Resource Revolution

Did you hear the one about a physicist, a chemist, and an economist who were stranded on a desert island without any food, when all of a sudden a can of beans was washed ashore? The physicist identifies the pressure points in the can and proposes pounding it with a rock until there’s an opening. The chemist wants to put the can in a fire and wait for it to explode. No, no, no, says the economist, that’s not necessary: Let us assume a can opener. Simple steps, such as composting, can help conserve resources and save money.

That’s an old joke from the 1970s, conceived during the throes of the first worldwide energy crunch. Someone figured that the presumption of macro-economists—that market demand could work magic by making supply appear—should be exposed as a joke. Maybe it’s time to bring the joke back, now that the world is in the throes of a combined energy crunch and economic downturn. Though faith in markets remains high, governments aren’t counting on market forces to bring the fossil fuels on. Subsidize them and they will come, seems to be the presumption to the tune of US$409 billion in subsidies from 37 governments reviewed by the International Energy Agency.

It’s a costly fantasy, especially at a time when the same governments are imposing austerity measures on social and cultural programs.

Perhaps the fantasy persists because it actually seemed to hold true throughout the last century, a happy time when new and low-cost resources kept coming on stream, causing resource prices to drop in half, despite a 21-fold increase in world demand for the likes of water, food, oil, and steel. But that long 20th century is now over.

The end of that hundred years of resource plenty is the back story to the two prolonged recessions of the last decade, according to a January 26, 2012 analysis from the authoritative science magazine, Nature. As with 10 of the 11 recessions since World War II, authors James Murray and David King argue, these downturns of the last ten years followed hikes in the price of oil and other building block resources.

The Nature authors show that double digit price increases for fossil fuels every year since 2005 have not coaxed into existence any lower-cost supplies of oil or gas, despite what market dogma would predict. The only possible explanation is that the fuels won’t come when called because they don’t exist. No Virginia, there is no can opener.

This bleak supply-side reality, Murray and King say, may force more governments to jump on the energy conservation bandwagon than any threats of global warming. Politicians interested in dealing with the root causes of prolonged economic downturn, the authors say, must “identify the necessary solutions” to “weaning society off fossil fuels.”

This call for a shift to conservation is a big-time game changer when governments around the world are preaching austerity in social spending while opening the spending taps on half a trillion dollars a year to prop up faith in the magic show of cheap resources.

The idea of diverting wasteful spending on resource subsidies to investments in increasing resource productivity has already caught the ear of a powerhouse firm specialized in consulting to global corporations, McKinsey Global Institute. Their detailed report of November, 2011, based on input from a hundred senior scientists and economists, calls for such a “resource revolution.” That’s the only way to make money and create jobs while beating the heat from global warming, the report confirms. No cheap supplies of land, water, oil, or gas exist to reverse the main economic event of the last decade—a 147 percent jump in the price of basic resource commodities, enough to overturn all the price improvements made during a century the 1900s.

Because cheap resources could be assumed during the 1900s, policy and business attention was riveted to making labor more productive and less costly. That attention must now shift to making resources more productive. If that’s not done, the greatly-expanded ranks of the global middle class—some three billion strong, the McKinsey experts believe—will send prices for goods through the roof.

The good news is that there are 130 “productivity opportunities” from 15 sets of initiatives increasing resource efficiency that can deliver three-quarters of the savings needed to keep pace with both greatly reduced resources and vastly increased population. As an extra bonus, these efficiency moves can generate a 10 percent yearly return on investment for individuals and companies—a tad better than what’s available in savings accounts and bonds today.

To accomplish this fundamental reset from labor to resource productivity, some US$1.2 trillion now spent yearly on a host of resource subsidies identified by McKinsey analysts—US$50 billion for giant fishing trawlers is just one of the more obviously destructive of them—needs to be identified as a misuse of public money. That same money could smarten up incentives leading to resource productivity—more work from less resources. That switch in subsidy spending, plus a US$30 a ton charge against carbon to discourage resource expenditures, McKinsey researchers estimate, will yield a global job bonanza of up to 25 million jobs, while reducing income and payroll taxes.

This strategy seems to be the secret of Germany’s success as an industrial and economic powerhouse which manages to treat its workers generously. Since 1999, ecological taxes imposed on energy bills have driven efficiency changes in cars, factories, and homes, while leading to major cuts in payroll and social security taxes and creating 250,000 new jobs, according to McKinsey analysts. Denmark has matched Germany’s success with similar approaches.

Few of the 15 proposed sets of McKinsey initiatives seem to rely on hard-to-discover rocket science. Many are declared policies of many cities—support for energy-efficient buildings, repairs preventing municipal water leakage, urban densification, and reduction of food waste, for example.

Other recommended initiatives in the report are blatant common sense, such as increasing farm yields and reducing consumer goods packaging.

Interestingly, not one proposal on the McKinsey report so much as hints at the need for personal behavior changes. Imagine how long a city citizen to-do list could be if it incorporated such personal measures as increase composting or backyard gardening or reduce meat-intensive diets (which require half the grains grown in the world). Such measures of resource productivity not only save money; they also boost personal and environmental health.

If municipal governments got behind such a set of initiatives, the resource productivity game plan could be eminently doable, while nicely going against the grain of business and austerity as usual.

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