Clean energy -- Necessity and Opportunity (26 July 2006)

We must change that mind-set and see environment and sustainable development as opening up promising new areas of economic opportunity, opportunities for technological and institutional innovation and for the development of an environmental services industry.

Keynote Speech of Maurice F, Strong, at the 5th International Symposium on Shanghai Development in the 21st Century

I always feel a surge of excitement and awe when I return to Shanghai as I am caught up in the dynamic spirit that has made it the most rapidly growing great city in the world. I am particularly pleased and honoured to have the opportunity of addressing this symposium which is focusing on Shanghai's development in the 21st century. As one of the world's leading megacities I congratulate the organizers and sponsors who have made this event such an important occasion, and accorded me the opportunity to address such an impressive group of participants. Indeed, this has become one of the most important events of the many now occurring in China, for which Shanghai has become such a favoured venue, preparing the way for World Expo 2010, which promises to be the biggest ever.

Shanghai set the pace of the truly remarkable progress that China has made since it began to open up and reform its economy some 25 years ago; This has provided a sound and promising basis for its future. It has also pointed out the risks and vulnerabilities, which cloud that future and threaten to deprive the people of China of the benefits of its phenomenal economic growth. This growth, unprecedented in human experience, has lifted more people out of poverty than has ever before been achieved in any country. It has also exacted a heavy cost. Many of China's cities are now amongst the most polluted in the world. Shanghai, too, has suffered deterioration of its environment, but I am encouraged to note that it is now managing this well. The leadership and the people of Shanghai understand that its future in the 21st century will depend on its ability to make the transition to a sustainable development pathway as the only means of ensuring security and continuity of their remarkable progress.

Healthy and unhealthy growth

The growth of cities is not in itself sufficient to ensure their sustainability as places where people can fulfil their aspirations for a better life. Only those which choose and move successfully onto the pathway of sustainable development will succeed in this. As we know from our experience as humans, there is a vast difference between healthy and unhealthy growth. In childhood and youth, physical growth is necessary to prepare people for a healthy, productive, and wholesome adulthood. But when people reach physical maturity, to continue physical growth becomes unhealthy and even cancerous. The emphasis must shift to the cultural, moral, educational, and spiritual dimensions of growth that also produce exciting new economic opportunities. Cities, too, must make this transition if they are to avoid being afflicted with the kind of cancerous growth that will be self-destructive. While I am sure this is not the. intention of their leaders or people, it will nevertheless be the inevitable result of their on their continuing current pathway, which is simply not sustainable. Let me first remind you of the context in which the environment has emerged, from an Issue of marginal interest to one which we must now see as fundamental to the human future.

We now understand that the environment embraces a broad range of issues through which human activities impact on the quality of life in cities and towns, the health effects of pollution and contamination of the food chain, and threats to the Earth's life-support system through such global phenomena as impacts on climate change, ozone depletion and accelerated loss of biodiversity. The Stockholm Conference put the environment issue on the global agenda and affirmed its inextricable link with development. It also gave rise to establishment of the UN Environment Program as the world environment organization.

This was notable, too, as the first Global U.N Conference of the United Nations in which China participated when it took its rightful place as a member of the United Nations. For me, it also began the long relationship I have had with China in the environment field, notable with Professor Qu Geping who became the pioneering leader of the movement in China. In my role as Secretary-General of the Conference, first head of the UN Environment Program and Secretary-General of the Earth Summit I developed the close relationship with China which I continue today.

Our common future

After Stockholm, never more could the environment issue be considered only in the narrow context of the pollution problems of the rich, but as deeply relevant to the development needs and aspirations of developing countries, underscoring the imperatives for new dimensions of cooperation and equity in north-south relationships. This is a legacy that continues. The essential link between environment and development which was articulated at Stockholm has since evolved into the broader concept of sustainable development in which the economic, social, population, gender and human settlements dimensions of the development process can be seen in their systemic relationships with each other. This was well articulated in the report "Our Common Future" of the UN mandated World Commission on Environment and Development which made the case for sustainable development as the only viable pathway to a secure and equitable future for the human community. This led to the decision by the UN General Assembly in December 1989 to hold on the twentieth anniversary of Stockholm, the UN Conference on Environment and Development - The Earth Summit - held in Rio, De Janiero, Brazil in June 1992.

The Earth Summit produced agreement on Agenda 21, the Declaration of "Rio" Principles and on two historic framework conventions, one on Climate Change and the other on Biodiversity which have since come into effect. It also launched the negotiating process, which led to agreement on a Convention on Desertification, an issue of special importance to China and many developing countries, particularly in the arid regions of Sub-Saharan Africa. The follow-up conference in Johannesburg, South Africa in 2002 reviewed progress - and lack of it - in implementing the decisions of Rio and gave renewed impetus to this process.

Successful transition

Despite progress and many good examples, globally the condition of our "Only One Earth" and its prospects continues to deteriorate. What happens in China will be decisive to the future habitability of our earth and what happens in Shanghai will be decisive for China's future. Indeed no country will benefit more than China from the successful transition to global sustainability and no country will suffer more from its failure.

My remarks today will concentrate primarily on the energy dimensions of the challenge Shanghai faces in the 21st century and the great new opportunities it now has to meet this challenge in ways that will give it a new generation of opportunity and comparative advantage. Energy - its' production, transportation, and use is at the very heart of this challenge, affecting virtually every sector of the economy. Although China's energy consumption on a per capita basis has declined significantly, it continues to consume some 10 times as much per unit of GDP as Japan and 3 times that of the United States. This imposes a burden on both the economy and the environment, which is simply not sustainable, quite apart from its immense costs in terms of human health. It is a gap that China must bridge.

This, I submit, presents exerting new opportunities for Shanghai and other megacities. Globally, transportation and buildings account for most energy use. In these sectors alone, as well as in its industries, Shanghai can effect substantial reductions in energy use, with major benefits to both its environment and its economy. To do so it must make its industries and its buildings more energy efficient, develop a more energy-efficient transportation system through use of natural gas in bus and truck fleets, more fuel-efficient vehicles; make further improvements in public transit and the incentives for people to use it. It must take the lead in developing and utilizing renewable energy resources, which cannot replace, but can significantly reduce the dependence on more polluting energy sources, notably fossil fuels. The technologies to do this are increasingly available, many either developed or improved in China, Shanghai is the logical place to see their further development and their application. This requires that all levels of government provide a system of incentives, regulations and penalties designed to drive this process. I am most encouraged by the evidence that Shanghai's leaders are already moving in this direction.

In past times changes occurred over much longer periods of time which enabled societies to adjust to them. Their impacts were largely confined to their own localities and regions. But today the changes which are determining the conditions of life and the future prospects of people everywhere are occurring within a global framework in which human activities, wherever they occur, are inextricably linked to a system of cause and effect in which their sources are often widely separated both in place and in time. All contribute to and are affected by the cumulative results of our individual actions and behaviours. And these phenomena know no boundaries. Thus climate change which threatens to affect the habitability of the entire earth has its main source in the ways in which people meet their energy needs notably in their transportation systems.

China is becoming the world's most rapidly expanding market for automobiles and potentially the largest manufacturer and exporter. The Chinese people cannot be denied the right to own automobiles. But it is in China's interests to ensure that in their manufacture and use environmental impacts are kept to a minimum as part of more integrated and efficient transportation systems. At this stage in the development of its automotive industry, China has a great opportunity to be a leader in developing and producing environmentally friendly vehicles. It is already taking some encouraging steps in this direction. Beijing, Phoenix, Arizona, and Los Angeles are amongst the growing number of cities is effecting significant reductions in air pollution by using natural gas for fuel. I am pleased to say that a Canadian company with which I am associated, Westport Innovations, has developed the technology which enables this to be done on an economic basis, including a promising new means of combining natural gas with hydrogen. Shanghai now has the opportunity to set the pace for cities throughout China to reduce air pollution by adopting this new technology, and contributing to reducing the global risks of climate change.

New challenges

The challenges that those who manage the cities of China are facing in their own communities are affected by what happens elsewhere in China and the world. While the nature of the ways and the extent to, which local actions and individual behaviour effect global sustainability vary considerably, they all occur within a framework of inter-actions that is systemic in nature and global in scale. Thus, the manner in which China's energy needs are met will not only affect the global climate, but will also be affected by the availability and the cost of energy supplies that is a product of global supply and demand.

The dust storms rising in Northern China, which undermine the productivity of its agriculture pollute the air in many other regions of China and even beyond. The alarming destruction of China's rich biological resources, the threats to its plant and animal life, the contamination of coastal waters, and the dangers to marine life of unsustainable urbanization are all issues in which China's actions are directly linked to the prospects for global sustainability. It is also the key to its own future, the reason that its transition to sustainable development is so necessary.

Technology is an essential feature of the prospect for positive and sustainable responses to each of these challenges. China, with its long history of scientific and technical innovation, now has one of the world's most creative and respected science and technology communities. It is thus well-positioned to respond to the challenge of making the transition to a scientific approach to harmonious, sustainable development to which its leaders are committed. China's scientific and technological community is increasingly linked with its global counterparts. Indeed, the President of China's Academy of Sciences, Professor Lu Yong Xiang, co-chairs the Inter-Academy Council, through which the leading academies of science of the world cooperate to address major global issues, including a very timely and important energy study.

China must act swiftly and decisively to improve its energy security, to accelerate development and better utilization of its own resources, and ensure more secure access to imports. Its most immediate, and I would suggest, most urgent opportunity is to reduce the rate of growth in its energy demand through conservation and efficiency in the development, transport, and use of energy. China has already made significant progress in this respect, but is still much less energy efficient as some of the traditional industrialized countries. This presents China with an immense "win-win" opportunity to reduce its reliance on foreign supplies by providing more time and releasing more resources to develop its own indigenous sources. These opportunities are mainly concentrating in its meg-cities.

Constructive participant

China's rapid growth and its dependence on fossil fuels for its energy supplies has made it one of the principal sources of greenhouse gas emissions, which give rise to global warming, a growing risk, particularly for the future of low-lying cities like Shanghai. China is expected to account for 26% of new global emissions by 2030, more than the increase in emissions by all OECD countries combined. While China has not been required to accept targets for reducing its emissions, it has been a very constructive participant in the Climate Change Convention and in implementing its Kyoto Protocol despite its repudiation b y the United States. One of the provisions of this protocol establishes a Clean Development Mechanism (CDM) through which those who can effect emissions reduction at a lower cost than others can obtain an economic benefit by selling the credits earned to those who must pay a higher cost to effect a comparable reduction in their emissions. Although China has yet to establish the conditions under which this can be allocated and then traded, an Informal market has already developed. I believe China is likely to become the principal source of such emission credits and one of its main beneficiaries. There is now a movement to establish a carbon trading program in China, tor which Shanghai would be the logical center.

Of course, emissions trading is only one of the measures that can contribute to reducing emissions of greenhouse gases on a cost-effective basis. Critics contend that it provides an incentive to pollute and will enable polluters in the more developed countries to buy their way out of their obligations by transferring their emissions to developing countries. Advocates, on the other hand, rapidly growing in number, point to evidence that, with proper establishment and enforcement of overall emission caps, it can produce substantial reductions in emissions and in the cost of making such reductions.

The best example is the actual experience in the trading of sulfur dioxide (S02) emissions established in response to the requirements of the United States Environmental Protection Agency to reduce acid rain. At the time, there was much discussion that reducing sulfur dioxide would be too costly to the economy. However, in fact what happened was that S02 emissions were reduced from 17.3 million tons in 1980 to 1003 million tons in 2004, and it is estimated that the cost of the U.S. acid rain program in 2010 will be 3 billion dollars to produce an annual benefit of 122 billion dollars. Already, China's S02 emissions are more than double those of the United States, and an effective sulphur trading program here in China is probably also desirable. Last year, in the United States, in response to the greater S02 market maturity and the need for industrial users and financial market participants to better manage their risk, the Chicago Climate Exchange, known as CCX, a pioneer of sulphur trading in the US. as well as carbon and other environmental markets, launched the Chicago Climate Futures Exchange, which was the first exchange to offer futures contracts in S02 allowances in the U.S. sulphur dioxide market.

Chicago Climate Exchange

The carbon market globally, and in China, dwarfs the US sulphur dioxide example. The immense potential of the carbon market can be appreciated by the knowledge that in the United States, the potential carbon "crop" will exceed-the total value of its corn, wheat, and soybean production. In 2005, in fact, the carbon "crop" in the European Union had already surpassed the value of these U,S. grain crops.

The Chicago Climate Exchange (CCX) was founded in 2003 by Professor Richard Sandor, who pioneered establishment of the S02 emissions market. With over 200 multi-sector members and many other associates, it is the only carbon market in the world handling all six greenhouse gases, I must disclose my interest as Vice Chairman of the Exchange, before telling you that it is the world leader in the field, now well on the way to being the centre of a global network, while also being able to design trading programs that are compatible with differing national regulatory frameworks and objectives. It founded the European Climate Exchange that now handles 80 to 90 percent of all exchange-based trading volume in the European Union Kyoto Protocol Trading System, making it the largest exchange in the European Union trading system. It co-founded the Montreal Climate Exchange with the Montreal Exchange in Canada, to design a Canada-specific system, and has established links with the Multi-Commodities Exchange in India, It is now reaching out to others that are rapidly developing throughout the world, notably Asia, to address specifically Asian considerations.

China is well-positioned to take the lead in Asia. Now is the time to make this move. China's carbon trading program must, of course, meet the distinctive needs and character of China, and be controlled and run by Chinese. I am pleased to say that the Chicago Climate Exchange has offered to cooperate in developing a Chinese counterpart and to customize a trading solution for Chinese requirements. Such an entity would be a key centre of the network of exchanges now being developed by CCX throughout the world. This is a very practical and immediate example of how Shanghai can meet its own challenges to achieve sustainability in the 2P' century can take advantage of a unique opportunity in adding new dimensions to its role as one of the world's principal financial centres.

The North American architecture of CCX requires members to make a legally binding commitment to reduce or trade their emissions by one percent a year from 2003 to 2006, below a baseline average of 1998 to 200I. In the next phase, its original members must reduce their emissions by an additional 2 percent and new members by 6 percent by 2010. This means that all members will have achieved a 6 percent reduction by 2010. CCX also includes cities, such as Chicago and Portland, Oregon, and the city of Shanghai could also join the Exchange, to learn more about trading and perhaps gain additional benefits from the many energy efficiency changes underway including in the city government operations. Of special importance in China is the fact that the CCX structure also includes verified offsets projects involving agricultural soil sequestration, reforestation, landfill and agricultural methane destruction, and renewable energy projects earn credits. Under certain conditions. Chinese offset projects could enter the CCX market as well. All CCX projects are subject to rigorous independent verification, and CCX's strong governance system has also contributed to the confidence it has earned as the leader in this rapidly growing new market.

New markets

As this is a relatively new market, and there have been many uncertainties as to how it will evolve, the price history of credits traded on CCX has followed an upward trend. Trading volume has also been growing significantly. In May of this year, trading on CCX reached 3.150,500 metric tonnes of C02 equivalent, more than double the total for the entire year 2005.

China's stunning economic growth, moving it to the front ranks of the world economies, has been accompanied by a high sense of responsibility to the developing countries of Asia, Africa, Latin America, and particularly the poorest of these which look to China as a role model. The COM offers developing countries the prospect of obtaining substantial new resource flows; though care must be taken both by them and the international community not to allow this to make them pollution havens that more developed countries can use to buy their way out of their own emissions problems.

Coal will remain a major source of energy, especially for electric power generation. Some of the world's most import dependent countries, including China, as well as the United States and India, have abundant reserves of coal. China's recent decision to invest heavily in converting coal to liquid fuels will clearly help reduce its imports, which will nevertheless inevitably grow in the foreseeable future. Overall, fossil fuels will continue to be the dominant energy source. This means that environmental problems, including air pollution and C02 emissions will undoubtedly worsen. The production, transportation, and use of fossil fuels all create significant environmental impacts. To reduce these impacts while meeting the growing energy needs of China is clearly one of its most formidable challenges.

Although the process of reducing our dependence on fossil fuels has already begun, the fossil fuels era is far from over. Indeed, oil is expected to retain its dominant, though gradually reducing role, in the energy mix for at least the next two decades, accompanied by the development of new and alternative sources and efforts to improve efficiency and reduce the environmental impacts of fossil fuels. I foresee an intensification of competition for reliable access to oil and gas on the part of the countries most dependent on them. Competition is already emerging between Japan, China, and Korea for access to major new reserves of oil and natural gas now being developed in eastern and northern Russia and in disputed offshore areas.

Environmental and social costs

The Middle East will continue to be the main source of oil supply for the foreseeable future as well as a major supplier of natural gas. Elsewhere, while advancing technology is facilitating the discovery of new oil and gas reserves and increasing recovery from existing reservoirs, the costs of exploration, development, and transportation are orders of magnitude higher than those of the Middle East. High environmental and local social costs will inhibit the rapid development of the Athabaska Oil Sands, which have made my own country, Canada, the second largest in the world in terms of oil reserves, though not production. Meanwhile, natural gas will gain a greater share of the market in China. It has significant domestic resources, and prospects are good for their further development. At the same time, establishment of new natural gas (LNG) terminals soon to be completed, will make China a major importer of natural gas. This huge expansion in its availability will lead to much greater use of natural gas, particularly iii the transportations sector.

The price of oil establishes the basis for other fuels and the economics of developing them, Oil prices will continue to fluctuate significantly in response to real and perceived risks to disruptions of supply. The trend is clearly upwards. Paradoxically, high oil prices will serve to reduce demand by providing an incentive for greater energy efficiency and conservation, The recent move away from gas-guzzling SUVs and the rapid growth in the market for hybrids are an example of this.

Environment and sustainable development cannot be dealt with separate from the management of the economy as a whole. Those countries, notably Japan, which have achieved the highest level of industrial assistance. are also the most - energy efficient. President Hu Jin Tao, in calling for implementation of the scientific concept of development, stated that equal emphasis should be placed on quality and efficiency and to greater harmony between the economic, political and cultural dimensions of development as well as better coordination between cities and the countryside and as between different regions.

Many of the ingredients for an effective world system of cooperation which must be put in place to ensure a sustainable future for the human community already exist mainly in the United Nations and its various agencies and organizations. However, the process of transforming them into a viable world system will be difficult - some many say impossible - to achieve, given the current state of political will. In the meantime the existing system continues to reflect the geopolitical landscape that emerged from World War II which will increasingly impair its legitimacy and effectiveness.

Quantum increases

The transition to sustainable development will require a quantum increase in cooperation and systemic management both within and amongst nations at the world level. The multilateral organizations of which the United Nations is the centrepiece are clearly not yet well prepared for the new generation of tasks that this will require of them. Collectively, these institutions represent an immense reservoir of experience and expertise, which is an invaluable and irreplaceable asset to the world community, Yet paradoxically, although the need for effective multilateral institutions has never been greater, support for them, both political and financial, is less today than when they were created in the aftermath of World War II.

To succeed in the transition to sustainable development requires that the environment be a full partner in planning and decision-making processes. Your environmental agency, SEPA is one of the best and most respected of any in the world, and I am pleased that its role in has been enhanced and its voice strengthened. It would clearly facilitate the transition to sustainable development if SEPA and its counterparts in China's provinces and cities could become full partners in these processes. Again, I commend the lead Shanghai is already taking in this respect.

Changing the mind-set

We must move away from the tendency to treat environmental protection and sustainable development as the source of extra costs, and therefore impediments to economic development. In the early days of the environmental movement, conventional wisdom was that environmental problems needed to be tolerated and subordinated to the priority which must be given to economic growth. It is now recognized that this approach is counter-productive, and for China, not feasible.

We must change that mind-set and see environment and sustainable development as opening up promising new areas of economic opportunity, opportunities for technological and institutional innovation and for the development of an environmental services industry, which is now growing rapidly in China. I am convinced that the new generation of economic opportunities for China can be driven primarily by its transition to a sustainable development pathway, nowhere more than here in Shanghai.

I have great confidence and admiration at the manner in which Shanghai has led China in meeting the extraordinary challenges it has faced over the past half century. It has also produced so many of the extraordinarily enlightened and effective leaders at all levels of its government, in its business community, and other sectors of this dynamic society who have contributed to its remarkable progress. I am especially impressed with the leadership of this great city and its deep commitment to resolving the challenges that confront Shanghai in the 21st century as evidenced by the presence of so many here today. I know that Shanghai is already on track to resolving the daunting challenges I have referred to. In doing so, it will lead China in fulfilling its destiny as a truly great nation and help lead the world to the more promising and sustainable future to which all people aspire.