China: Forcing the World to Rethink Its Economic Future

Thank you Mark. As uh, I was coming in someone said that we need to uh, meet the uh, moderator tonight. And I said, "Who is the moderator?" and she said "Mark Herzog" and I said "Wow! I haven't seen Mark in a few years now." So its just great Mark to see you again. When you were talking about the books I remember when the late senator Paul Simon of Illinois was introducing me and he held up the copy of the latest book and he said, "Lester's written the sort of book that once you put it down you can't pick it up again." I have a friend in Washington who is an amateur masseuse and she once told me that she could put a person to sleep in fifteen minutes. And I said "well I don't in any way want to diminish you skills but in fifteen minutes I can put a whole room full of people to sleep. Can I just tell stories for a while Mark? Our time is short tonight and those of us who've been working on environmental issues have been saying for a long time, Mark was saying this in his book "Earth Odyssey" several years ago, hat for environmental reasons we need to restructure the global economy. I mean the simple reality is that the existing economy is slowing destroying its support systems and if we go back and read Jared Diamond we know what happens to civilizations that destroy their support systems. Though many of us environmentalists, environmentalist, environmental scientists, ecologist have been convinced in need to restructure the economy, not enough people have yet been convinced because we're not making much progress. But what's happening in China I think is going to convince the economists as well as the ecologists. Almost ever since most of us can remember, we've been saying that the United States, with five percent of the world's people consumes a third or forty percent of the earth's resources. That was true, it is no longer true. China now consume more of the basic resources than does the United States. We look at the food sector, grain and meat, the energy sector, oil and coal, the industrial sector, steel. Of those five basic commodities, China now consume more than the United States of each of them except oil, the United States still has a wide lead in oil consumption. Meat consumption in China nearly doubled that of the U.S., steel consumption in China more than double that of the United States. But the fact that China has now eclipsed the United States in the consumption of most basic resources gives us license to ask the next question which is what happens if China catches up to the United States in consumption per person? If the Chinese economy slows a bit to say 8% a year, then by 2031 income per person in China will be comparable to that of the United States today. If we further assume that the consumption pattern will be similar then in 2031 China's 1.45 billion people will be consuming the equivalent of two-thirds of the current world grain harvest. At U.S. paper consumption levels per person China's paper consumption will be double current world production, there go the world's forests. Or if China one day has three cars for every four people, as we now do, China will have a fleet of 1.1 billion cars. The current world fleet is eight-hundred million cars. China would have to, to accommodate that number of automobiles, China would have to pave for roads, highways, parking lots an area comparable to the area now planted in rice. China's oil consumption would be 99 million barrels a day. Current world consumption, current world production is 84 million barrels a day and it may never go much beyond that. What China is teaching us is that the western economic model, the fossil -fuel-based, automobile centered, throw away economy is not going to work for China. If it doesn't work for China, it will not work for India, which by 2031 will have an even larger population. Nor will it work for the other three billion people in the developing countries who are also dreaming the American Dream. And perhaps most importantly, in an increasingly integrated global economy, where we all depend on the same oil, grain, steel, it will not work for us either. Sustaining economic progress now depends on restructuring the global economy. Shifting to, shifting from a fossil fuel based economy to a renewable energy powered economy, from an automobile dominated transportation system to a much more diversified transport system, from a throw away economy to a comprehensive reuse, recycle economy. This is the big challenge for our generation. And we don't have a lot of time, we can't wait till 2031 when China's consuming more of many resources than the world currently consumes. We're gonna have to start the restructuring soon. The stresses are already beginning to build. I would argue the price of oil is one of the manifestations of growing stress of a world of six and a half billion increasingly affluent people on the earth's energy resources. Now the question is, I mean, one of the questions is what will convince us I mean what will the evidence be that will convince us we have to change? One can sketch out many scenarios. One that I think is perhaps most likely is the one where food prices begin to rise. We have always been concerned about the effect of high oil prices on food production costs, simply because modern agriculture is so oil intensive. That continues to be a major concern. But more important is the effect of high oil prices on the demand for agriculture commodities. Because once the price of oil gets up to sixty dollars a barrel, where it is now, it becomes profitable to convert many agriculture commodities into automotive fuel. Almost everything we eat can be converted into either ethanol or bio-diesel used for use in automobiles. So what this means in effect, is that the world price of oil becomes a support price for agriculture commodities because if at any time the food value of a commodity drops below the fuel value the market will move that commodity into the energy economy. Up until recently, within in the last year or two, the various bio-diesel programs in various countries in Europe, the United States, Brazil, a few other countries were all driven by government incentives. Now, with the price of oil so high, the market is taking over Brazil, for example, which is with the U.S., the leading producer of ethanol in the world some forty-four percent of Brazil's automotive fuel last year was in the form of ethanol. But Brazil has no subsidies at all now for bio-fuels. Its all market drive and what were seeing is heavy investment. More than five billion dollars have been committed to investments in sugar mills and ethanol distilleries in Brazil. . In this country we now have something like ninety-five ethanol distilleries. Up until a year or so ago they were all in the corn belt. Now they're being built two in New York State, North Carolina, Georgia, Florida, Texas, California, scattered all across the country. And there are another thirty five in the planning stage. As the capacity of the bio-fuels industry, either ethanol distilleries or bio-diesel refineries expands, then were going to see direct competition between supermarkets and service stations for the same commodities. Up until recently, there was one group of buyers in the agriculture commodity markets and they were all buying for food processors. But what's happening now is that there's a second group of buyers and they are buying for fuel producers, either ethanol distilleries or bio-diesel refineries. This sets the stage at the global level for direct competition between the eight million of us that are affluent enough to buy automobiles and the two billion poorest people in the world for the same agriculture commodities. Now were already beginning to see the signs of higher prices of agriculture commodities as a result of this. If you follow sugar prices you know that the world price of sugar right now is at the highest level in twenty four years and projected to rise further this year because of the extraordinary growth in the number of ethanol distilleries, particularly in Brazil. Brazil has already had delegations with Japan and China discussing possible long term ethanol supply agreements. So this competition between food processors and fuel producers for agriculture commodities is, has the potential, I should also mention that in Europe where rape seed oil, in this country we call it canola, is in short supply and the margarine producers association of Europe has complained they canít get enough vegetable oil to make margarine. Unileaver, major user of vegetable oil in its products is complaining about this. But were only on the beginning of this and what could happen is that we could see grain prices for example, double. Particularly given the fact that world grain stocks are at the lowest level in thirty years. And if we have a moderate or poor grain harvest this year and soaring demand for grain to convert in to ethanol then we could see grain prices take off. The risk is that high grain prices could lead to political instability in low income countries that import a sizable share of their grain supply. That political instability could disrupt global economic progress and effect the UK index and Dow Jones 500 and so forth. Most of us in this room could survive a doubling of world grain prices, there are a lot of people who couldn't of course, we probably could. But when it begins to effect the stock markets and the value our penchant funds and so forth, then it would begin to effect us rather directly. So there are many scenarios one can sketch out as to how were going to face reality and realize we've gotta restructure the global economy. Now, and this is one, now there is an alternative to the bio-fuels, transport fuel model and that is, and I'll use the United States to illustrate this, if either for oil security reasons or for climate stabilization reasons we decided in this country that we're going to dramatically reduce oil and therefore gasoline use we could do it by, say over the next decade systematically shifting to gas/electric hybrids as our basic propulsion technology. Now this is, this could be done with incentives of various kinds, various ways of doing it but, if we were to shift entirely to gas/electric hybrids, we could probably cut our gasoline use in half. But this offers another option and that is a gas/electric hybrid with a second storage battery and a plug in capacity. That would enable us to do our short distance driving, the daily commute, grocery shopping, that sort of thing, entirely or almost entirely with electricity. Now, looking at the supply side of the equation, if at the same time we are making this shift to gas/electric hybrids we invest in hundreds, maybe even a few thousand, wind farms across the country feeding cheap electricity into the grid. Then we have the potential of running our cars on wind energy. In effect, advance in gas/electric hybrid technologies and in wind turban design have set this, have provided the technological foundation for creating an entirely new automotive fuel economy. The, using wind, particularly in the night when demand for electricity drops, using wind generated electricity would cost maybe sixty cents the equivalent of sixty cents a gallon for fuel so it is cheap. It is cheap, it is inexhaustible and its ours. Its ours. Nobody is gonna be able to cut off the wind supply. So this is what is exciting about, for me one of the most exciting ideas in plan b 2.0, being able to see with technologies now on the market, how we can make this shift. Now, let me just comment, oh incidentally one of the great advantages of marrying wind energy and gas electric hybrids is that the batteries in the hybrids become a storage facility for wind energy. One of the weaknesses of wind energy is that it fluctuates. But with gas electric hybrids and the batteries storing wind energy, but beyond that we have a tank of gasoline for back up if its needed. So this is a great way of incorporating wind energy into the economy in a major way. We've been a little slow in this country in developing wind energy. We got off to a quick start here in California more than twenty years ago. But then we sort of forgot wind energy and the incentives phased out. And we didn't keep developing it. Europe has. In Europe today, there is enough electric generation to satisfy the residential needs of forty million Europeans. The European Wind Energy Association projects that by 2020, wind could be supplying the electricity needs of 195 million Europeans or roughly half the population of Europe. In this country, some of you will remember that, in 1991 the Department of Energy did a national wind resource inventory, in which they pointed out that three of our fifty states, North Dakota, Kansas and Texas have enough harnessable wind energy to satisfy national electricity needs. And many of us said wow because we just didnít know that wind was such a huge resource. But in retrospect, we know that was a gross underestimate because it was based on the wind turban technologies of 1991. Advances in wind turban design since then enable wind turbans to operate at lower wind speeds, to convert wind into electricity more efficiently and where as in 1991 the average turban was maybe 120 feet tall, now the turbans are three hundred feet tall so we're harvesting a much larger wind regime at a higher level, stronger winds, stronger and more reliable winds. So wind energy is a vast resource in this country. And its beginning to grow very fast. One of the most interesting recent developments has been the entrance of Goldman Sachs into the wind energy. How many of you are aware of Goldman Sachs? Investment in wind energy I should say. Several people do. Its interesting because about this time last year, as I recall, Goldman Sachs bought a small wind farm development company called Horizon and as of now Horizon has 5,000 megawatts of wind generated capacity, they're under construction, in the planning stage. Now, I think most of that is in the planning stage. But just to put it into perspective 5,000 megawatts is equal to seventeen three hundred megawatt coal fire plants for example. So this is, this is not a trivial commitment and I think its just beginning. Now Goldman Sachs is not doing this because they want to be good environmentalist, I mean they may want to do that, but they're doing it because they see a decent rate of return. Now one of the most interesting developments in the U.S. energy market is that, as most of you know over the last decade many utilities have offered customers green power but you had to pay a premium for it, additional ten or fifteen percent. And what's happened now in some situations and the one I'm most familiar with is is the Austin, Texas utility is that while people bought green power on long term supply fixed contracts the cost of the rest of the electricity that the utility has to sale has gone up rapidly because of rising natural gas prices. And so now, the people who paid the premium to get the green power are getting the cheapest power. And suddenly there are a lot of environmentalists out there wanting to sigh green power contracts. Of course there's not enough to go around but there is a basic shift underway in the economics of energy. And with natural gas prices having nearly, what, doubled over the last fourteen months or whatever we're beginning to see this come into play. I had a phone call for my son some months ago he was driving on an interstate in west Texas and he saw one of the new wind farms there. Texas now is gonna pass California before too long in wind generations, moving very fast. But he said it was fascinating because this was a big wind farm. He said you could see the rows of wind turbans sort of receding towards the horizon. And interspersed among the wind turbans were oil wells. And the wind turbans were turning and the oil wells were pumping. And he said it was, he was frustrated because he didn't have his camera with him, but he said it was like the past and the future meeting. You know the fossil, the age of fossil fuels and the age of renewables in the same image. And I said you know if you go back thirty years from now the wind turbans will still be turning but the oil wells will not likely be pumping. And so, this sort of, I mean what he was looking at was the energy transition and that's what we gotta be working on. Not only in this country but throughout the world. Plan B 2.0 has three principal components. One is the restructuring of the global economy and the key to restructuring the global economy is to get the market to tell the ecological truth. Now it does not. For example, we're gonna to be looking at photographs of China after this, the exhibit out here. In 1998, there was extended flooding in the Yangtze river basin in China, some of you will remember, went on for several weeks. It did, in the end, 30 billion dollars of damage. To put that in perspective that's the value of the annual rice harvest in China, so it is not trivial. And for some weeks the government said well this is an act of nature, but then in mid August, and it was an act of nature in a sense, it was monsoon season and there was flooding in China and thatís not new. What was new was the scale of the flooding. So they had a press conference in Beijing in mid august and they said, "This is an act of nature, but there 's also a human contribution." The deforestation of the upper reaches of the Yangtze river basin is contributing to the severity of the flooding and they announced a ban on tree cutting. Initially in the Yangtze river basin but it quickly became nation wide in all natural forests. And they justified it economically by saying, by pointing out, they said the value of trees standing are worth three times as much as trees cut. And what they were recognizing, was that the flood control services provided by forests are three times as value as the timber in those forests. Now when you see a cartoon and sometimes you see the light bulb, you know the idea, that's what happened in China. That was a conceptual breakthrough. And what happened in China, in the summer of 1998, is what has to happen to the world. As we look at the costs of various products, for example we pay for a gallon of gasoline two dollars or maybe three dollars but the cost to society, based on the most detailed study which I've seen which includes the medical costs of treating respiratory illnesses, damage from massive rain, climate change, the cost of the military establishment to protect our excess oil in the Middle East, when you put all these things together, a gallon of gas costs more like nine dollars a gallon than two or three dollars a gallon. What's happening is that we as economic decision makers, as consumers, as corporate planners, government policy makers, investment bankers, we all make decisions based on the economic information that the market gives us, information on prices. But the market is giving us bad information. And when you get bad information, you make bad decisions and that is what's happening. We need to restructure the tax system to begin to reflect these so that product prices reflect these indirect costs. We're not talking about raising taxes. We're talking about reducing income taxes and off setting that with taxes on environmentally destructive activities like carbon emissions, use of pesticides, discharging toxic wastes, material going to landfills, these are the things we need to be taxing in order to get the market to tell the truth. If we get the market to tell the truth, a lot of things will begin to fall into place. Oisten Dolly, a Norwegian, and for many years the Vice President of Exxon for Norway in the North Sea, now retired, said in the early 1990's after the fall of the Soviet Union, he said, "Socialism collapsed because it did not allow the market to tell the economic truth." Capitalism may collapse because it does not allow that market to tell the ecological truth. And that's on page 228, I think, or something like that, in the last chapter of Plan B 2.0, But in that he caught the essence, I think, of the issues. So economic restructuring does not require a fiscal budget, to speak of, it depends mostly on restructuring the tax system. Decreasing income taxes, increasing taxes on environmentally destructive activities. The second major point is the eradication of poverty and the stabilization of population. I put those two in the same package and that does have a cost of about 68 billion dollars of expenditures per year worldwide. And that includes making sure all youngsters go to school, get at least an elementary school education, girls as well as boys, it means school lunch programs in the poor of the poorest countries, it means basic village level healthcare, including things such as childhood immunizations for infectious diseases and so forth. And it means make sure that women everywhere have access to reproductive healthcare and family planning services. We should not forget that most of the three billion people to be added between now and 2050 will be added in countries where water tables are already falling and wells are already going dry. That's not a happy situation over the long term. So, gotta stabilize population sooner rather than later and as Jeffery Sachs points out, for the first time in history, we have the resources to eradicate poverty. Gonna have to wrap up here. The third component is what I call the Earth Restoration Budget. Reversing deforestation, restoring fisheries, controlling soil erosion etc. That comes in at 93 billion a year you combine that with poverty eradication and population stabilization and were looking at 161 billion dollars of additional expenditures. Now that quite a bit of money. But its , only a third of our military budget of 492 billion dollars this year. Which incidentally, for the first time in history is equal to the military expenditure of all other countries combined. If ever there was a situation where fiscal priorities and the real threats to our future security are out of sync its in Washington at the moment. These high priced weapons systems, some of which cost over a hundred billion dollars to develop over a period of years, are useless in reversing the deforestation and climate or in stabilizing climate or in restoring oceanic fisheries. These are the real threats to our future. Climate change, population growth, these are the things we need to be concentrating on. And terrorism is a problem for sure, but its not the major threat to our security by any stretch of the imagination. Climate change is and failed stated of population growth as societies disintegrate, those are real threats to our future. The scarcest of all resources is time. We don't even know for sure how much time we have. I mean it'd be nice if we could reset the clock, but nature's the time keeper here, nature's established a threshold and its nature that's going to make the decisions if we make this time or not. With climate change, melting of ice in the arctic sea, which in turn could result in the melting of the Greenland ice sheet. If all the ice melts in the arctic sea that doesnít affect sea level because that ice is already in the water. But if the warming of the arctic as a result of that ice melting leads to the melting of the Greenland ice sheet see level rises twenty three feet worldwide. Most of the worlds coastal cities will be under water if not entirely, then partly. The rice level growing deltas and plains of Asia will be under water. We're looking at a world unknown or one that we can easily imagine. We're also looking, for the first time in history, socially fracturing generation lines. We've seen socially fracturing religious lines, racial lines, ethnic lines, geographic regions, but now perhaps along generational lines because the next generations is going to say why didn't we do something? We knew what was happening. They'll look back at the same scientific literature we read. Why didn't we do something? That's our challenge. And saving civilization, and were not talking about saving the earth now, we're talking about saving civilization. The stakes are high. And it is not a spectator sport. We all have to get involved and it means becoming politically active. We can all make lifestyle changes but we need to become politically active at the local level, at the national level. Gotta support candidates that are gonna take these issues seriously and do something about em otherwise we will most likely see a social fracture along generation lines. It will not be a happy situation. How will it effect us if we realize we set into motion something that is going to melt the Greenland ice sheet? How will it effect our perceptions of ourselves? Q & A