a huge amount of barriers that stand in the way. And the report, we go through all these different barriers. But to give you a sense of what we think has to happen... Before you go on that, you're using the word product. That's a good question. So our use of productivity is across improved efficiency of resources in extraction, conversion and end use. And let me just spend a moment on that because that's a very good point. What we're not saying here is behavioural change. So as I said, we left out consumer end waste, about people not wasting the food in their fridge and so forth because that is a behavioural change. We're looking at technical opportunities. So in extraction, we look at how can we improve the yield rates in farms? For example, how can we improve oil and gas recovery? In conversion, we look at how do we improve power plant efficiency? And finally in end use, we look at everything from building efficiency to transport efficiency to reducing water leakages and so forth. And briefly on the climate agenda. One of the motivations for this research was can we come at the climate agenda from a different viewpoint? So rather than focusing on carbon as the objective, let's focus on efficient use of resources and see how far we can get towards the carbon goal. And what's interesting, by pulling all these measures that we talked about, we get roughly halfway to a 450 ppm pathway, which is roughly the pathway which scientists believe can limit temperature increases to 2 degrees. So it gets us a long way there. It does a lot of the hard work, but we need a bit more. And we look at what other opportunities are available and we find that this would cost roughly in the region globally of about $300 billion per annum. So it's a lot of money, but let me put that in perspective. The world currently spends today roughly $1.1 trillion of resource subsidies. So it's more of an allocation question than an absolute volume that's the constraint here. In terms of what needs to happen next, we talk about four broad areas of action that we need to consider. The first is that we believe this starts with a new approach and we need a more integrated approach. If you look at governments today, we tend to have resources still operating in silos. So we have agricultural departments that don't talk to water departments that don't talk to energy or economic departments. And we think the real risk of that is that we lose some of the complementarities and trade-offs between resources. We looked at, of our top 15 opportunities I showed before, which were the ones that public attention was currently focused on and we did this through various press searches and other data. What we found was that some of the biggest opportunities are actually receiving very little attention today. And we think that's partly reflective of the fact that we lack this kind of integrated approach. We also need to strengthen market signals, as Senator Luger referred to. And principally what this means is that we're building the market to really set the true price of resources. At the moment, these $1.1 trillion of subsidies distort the prices of resources and reduce the returns for investors to go after these efficiency opportunities. And third, there's a various other market phases that need to be addressed. And I'll just talk about one of them, which is access to capital. Currently the world roughly invests about $2 trillion per annum in the natural resource systems. We believe under any different scenario that we look at, we're going to increase by at least $1 trillion. So we're going to invest over $3 trillion per annum. And getting access to this capital, particularly in those developing countries where a lot of these opportunities are located, is highly difficult. And we looked at different case studies and found some serious challenges in capital markets that will inhibit the ability of which we can get after this change. And then finally we need to create what we call long-term resilience. We need to have better information and linkages between resources. We also need to have safety nets to mitigate the impact on the poorest members of society from these price changes. And finally, we need to have a change in consumer mindsets. This kind of third of food that gets wasted in consumer households, this is something that's kind of low-hanging fruit upon the pun that we could go after. So we think there's a huge opportunity there to actually change the way we think about the usage of our resources. So on that, let me finish up there. I did just want to say one acknowledgement, which is we've had a huge amount of help in this work from a variety of experts around the globe, both internal but also external to the firm. A few people I want to particularly thank who are core members of this team, Daniel Clifton, Panav Kumar, Kay Kim and Nicholas Flanders, who did a lot of the hard toiling behind us. So with that, thank you very much and I'll hand over to Patrick. Okay, now if you can hold on to your questions. I know there's a lot of stuff you want to get into. We're going to transition quickly into our panel conversation and have our panelists chew over all this great material first. And so I'm going to call Edward Abo, Alan Sher, Andrew Steer, Scott Nyquist and our moderator, Edward McBride. Edward is so generous to make his time available to us today. He's Washington's correspondent for The Economist and has been watching these issues and been now in Washington, D.C., kept up late last night by his little daughter, but he's ready and willing to engage this great panel. So I'll turn it over to Edward. Thank you. Thank you very much. Trust me, getting my daughter to sleep will be easy compared to solving the world's energy problems. So that's the least of our worries, but thank you for mentioning it. We have a very distinguished panel here to discuss some of the themes we've just heard about from the report and to expand on them. I'll just briefly introduce them, ask a few questions myself, and then there'll be time also for you in the audience to ask questions. We'll leave plenty of time for that. So you've already met Scott. Beyond Scott is Alan Schur. If you've flown out of National Airport recently, you'll be familiar with the signs that tell you how there's a bold future awaiting us where shirts will pick our ties and food will tell us if it's going bad in our fridges. And IBM will usher that future in for us. As Vice President of Strategy and Development for Global Energy and Utility Business, Alan is responsible for making that vision come true at least as far as energy and water is concerned. Just beyond Alan is Andrew Steer. He's the Special Envoy for Climate Change at the World Bank. He's fresh off a flight from Durban, and I intend, I'm sure many of you do too, to ask a few questions about that. But he's previously been the World Bank's man in Jakarta, or the boss of all the World Bank's men in Jakarta, in Hanoi as well, worked for the DFID, the British Ministry for International Development. And when I was Southeast Asia correspondent, I plagiarized a lot of my articles from Andrew's opinion, so I can promise he's worth listening to. And beyond Andrew is Edward Abo. He is President and Chief Technical Officer of C3 Energy Resource Management. As I understand it, Edward helps firms minimize their energy bills and their carbon emissions. He has a background in software as well as in energy. He's one of three engineers on the panel. I'll let you figure out who isn't an engineer. But from the business end, we'll be able to give us some good perspectives on achieving some of these efficiency gains that we've heard about. But so maybe I could start with you, Scott, and just see if we can expand a little bit what we heard from Fraser. What went wrong? There was that tantalizing moment where we saw the chart that showed how commodity prices in general have more than risen beyond all the gains made over the last century. Why didn't investment and innovation keep up? Is it simply because the scale of the problem is bigger now, is scale demanded is bigger, or is there some other failing? Well, I look at it from the point of view of many of the clients that we served in the corporate world on this thing, and what you would see in the 90s just a consensus view developed that the last 100 years of commodity price decreases will continue, and therefore if you are a corporation thinking about investing in supply and technology, all the price assumptions that you use looking toward the future were cautious. You couldn't justify big R&D investments. You had hard time justifying huge capital programs that would acquire high prices. And I think that was almost a consensus view across many different strategy planners and many different corporations. And I think underpinning that was just the difficulty of even imagining that you could have three billion new middle-class consumers of China and India. After 50 years of watching those places just kind of live in poverty forever, it was just hard to imagine that this could happen. So it's taken 10 years, I think, for the people who think through these issues to kind of get their heads around that this is real now. And everybody's just ratcheting up their capital programs in corporations. And it's a mind-boggling number if you spend time to oil industry just two trillion of capital in the next five years. It's just staggering. And that's now kind of getting embedded in the way that corporations think. Then I would add that on the government side, it's a similar issue. Governments had just got used to not thinking about the subsidies and other market failures that were embedded in the resource systems because it was working. Prices were pretty low, people were being fed, and there wasn't this need to change. And governments, at least in my experience, seemed to operate much more effectively in crisis than they do in anticipating a problem. And so now that we have a crisis, we're looking forward to governments to get going. You may look forward sometime. So that sounds optimistic in the sense that it sounds like perhaps people missed a trick, but now attention and hopefully capital and innovation is being brought to bear on this. I mean, do you think that it is like clear that the host of problems described in terms of achieving these efficiencies will be overcome, or that great minds will find a way to do with shale oil, what they did with shale gas will find a way to do cheap desalination? I mean, obviously I assume you'd want both, but which do you think is likelier to bring a rapid response to some of these problems? Well, I think in the near term, I think we will see prices rise and that will cause great pain, particularly on the food side as Senator Luger articulated. And we're not in the price forecasting business, but to think through trends over the next five years, most likely you would have kind of rising commodity prices as a way to encourage new supply to meet the growing demand, and the high prices would actually encourage lower demand in some areas. And then after the high prices come, then I think we'll get more engagement of governments to break through some of these subsidies. It's very hard to afford all these subsidies when prices are so high. They'll bankrupt these governments, so that'll encourage them to change the way they operate, because you just can't afford it anymore. So to me, the mechanism of markets driving up prices, leading to changes of supply and demand, and then governments responding with adapting their policies to meet the new reality. Okay, so let me just try one more. I've got an exhibit here. It's from page 13 of the report for those of you who have the report with you. You don't need to be able to see what's on this piece of paper. I know you can't. Just it's hauntingly reminiscent of the, which I think you might have been involved with, the McKinsey cost curve of greenhouse gas abatement opportunities that was produced about 10 years ago to tell us all that, you know, it was okay. You know, we could afford to tackle climate change. And indeed we would, for the most part, make money off tackling climate change. Obviously, even though I don't think anybody really disputes the core of that finding, that didn't happen over the past 10 years. Is this, you know, are we likely to suffer a similar fate, some very good ideas that simply don't find their political moment? No, and I think the framework that we use in the greenhouse gas cost curve analysis is very similar to this framework we're using in the research productivity. The story I tell is, you know, we spend 20 years doing all kinds of work inside McKinsey, and then all of a sudden this one chart everybody likes so we decide let's go with it. It seems to work. And so we've done it again. And we now can look back over five years at every single bar in that chart and find out what has happened faster than what we thought, what has happened slower than what we thought. And there have been many areas where things have gone slower, and particularly in terms of government policies to break through some of the barriers. Aspects of energy efficiency have moved slower. But then I would say technology has moved faster in many areas. So when you get underneath the assumptions that are embedded in the curve, you find that there are many things that are actually proceeding at a fast rate. And so when we go back and look at that curve, we are quite proud that many of these productivity improvements actually have come to pass and are being implemented, and some are even going more quickly because of new technologies, where other ones that we were more optimistic on have proven not to take place. And I think we'll find the same thing on the resource part. We see huge opportunities, as Fraser outlined, to be more productive in our use of resources. And we can see how many of these will prove to be very conservative looking toward the future. And other ones will look back and say we were just way optimistic on what could be there. But I'm very hopeful that we'll get a large number of those. Well, that provides a good opportunity to draw you in, Alan. In these different areas, I mean, you saw that list of some of the opportunities, the 15 opportunities that represent the bulk of the efficiency savings. What do you see amongst those? What from dealing with your clients do you think are the areas where you think rapid progress is possible? Well, I'm really quite optimistic. When I look at that list and what we see our clients asking us for, you know, in a way, when you're a hammer, everything looks like a nail. And when you work in information, everything looks like information can improve the outcome. And that's what we're finding. Notwithstanding the ad in Reagan about shirts picking ties, I think there's more fundamental ways that information can address this problem of resource constraints, resource pricing. And we've got, I've been taking notes this morning, thinking about examples after example, where we've been working with clients to make fundamental shifts in the way they either acquire, extract, use some of these same resources. Building energy efficiency, the number one area, I think Ed has a lot he can share with that, but before I came to IBM, I worked in that field, and there is enormous opportunity, but, you know, so much of it was an issue of not the building wasn't retrofitted like the Empire State example, but thousands, millions of buildings that are strip malls and much less attention paid to their energy footprint, yet it really comes down to the person paying the bill was not the one that owned the building. And I would say that maybe five, six years ago, some things shift. If you know the commercial real estate market, triple net rent means you pay the rent, and then all these other things are fixed and you ignore them. That's taxes, it's maintenance, and it's energy. But about five years ago, people started asking about the energy cost of their rent, and triple net sort of became double net. They started comparing leases, not just on the rent, but also on the energy footprint. And that led to, I think, more differentiated offerings by the commercial real estate community. We work a lot in the water area, transportation area. I do a lot in the energy field, particularly around trying to squeeze efficiency out of both the supply, the delivery side, and also the consumption side, and there are breakthroughs happening because information technology is being applied, where before it was really more traditional things around retrofitting equipment. Now we can do things with controls. We can measure our effectiveness better. I'll give you just one quick example. Data centers five years ago probably were the least efficient commercial building operation on the planet. Data centers were filled with a lot of expensive gear that frankly put out a huge amount of heat because it wasn't designed to be efficient itself. And then the way that that heat was removed was inefficient. Basically, you build in a data center a meat locker type chilling system to try to remove all that so that the computing systems would operate efficiently. Our research organization created this test device, sort of like a robot, that would go down through a raised floor data center. And if you have been in one, four foot floor tiles that are on a raised floor underneath that is all the air conditioning. Every two feet it would stop and it would take a series of measurements of temperature and air flow, and it would build a three-dimensional curve of what temperatures were going on in a room at different elevations at these two foot increments. And we found just enormous inefficiency in the way air was moving. And so when we got our computing side to build more efficient equipment, then we had to retrofit the cooling side to cut data center energy consumption by half. And data centers are a hugely growing type of building. So that kind of breakthrough, applying basic technology instrumentation, which we are seeing cheaper and cheaper, a lot of innovation happening there. Communication, so now our latest generation of this robot, it's all wireless communication so it doesn't have to download anything later. And then analyzing it into these three-dimensional curves, we can audit continuously these data centers as they're getting less and less of an energy footprint. That kind of technology is being applied in lots of places around energy. We're seeing the same things with water leak detection. Yeah, 30% is a real number. Nobody complains when their trees are growing a little bit more because the pipe out in the street is leaking. It's not like a gas leak where people will call it in. They leave it alone. Yet the water leak problem is a huge one and instrumentation is helping detect those things like they couldn't be detected before. Ed, does that square with your experience? Are we turning a corner in terms of hunting down the elusive NegaWatt? How's business, I guess, is what I'm asking. I'm debating now whether I reveal now or wait till the end of the panel that I'm not Ed Abo. I guess I decided to do it now. I'm sorry, I couldn't make it at the last minute so you're stuck with me. I am with C3 though. I didn't just walk in up the street. But I'm the vice president for strategy. I was thinking the picture looked a little different but I didn't want to leap to any conclusions. Yeah, about six inches taller, but anyway. Business is great, thank you. My name is David Struse, S-T-R-U-H-S. What was the question again? Are you finding that people are, suddenly companies are more interested in seizing these efficiency opportunities than historically they have been? Historically, energy, people leave $100 bills on the sidewalk. I think this discussion sets it up perfectly because McKinsey has made a very compelling case that we're going to see resource constraints around food and water and energy and basic materials. But if you think about it, there's one resource that is actually growing and it's growing faster than it ever has before. And it's becoming cheaper and it's becoming more usable and that's data. And many of you have probably seen some of the research done at Wharton, MIT, and Babson College. And one of the conclusions is that the amount of business data available is doubling about every 14 months. So that's just a remarkable amount of data. The question is what you do with it. And of course, information technology is the tool that you can use to harvest that resource, harvest that data and actually begin doing things with it. We all wish and hope for the great big material breakthrough, whether it's energy or materials, and someday those substitution opportunities will come. But in the meantime, I think it's almost universally agreed that the best way to stretch the resources we already have available to us is to use them more intelligently and using them more intelligently means taking advantage of that data. And what we do at C3 is a bit novel. We come at it from a different point of view, using some advanced IT where we actually model the enterprise. We have a working model of physical resource flows that go through the organization. What you can do by that model-based approach is you can then calibrate the physical resources to the key financial performance indicators or business indicators that are important. By calibrating the physical resource flows with what's financially important to an organization, you begin to start to see things and have insights that you might not otherwise have. And what that leads to is the ability, of course, then to do some scenario planning because we are facing some uncertainty. We don't know what happens is that chart goes off to the right. But we do know we have to make capital decisions today and sometimes we're making decisions that are long-lasting in terms of capital investments. So the opportunity for an organization to do some robust scenario planning that's actually based on a model of their enterprise is pretty valuable. The other thing we find is that by breaking down the silos of information within an organization, you avoid the common problem of suboptimization. Oftentimes when you think about improving efficiencies of any type, it's typically done by business unit or region or product line or plant. And we shouldn't diminish the importance of those efforts, but if in the end what you really want to do is to maximize the financial objectives of the enterprise, you need to be able to step back and make sure you're not making suboptimal choices and by modeling the organization, you avoid that problem. So business is good. Business is great. One of the reasons that is not here is because he's with an important energy customer who is actually looking to expand their use of our software. Andrew, maybe I could ask you several times in the presentations, subsidies were mentioned, and subsidies seem to me the sort of crowning example of seemingly sort of wrong-headed behavior that makes this problem worse, that allocates money that could be used to fix the problem and so on, and yet especially in developing countries they seem to endure in many of the countries you've worked. Can you walk us through a little bit why what appears to be such an obvious opportunity is untaken and how to remedy that? Well, you're right. There are many hundred dollar bills on the pavement. In developing countries energy subsidies range between 300 billion and 500 billion according to the international price of energy. OECD has just done the most detailed review ever of energy subsidies in OECD countries, and even there 60 billion dollars is subsidizing fossil fuel. Now in developing countries, subsidies are basically on consumption. In OECD countries they tend to be more on the production side, so they're much harder, whether tax expenditures or whatever, they're much harder to identify, but the OECD identified about a couple of hundred different types of cleverly concealed often subsidies of fossil fuel production mainly. Why are they still there? Well, it's because people actually haven't read this. This is a wonderful book. And whether or not we succeed in addressing the challenges that are identified in here, which we would totally share and understand, we totally would share the analysis of this at the World Bank, whether we succeed or fail, it's whether or not we're able to get the understanding that actually it is smart politics to move in the right direction. And we're seeing a lot of encouraging moves. I mean, the whole green growth thing is catching on in a very big way. So last month I was in Vietnam. Vietnam has now set up a national commission for green growth. They say we know how to grow at 9% a year, but we actually want to do it differently, and we actually think it's in our interest as well as showing international leadership if we do things separately. China didn't need this year to impose cap and trade on itself in four cities and two provinces, and it's made a decision that by 2015 it will have a nationwide cap and trade system that by 2020 would then be part of an integrated thing. And not because they have any international obligations is because they want to grow differently and they know they should, and their 12-5 year plan tries to capture exactly that. So there's a big intellectual battle in the next four years, and I think the answer to the question is there going to be a global deal on climate change by 2015 depends upon whether or not these messages get through, I think. At the moment, the jury is very much out. We've got to be absolutely honest, as this report is, that the task ahead can partly be done in a win-win way. Half of what needs to be done can be done in a win-win way, and it's not being done in a win-win way right now. I mean, energy efficiency is not financed through most countries' banking systems. It is extremely hard to get banks in all around the world to lend for energy efficiency for all kinds of well-known reasons relating to what's your collateral and so on. It's also very difficult to get politicians in many countries to get as excited about energy efficiency as it is to get them excited about some new, wonderful, high-tech investment which they can cut a ribbon over. There are all kinds of reasons why the win-wins are not being taken. We need to demonstrate that they are there because once you take what's available under the negative part of the cost curve, you then can see that what you have to do up here on the positive is not beyond the realm of possibility. And last year, as you know, $250 billion worldwide invested in new renewable energy investments, of which more than half in developing countries. So things are happening. The problem is they're not happening at scale. And what you've seen, if you look at the Copenhagen Cancun Durban trajectory, in each case of the 20,000 people who go, most of them are not doing negotiation at all, so why are they there? They're there because they care about the world of action. In Copenhagen, the private sector was there in force, and they wanted to be close to the negotiators. We want to be with these negotiators. In Cancun, they were 10 miles from the negotiators. They were getting on with the job, and they were sort of looking down at the negotiators, saying, come on, guys, let's get going. In Durban, there was an incredibly vibrant, energetic discussion going on among private sector, academics, and governments who were doing deals and laying out the kind of messages in here, and they were contemptuous in many regards of the negotiators, saying, you guys, we're not asking much of you, but set in place for us a framework so we can get on and do the job that we need to do. And in many ways, the success at the end, I believe in Durban, was finally some of these negotiators who were lagging a long way behind the world of action. They wanted to say, OK, OK, we'll try and catch you up. And whether or not the next four, which obviously the next four years are absolutely crucial as to whether or not we get a global deal, whether or not we're successful is whether or not that kind of dynamic is able to continue. Can you expand on that a little bit? Well, since everyone here this morning has been sort of bleating about price signals and obviously the biggest price signal that's missing in most places is on carbon, what will make the difference over the next four years? I put the optimistic case for what took place in Durban and how that might lead to a proper price signal on carbon. Well, I mean, for example, there are now 40 developing countries that have feed-in tariffs. That means we will pay a little more for electricity which will purchase into the grid if you, whether the private sector or public sector, is able to generate it with renewable energy. Now, whether or not we're successful is whether or not that is shown to work. Everyone will be monitoring China's cap and trade system. Everyone will be monitoring Australia's new carbon tax system. Everybody will be hoping that South Africa's new carbon tax goes through. We've assembled a group of 20 developing countries who have said, look, we actually care about this carbon thing not because we have international obligations but because we actually think it's good for our economy and we're going to use market-based instruments. So we've put together a little fund, so currently $80 million, to help them put in place these market-based systems. So countries like Chile and Colombia and Mexico and Indonesia and China and Korea, and countries like Ukraine and others, India, South Africa, they all want to experiment with this. So whether or not we succeed is sort of whether or not it works, whether or not it works politically and whether or not it works economically and whether or not, as these countries try and do the right thing, whether or not that in turn drives down the costs. I mean, talking to the mayor of Chang'ing, you say to him, well, my goodness, it must have been a real burden on you when the government of China imposed upon you as one of the four cities that you would have a cap put on your carbon emissions in the next year. Surely this was a huge burden. He said, well, no, actually, we were sort of, we were actually quite keen to have it. Why? Because it's in his career interest to show that in fact, Chang'ing could become a sort of center of technology and so on. Now, there's an interesting dynamic there in China which clearly doesn't exist in many other countries, but if you can start getting that kind of, you know, political sort of jostling, you know, I want to be the politician, the mayor who introduced, you know, and that's what the C40 is. The C40 is a group of, it's currently chaired by Mayor Bloomberg, it's a group of among the 40 biggest cities in the world that have said, actually, we're taking this climate change thing seriously and a lot of it is involved in both sort of technical bringing the best advice or sort of win-win kind of thing, but also then politically for the mayor of Durban to host, you know, a big meeting where we brought mayors together in Durban, this is good for the mayor of Durban, do you know what I mean? So there's politics, there's technology, there's policies, they've all got to come together and we've got to be pretty smart to get that mix just right. Okay, thank you, thank you all. I have lots more questions to ask, but I promise to leave a full half hour for questions from the floor. So why don't we go ahead with those? There's a microphone coming from the back and maybe if you could identify yourselves when you ask your question and ideally actually ask a question rather than pontificate. Why don't we start here at the front? I'm Mitzi Wertheim with the Naval Postgraduate School. And I've been working on energy since 05, I'm a social anthropologist. A number of things about the report that intrigued me. One is you left out human behavior. That turns out to be the number one issue the military is now dealing with vis-a-vis energy, is changing the behavior. Secondly, the report is so long, most people won't read it. And I'll just give you a very quick summary. Mike Mullen came to my house one evening for dinner about five years ago and I'd been asked to rethink education policy for the Defense Department, I guess it was eight years ago. And I was putting down some things that were clearly out of the range of how DOD was thinking and I had three pages of very few bullets on it. I gave it to Mike when he was leaving and I said, would you just look this and see if I'm really out of bounds? He said, Mitzi if it takes more than five minutes I'll never get to it. So the question I have for you is how do we get this nation to think in terms of systems, design systems, process systems, complexity. None of that is the way we're educated. I don't believe it's taught in business schools. How you can bring all these pieces together to understand this complex thing if you just deal with them in isolation. I'm glad to hear that you're beginning to recognize it but if you don't get it into the school system across the board. Okay, I think we've got the drift and Scott can see the best person to answer that. Your report is long-winded and off the point. How do you... I think it goes back to what we were really trying to achieve even in the greenhouse gas cost curve work we did before and then now on the resource productivity is try to find a way to integrate all these different pieces of silos and put it together in one magical chart that everybody can understand. So it was our attempt to communicate. We then have a tendency to put in lots of pages because people do need to be able to sleep and this is a helpful way. But our view of the communication was and I'm actually proud of the power of that one chart to actually engage and we see it now in some places when you go to schools. My daughter is in a school and she comes home with daddy and hears this chart and I was kind of stunned to find out that in high school she was looking at this issue. So I'm more optimistic that there is a way for these very complicated topics and it wasn't by design it was by luck that somebody came up with a chart that worked. But that's an example, I think, of one way to kind of engage in communication is to find a simple chart that people can get their heads out. What about the behavioral part though? It does seem that there is, in spite of what Fraser said, a huge behavioral element here for businesses, for bureaucrats, for politicians, you know... Animation. Yeah. Well, and we especially chose to be conservative on two aspects. One is behavior and the other is on technology. And the reason why is many of our corporate clients were particularly skeptical of anybody who's going to assert behavioral change or technology you're just dreaming. So we said, okay, we're going to find some solutions that don't require any technology change or any behavioral change to get after these issues. And then we'll treat those as opportunities to do more. If we can do more behavior, do more technology, that'll make our chart look incredibly conservative going forward. And in the report, that's how we position it. We don't have the expertise on the social side to get into the behavior of things, but we found it a very compelling way with the most cynical corporate executives to kind of position it that way. But won't you need behavioral change on the part of those corporate executives? Not mass consumer behavioral change to achieve these things, but I mean, in boardrooms, in bureaucracies. So the behavioral change on the consumption side is what we were talking about. But on the behavioral change of corporations, that's where this kind of work does actually help, because they're used to dealing with facts and analysis. And when you come in and say, and it's very much what colleagues were talking about, all this data out there, when they see the data and see the business opportunity from it, that's what gets corporations into action. And IBM and C3 both are providing ways to make that happen. And that kind of behavioral change we see in our clients happening at a very fast pace. Okay, thank you. Let's take another question here on that. My name is Nick Curitz. I'm with Constituation Energy. So you were talking about sort of the resource shortages, but from our point of view, I'm in the power industry and the price of power tends to be set by natural gas. And anybody who's been following the natural gas market knows that natural gas prices are getting crushed. The whole shale gas horizontal drilling is massively increasing supply. U.S. gas is stranded, can't be sold overseas because we don't have LNG exports. By the time we have LNG exports, Australia is going to be doing LNG exports. And so from the point of view of energy, it seems like there's sort of a revolution going on that how long this is going to last, I don't know, could be 20 years, could be 50 years. So this is sort of a boot in the works. I believe in global warming, and I don't think this is necessarily a good thing, but it's a prisoner's dilemma. I don't see anybody, any country having the incentive to step outside and not use that resource. So I just think that that really puts a big hole in the balloon of this pressure and lets a lot of pressure out. Let me forward that to you, Alan. We'll give Scott a break. So I think the fuel part of the power equation, absolutely true, gas sets the marginal price in a lot of markets, but the rest of the cost equation for most power, whether it's repowering power plants, constructing new to replace retiring plants, all the transmission distribution where copper, concrete, aluminum, labor, those prices are not going down. That's completely driven by the demand happening really in China and India and the Asia-Pac region. And so the real choice around the total price is probably being moderated by gas for now in some markets. It's not the same as in Europe. If you look at what some of the policy decisions are that are happening in Europe, natural gas prices has almost nothing to do with the price of power in Europe. We have a client in Germany just to give you an example of how this decision point is facing them with all the solar, the feed-in tariffs that are happening in Germany, the number one solar producing country, even though it's pretty cloudy. And their engineers are facing real dilemmas now because of the massive injection of solar. They have voltage issues at the secondary voltage level. And the decision is more what they call more copper, more transformers, re-conductoring lines, or trying to be smart about how they manage those flows. So it's really a trade-off of information versus copper. That's literally how they talk about it. And copper prices, as they're going up, is creating a strong diversion of their interest at the senior executive level towards some kind of smart way of mitigating that cost, irrespective of fossil fuel prices. Alan, couldn't you interpret that example as a sort of pessimistic one? I mean, that on two levels. First, that the price signal in terms of alternative energy isn't there because of cheap gas in many cases. And then on top of that, the way the price signal is, countries are attempting to insert the price signal is in this incredibly inefficient way that I'm sure McKinsey could write a huge report about with the beautiful cost curve of Germany spending a fortune to put solar panels under cloudy skies. Well, let's just take Germany for a second because with their decision to shut down the nuclear fleet in Germany by 2020, they have to replace with power somehow. I think even without feed-in tariffs, you would find a cleaner energy mix than coal generation that was a generation ago's substitute in Germany. And I don't think that the feed-in tariffs would have to go up. Arguably, they've gone down some already. I think you'd find all kinds of other creative strategies for mitigating that policy decision about nuclear power that would not require massive subsidy. I just don't think it's necessary. They're in a bind without it. Andrew, can I just ask on that? How is this all viewed in the developing world in particular? Do they think they've got a break because gas is cheaper, there's lots of coal around, or are they looking beyond that in some way? Is the bottom line still basically the resource price or is there... Look, I think in most developing countries, understandably, they are wanting to get the cheapest power. 68% of homes in Africa still don't have electricity. Now, an interesting question is, should the existence of climate change delay that, or should it accelerate? And one of the things that we tried to do in Durban was really change the psychology of Africa towards climate change to make it a much more pro-growth. So that, for example, my view is that the existence of climate change should accelerate those 68% getting electricity. Why? Because at the moment, they're spending $17 billion a year. African poor households are on solid fuels in the form of sticks and dung and so on, all of which are highly polluting and actually worse for climate change. Only 7% of Africa's hydro has been developed as opposed to 70% in most other regions. It's a renewable source of energy. But also, I mean, countries like Kenya, South Africa, Morocco are demonstrating that actually renewable energy is just as attractive, certainly over the longer term, I mean, particularly in North Africa. So you've got, for example, we've just done a deal with Morocco whereby it's the first of a whole step of investments in concentrated solar power that would double worldwide installed capacity. So we're putting in $750 million of subsidized money from what we call the Clean Technology Fund that will bring in another $5 billion of other financing, mainly private and carbon market funding. And as a result of that, North Africa and the Middle East, which has been, of course, the biggest exporter of old fashioned energy will become, in turn, the biggest exporter of clean energy to Europe. And so at the moment, power flows south through Spain into Morocco under the water. Five years from now, it will flow north and countries in Europe will be importing clean electricity. But I mean, I don't want to overdo this. I mean, at the end of the day, the vast majority of energy ministers understandably want to go the cheapest route and quite frankly, I mean, given what they have to do, one can't blame them. And I think the burden on us and this report and others is to try and show that over time, there is a better way. But we obviously need to lead by example. Sure. In the middle here, the gentleman on the aisle. Rasha Khramon, Virginia Tech, International Energy Efficiency Network. I'm interested in incentives. I know in the McKinsey Report, they talk a lot about incentives. Have you seen any creative incentive systems that are addressing this barrier in your work, any of you? Maybe Scott and David could both have a crack at that. Well, we put forward the, I guess the obvious instead of just get the price signals right. And when you get into the second order of facts of once you get beyond just getting price signals right, what can you do to get the right incentives when the market actually sees the right price to avoid some of the market failures, for example, in something like energy efficiency, because there are these agency issues where people don't make the right choices because the incentives aren't aligned. And we have lots of debates around how to do that. And the first kind of area of broad agreement is just having all the information available so all the decision makers understand the economics and it's both information and education. And then from there, the incentives get more into a political ideological debate. And you have those who say, this is so clear we need to put in standards and mandates to require people to use the right type of energy efficiency device, whether it's a light bulb or a heating and air conditioning system. Others say, no, we want to use a more market oriented approach and we're going to put in a whole variety of price signals to break through the market barriers and there are many examples of that out there. But the way I think about it is, first let's get the prices right, then let's get the information right and then we can start adjusting with getting after the second, third order of barriers. I'm going to add to it, the incentives question is interesting because there's two levels of answer. One is, do you have the right incentives, the right public policies and that's obviously the result of a political process. But assuming that the politics get the incentives right, one of the sort of non-priced market failures is the lack of relevant applicable timely information about the incentives, getting the information about the incentives to people who can take advantage of them. There's no lack of incentives or disincentives today that affect behavior, there's thousands of them. The ability for a large complex enterprise with global operations to figure out how to navigate through them, there's a barrier there and many times it's not a capital barrier as much as it is a capacity barrier. If you're running a large complex plan you've got so many things to take care of, pursuing the incentive is sometimes at the bottom of the list. So incentives don't always have the full effect that they might. We believe that information technology can help solve that problem. If rather than having a human being essentially do the search to try to find incentives that are applicable to your kind of process or your kind of facility and your particular jurisdiction, if you actually have a model of your enterprise that model can be used as the search query to then look at all the incentives that are out there, whether they're tax or utility rebates or what have you. We believe you can unlock a lot more actionable, relevant, incentive-based behaviors. There's a number of examples. In my previous job I worked for the pulp and paper industry and there was a change in the U.S. tax code related to biofuels. It just happened to hit as the economy was going into the tank and by recognizing that change in the U.S. tax code we were able to get a tax payment from the IRS, a rebate from the IRS that amounted to $1.2 billion in a single year. I don't think it was the intention of Congress to do that, but in fact that was the legal conclusion. We'll call Senator Lueger back. Yeah. But the point is there is an information capacity problem that could really make incentives a lot more beneficial. There was a statistic in the report that I think sort of speaks to all of this and so maybe Scott I could quiz you about it to show off how closely I read it if nothing else. It was about how most of the projects or the areas of potential efficiency gains were low hanging fruit with a good rate of return more than 10% and better yet if you eliminated subsidies and put in a carbon price then even more of the projects would have this great rate of return. But there was a horrible sort of glaring emission that 51% of the possible efficiency gains in energy had a rate of return of less than 10% and even once you've eliminated subsidies and put in a carbon price of $30 still 46% had a rate of return of less than 10%. So even in this world that we don't really imagine is coming anytime soon with no energy subsidies and a strong carbon price these are still going to be marginal projects aren't they? So I mean this question is critical even in the sort of economist dream world where there are clear price signals and no distortion. So what then is the most efficient way to get some of those 46%? So the analysis was looking at projects that would have a return between 4% and 10%. So in other words they were still attractive at a 4% cost of capital which was sort of a society cost of capital and the 10% is something more akin to what you would find in a kind of a corporate environment. So what we find is that we find frustration that we're not achieving as much we would like on those projects that are above 10% and the IBM and C3 have lots of IDs on how to get after them and we see it in our clients to go after them. But then you do get in the ones where there are lower returns and oftentimes at the consumer side where you have to be thinking hard around what is required in order to make those happen and many times if you are a free marketer you will say well those returns are just too low and consumers are going to choose not to happen and those opportunities will not be realized. So that's part of the cost curve where it gets very difficult to get implemented. And then if you're in a place like China we're just going to drive it that way through standards and very aggressive targets. That's where government plays a very big role and that they would argue that they're going to get that society benefits of these returns and that's advantage their system has with a strong effective government compared to a less effective government in a free market. So there's these debates that we see going on. My point of view on it is that since we are so conservative on the technology and on the behavioral side that we'll get more than the opportunities we see in those bars because technology is going to improve much faster than what we have in there. And the behavioral side is people absorb all these ideas and socially begin to engage them will pursue them on their own and we see that happening. So the reason why I, from an editor point of view was happy to put in those numbers is because I think they're all conservative. Alright, well let's hope so. Maybe we'll take a question at the back there. Thank you. Chris Herman from the US EPA. Thank you for a really interesting report. I had two questions for McKinsey. One, there was a table during the presentation that showed linkages with the wider arrows and narrow arrows. It's not in the report. I was looking forward to using it and wonder if it's available elsewhere. The second question has to do with this strengthening the price signals. The desubstitization is an important dimension but with respect to setting prices there's only the reference to setting a carbon price. Is it time to set a price on water? So the second one first and then Fraser can... First on the rink, it's page 51. Skipped over that page. Well I think, and again Fraser could point out the chart but on the price signals we do advocate a very or not advocates wrong word. We do see a huge opportunity to put in price signals on the water side as well. And when we talk about the trillion dollars per year cost of subsidies embedded in the system, water is about a third of it in there. So water prices is a huge issue. And in fact just to build on that inside McKinsey when we talk to our skeptical colleagues they say how on earth can water be a problem? It rains all the time. What's the issue? And then we say well when you have incredibly low cost of water and it's priced in this way it leads to these terrible water shortages and they go on and say well it's very simple we just need to put in price signals and we say yes it's very simple. But this is the big issue in water is getting the right kind of price signals in place and that would be the first step toward getting after this issue. Do you find Alan with your clients that obviously unfortunately most water goes to agriculture and they don't have the price signal but presumably your clients do have a price signal and do have an incentive to manage water as a scarce product by and large? Well you know it's not what you think. There's a lot of unmetered water. There are many cities that don't meter consumer based water accounts. Industrial water commonly has some metering attached to it and I think that a related topic to getting these subsidies removed is getting cross subsidies removed because we have a lot of average pricing while the average price might in total recover the long run marginal cost of that commodity. There's false price signals within that particular commodity and we can only look to power for an example of that. The vast majority of consumers never see the price of peak power as a more expensive decision than off peak power yet the wholesale price might be a thousand times more expensive at peak during off peak until we start pushing those cross subsidies out and seeing more de-averaging of prices which doesn't cost us anything on average. It's simply a matter of setting the right kinds of price signals for the right behavioral decisions. I think we'd see vast improvement there. Can I just say that comment? One of the things I've observed is what we're talking about this morning where we're kind of using interchangeably the idea of a price signal and a cost signal and obviously those are two very different things and I just think there's probably good advice for policy makers which is don't focus just on price signals but actually what you really want is the cost signal. You want the price to get as close to the actual cost as possible and that's how you would really begin affecting behavioral change. Sure, absolutely. With water it would be a good start to price it at all for most users, right? We've got another question at the back there. Hi, this is Mania Ranjan with McKenzie. We heard a lot of discussion on the topic of subsidies that they start the prices and you have to do away with any of the subsidies either in the developed world or the developing world. If you look at technological adoption over the years, any kind of technology or adoption has happened only because of some kind of subsidy which opened the door to any new technology and eventually led to a reduction of prices which then lead to mass adoption be it solar subsidies in Germany or feed and tariffs for wind. I was wondering that do we make any distinction between these two types of subsidies or are we advocating a complete removal of any kind of subsidies be it of any kind? Andrew, do you want to... Well, I think you're absolutely right that we shouldn't assume that everything here, even the part that supposedly below the cost curve is sort of totally free and that's precisely why we do actually need to mobilize resources. Obviously we work in the developing countries but it's just as relevant in the rich countries. One really does need to inject money very carefully throughout the entire decision-making system and so, for example, one of the things that came out of Durban was the creation of a green fund. One of the most controversial parts of that has been should there be a private sector window which we have fought very much for? Why? Because actually one needs to use a whole range of instruments that could be used whether to lower risk or to address the global externality but one has to use it very, very carefully so we monitor extremely closely the leverage that we get with our subsidized money for climate change, for example. In other words, I mean if we don't get a sort of 8 to 1 ratio that means we put in $1 and the overall investment in green investment if you like is $8 we would feel we're not doing a good job so the worst thing that would happen is if we raise a lot of money and we just go into old-fashioned projects we've got to precisely put it in very, very cleverly, we've got to be able to estimate the supply curve in whatever particular type of investment it is. And that's why, by the way, some countries are rejecting feed-in tariffs in the old-fashioned way because they feel Germany has wasted a great deal of money and some, such as Michael Lee Brick of the Bloomberg New Energy I mean his view would be actually the feed-in tariff in Germany slowed down in many ways the development of some forms of renewable energy and so that's why India and other countries have gone the route of sort of reverse distortions in order just to make sure we really do understand where that supply curve is. Alright, I think we only have time for one more question I'm afraid. How about this gentleman here near the front? Negi, Hanna, advisor to the World Bank among others. I want to come back to the issue of consumer behavior and particularly to relate it to the clients of McKinsey which understandably we're supporting a report that will focus more on the technical issues. One of the big problems is that what you may call induced behavior that comes more from commercialization, advertising, hyper-consumerism and so on. And that is catching up not only in the U.S. but all over the world particularly for the upper middle class and so on. And the question is that to what extent either corporate social responsibility or some change in the mindset will be needed to begin to address these issues because ultimately if everybody is aspiring for a higher consumer behavior including private car and everything else it would be difficult also for the politicians to change the signals as well. So it's not just an individual responsibility, it's a corporate responsibility and it's also a political responsibility. Can we tackle this problem because ultimately it's a vicious circle if the most powerful corporations essentially ignore their responsibility for the environment and I'm not accusing that they are like that but I'm saying by encouraging consumer behavior they will do that. So again I have an optimistic view on that and looking at over a long time frame if you think about the conversation we would have had say 20 years ago on this agenda and the attention that it would receive in a boardroom or middle management of any company was a very small share of mine where now it's a very big share of mine and most companies have an approach to engage externally with the world around what from their point of view could be done to make people more aware of these issues and also coming from their employees helping them figure out what views should this corporation put in place to enable the right incentives to be put in place so they can do the right thing. One of the things that is very frustrating to corporations is when they know what the right thing to do is and yet the signals they are getting from the policy makers is causing them to do exactly the wrong thing. It causes them a lot of grief because they have to explain to the customers and the employees why they are behaving in a way that is not against their own values. So I would say an enormous shift of attention toward corporations getting involved in a much more explicit way and there are many many examples of companies out there that are out there trying to engage with consumers around this topic and are devoting resources to it. They will be constrained by the fact that their primary role or at least if not the primary, a huge chunk of their role is toward generating profit and that will limit the resources they can deploy but I don't know any company that I see that doesn't have this high in their agenda is engaging in this debate. Would it be reasonable to say that trying to get companies to tell people they don't want the things they are selling that is going to be a difficult far out of plow but perhaps getting companies to acknowledge the implications of selling those things and therefore to make them efficient in their use of resources their creation of emissions and so on that's a more manageable goal isn't it? I think that's the ones who have really thought through this, this is the way they operate. So if you're Coca-Cola or Pepsi operating India and you consume lots of water you're not going to go tell your customers not to drink Coca-Cola because you have lots of water but you are going to go really try to find ways to use water responsibly and engage in the water conversation in a sophisticated way in India so it's that kind of mind so we haven't persuaded all companies to say stop using oil but they are looking through their value chain around what are the ways to use it more productively and many if not all of them now understand that the carbon needs to be at least part of the conversation which is very different versus 20 years ago. There's quite a few companies that are looking to different solutions to save money improve their bottom line by using fewer resources energy being most obvious but what we have found in our experience is that some of the very very largest energy consumers like Dow chemical customer of ours and using software technology to figure out how best to reduce their energy consumption has also recognized that they can use that technology to better understand and explain the full cost of their investment so if it takes a lot of energy to produce materials that in the end over the life of their use in the marketplace actually saves energy the ability to tell that story to consumers is very powerful and the ability to sort that out requires some pretty sophisticated analytics but we see more and more companies being able to tell that story that yes we consumed a lot of energy to make the product but in the marketplace it has a net benefit I'm going to wrap this up and I first want to thank our great panel Scott, Alan, Andrew and David for joining us today and for Edward for a great moderation of the session I think sometimes in Washington we focus on the right conversation at the right time we haven't been doing that often in this town but a conversation that talks about increased profitability increased jobs and increased sustainability all at one place I think that's the conversation this town needs to have we started it here and a real great thank you to Mackenzie for actually spending so much and investing so much time and hours on this kind of a report to be able to seed this conversation especially in this town but also globally and thank you all for coming thanks to Senator Luger and Absentia and we'll see you again next time thank you