In this session, we're going to look at efficiency, and we're going to look at two different aspects. One is trying to answer an important question, how much difference can improve efficiency make? The second question, or rather the second aspect to look at is the so-called efficiency paradox. I'll explain what that means. Let's go back to what I like to say are the facts on the ground, and it is energy use. This is another way, a slightly different way of cutting the same information I showed before, and I have energy use split by residential, and commercial buildings, industry, and transportation. You can see energy used in buildings when you combine residential and commercial is roughly 40 percent, and energy used for transportation is roughly 30 percent. Let's keep these numbers in mind. Since buildings, residential, and commercial use up so much of the energy use, let's look at a bit of a breakdown, again, of residential and commercial buildings in heating, how much we spend in order to keep the building warm, to cool it down. Rather similar for residential and commercial, water heating, lighting, computers, etc. I won't go through all these numbers here, but the reason for putting all these numbers here is that when we talk about efficiency, we have to make sure that this efficiency effort is going to move a needle. Therefore, knowing where the energy is used up in these different elements here plays a very important role. I could present similar tables for the other sources, but, well, for instance, here, transportation is important. One thing I would like to draw your attention to is aircraft. Traveling by plane is less than 10 percent of transportation. Transportation, as we saw, was about 30 percent, so 10 percent of 30 percent is roughly three percent, is actually slightly less than that. I'm simply pointing this out because aircraft, traveling by planes, has become the symbol of the wasteful use of energy that we are currently engaged in, and symbols are important. However, in the big picture, if we completely eliminated air travel, which would have quite severe consequences on the way we live, we would only reduce the total energy consumption by three percent. This is just one example. I'm not defending the air industry. I'm just saying that we have to make this type of considerations all the time exactly because doing something that makes a difference requires such big changes ahead. Now changes in energy use began in the 1970s as a response to the oil embargo. The first efficiency standards, the first requirements imposed by states all over the world and in the United States in order to reduce energy use, were not motivated by concern about climate change, but they had economic and political motivations because of the hiking price associated with the oil embargo in 1970s, and the need, the perceived strategic and economic needs perceived by United States to become less energy-dependent. Therefore, standards were imposed and by the time the standards became fully effective, the average miles per gallon had increased a lot from 14 miles per gallon to 28 miles per gallon. However, after the 1980s, the price of oil began to fall again and incentives to rise efficiency also dropped. There has been an interesting phenomenon. Cars have become more efficient and not more efficient. What do I mean by that? Thermodynamically, today's cars are much more efficient. They can perform more work for the same input of oil. However, cars have become much heavier and much faster. For instance, the time it takes the average car to accelerate from 0-60 miles an hour, which is approximately 100 kilometers in hours in 1975 was 15 seconds. The 1975 car, would be left way behind by the 2010 average car that can accelerate from 0-60 miles an hour in about nine seconds. Therefore, the improvement in gallons per mile has been rather muted. The net result has been a great increase in what I call thermodynamic efficiency but have we used these increasing thermodynamic efficiency in the best possible way? Well, I don't know. Do we really need such heavy cars? Do we really need such fast cars? When people ask me, can we be more efficient with cars? Well, my answer is, you got to be kidding me. There is a sector of the car industry that produces unbelievable vehicles, not for military or off-road purposes, but just for recreational purposes. Yes, of course, we can make a car like this much more efficient. The fact that we have increased the thermodynamic efficiency has been compensated in a negative way by the fact that we are now moving much heavier cars. This is a very interesting graph. This shows on two axes. You have the left y-axis, the energy intensity which notice is on a logarithmic scale. On the right y-axis, I have the composite fuel price. This is in natural, not logarithmic scale. I have a straight line going down. I'm measuring here energy intensity over time. There is a trend line and I have the energy intensity for traditional and commercial fuels, this jagged line that goes down. Notice the sharp change in slope in correspondence with the fuel price crisis of the 1970s, 1980s, a vet point intensity plummeted. But then as a fuel price went down, it reverted to a much more muted improvement. Here we have a similar message, on the y-axis, I have a model here for trucks, cars, and combined. I have the average weight. You see the fantastic drop in the 1980s where it was no thermodynamic efficiency, but it was the money you had to pay to buy very expensive petrol that made the difference. But as that price signal then went away, the weight of vehicles has been steadily gone up well above the 1975 average, at least for trucks. Again, similar pictures here. We have seen the weight. Let's look at the top graph here. The red squares show the vehicle weight, something we've seen already, but the blue line shows the 0-60 miles per hour accelerations, so the time it takes to go to 60 miles an hour. As you can see, it was around 14-15 in the 1970's, 80's, and it is dropped to nine seconds in 2010. Therefore, looking at the bottom of the graph, we have two different pictures. Whether we look at the mass adjusted, fuel economy, or the raw fuel economy, mass adjusted, fuel economy, what they call the thermodynamic efficiency, has been going up markedly, but the actual on the road fuel economy has stagnated since the 1980's. Now, why are consumers not more keen to make use of more efficient, it's not just cars. I'm not demonizing cars. In general, efficiency is not taken up as widespread a manner as economic theory would predict. There are many explanations, one could be that people don't know and if people don't know where the energy goes, and that is why I'm always so keen in saying, well, this is how we spend the energy, there is no pointing in being penny wise and pound silly. We have to know what will make a difference. Not caring. If saving as an individual level is more, perhaps the individual might not care about. Wrong incentives. For instance, a typical example which is always given, is house builders do not put inefficient heating systems if buyers do not give them credit for that, and we're going to look at some data for this. Another explanation is to the extent that the profits of utilities are linked to sales. So if utilities can only make money by selling more energy, they have the wrong incentives. What has worked so far? Some measures have proven effective, one is so-called demand side management. Reducing consumer demand by programs run by utilities whose profits are decoupled from sale. In New York state and California, utility profits have been linked to reduce demand, and they've have been the two main States where energy consumptions has remains constant since the 1970s. The other alternative is to mandate, to enforce regulations that compel building efficiency standards. For instance, European buildings have much higher standard than American ones. In America, there is a huge variation amongst states; again, California is in the lead. Increase efficiency as a significant role to play in reducing emissions. However, we cannot curb climate change by efficiency alone. Don't get me wrong. We can go down by 10-20, perhaps 25%, which would be huge, a relatively little cost. It is in a way strange and we will touch upon these from the economics point of view later on because efficiency costs very little, actually should save money, and it is strange but it is not more demanded by consumers. The rational consumer from this point of view, does not seem to be very rational, or to value reduced emissions very little compared to the pleasure of drying a hammer. Given this background, regulation has proved effective in mandating efficiency gains. As we shall see, issues are more complex and more interesting, but this is just the framing discussion about the role of efficiency in the management of carbon emissions.