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Good morning. Thank you to the chair and members of the committee.
My name is Bob McCulloch. I run an independent consulting practice in Toronto. I'm also vice-chair of the board of the Canadian Association of Management Consultants, also known as CMC-Canada, and I'll be referring to that during these words. With me is Heather Osler, the president and chief executive officer of the CMC-Canada.
Thank you for inviting us to appear before this committee today. While we always appreciate more time to prepare, being consultants we also always have something to say. So that's what we're here for.
Before I describe the current state of management consulting in Canada, it's probably helpful to this committee to understand a bit more about CMC-Canada.
The title, certified management consultant, or CMC, is a statute-protected professional title in all provinces across Canada. CMC-Canada administers the CMC designation and actively promotes it to the client community. To be eligible to become a CMC, one must have a baccalaureate degree in a relevant discipline and have at least three years' experience in management consulting. Applicants must agree to abide by the rigorous uniform code of professional conduct and successfully complete a comprehensive examination administered by CMC-Canada.
Currently there are 2,400 CMCs practising in Canada and a further 800 members of CMC-Canada who have yet to gain their designation. This represents about 13% of an estimated 25,000 management consultants in Canada. The CMC designation is recognized in 43 countries, and CMC-Canada is affiliated with many of the institutes that provide the CMC certification in their countries. We're also a founding member of the International Council of Management Consulting Institutes, the profession's international standards body.
I'll now give you a thumbnail sketch of the management consulting landscape in Canada. A lot of this comes from a study of management consulting in Canada that we just completed by the Kennedy Information group in the States.
After a tough couple of years at the beginning of this century, the post-Y2K letdown, 9/11, following the recession and structural changes in the business environment, Canadian management consulting is now again experiencing strong growth. In 2006 the industry generated gross revenues of approximately $9.3 billion. Gross revenues are projected to hit $11.5 billion by 2010. I would like to put this in perspective. Industry revenues 40 years ago were an estimated $25 million, so it has grown dramatically in that period.
For analytical and descriptive purposes, management consulting in Canada is broken into five service lines or components: strategy; operations management; information technology; human resources; and a recent entry, business advisory services, which focuses primarily on financially related matters and comes out of the accounting firms, by and large.
While each of these components has experienced solid growth for the last several years, the leaders are, not surprisingly, business advisory services, with their link to the large audit firms, and information technology. The public sector, which includes all levels of government and the publicly funded portion of health care, constitutes the largest single-client grouping for management consulting services in Canada, accounting for over 30% of total expenditures on management consulting. In addition to direct consulting expenditures, government legislation, policies, and initiatives drive a large part of consulting to clients in the private sector.
The Canadian management consulting industry is what economists would call an atomistic market, meaning there are many players in the marketplace and no one firm is large enough, relative to the market as a whole, to have any appreciable effect on price.
The structure is consistent with what those same economists--perhaps you, Glen, I'm not sure--would identify as perfect competition.
In composition, the industry contains several multinational firms, primarily in human resources and information technology, several Canadian-based companies with a global reach, a few large national players, smaller Canadian consulting firms that focus on one sector or a geographic region, and a long list of small management consulting boutiques and sole practitioners.
This atomistic structure keeps the management consulting industry very competitive and very nimble in Canada. Ontario continues to be the largest market for management consulting services of all types, and Alberta evidences the strongest rate of growth currently.
The factors that drive growth include strong economic growth of the companies that use consulting services; the pattern of economic growth, such as increased focus on international competitiveness and the increase in mergers and acquisitions, both of which are prime areas for management consulting involvement; the focus on improving effectiveness and efficiency in the huge health care sector; the growing shortage of highly qualified personnel, brought on by both economic growth and aging demographics; the Canadian-U.S. dollar exchange rate, prompting the drive for companies, especially manufacturers, to achieve greater efficiencies and competitiveness; and increased interest in and investment by governments at all levels in infrastructure projects.
The barriers to market entry for management consultants and management consulting firms are not as high as for other business areas. At the extreme, all it takes is the declaration that one's a consultant, and with fewer multinational management consulting firms in the United States, the Canadian market provides very fertile ground for locally formed small and medium-sized firms to establish themselves and prosper.
Challenges: the future of the management consulting business in Canada is very bright. We see that, and it's not without its challenges. One challenge is that there's currently no effective way to prevent anyone, including the charlatans--superficial celebrities and dubious experts--from hanging out a shingle, calling themselves management consultants, and offering their services. CMC-Canada and the provincial institutes do their best to warn potential clients of the dangers of hiring such individuals and to encourage them to hire only those who can demonstrate their qualifications of background, education, and experience through their membership in CMC-Canada. However, this is only a partial solution, and clients will still have unfortunate experiences with no recourse if the consultant is not a certified management consultant. When the foreign client assumes, in good faith, that a Canadian who calls himself or herself a management consultant must be competent, and experiences a shoddily executed intervention, that situation reflects both on the profession and on Canada as a whole.
Regulation of professions is within provincial jurisdiction. Still, members of CMC-Canada operate under a national uniform code of professional conduct, and the criteria for certification are consistent across Canada, providing a professional with unencumbered migration across all provinces.
Yesterday the competitions commissioner unveiled her report on professional regulation in Canada. The report cited several areas of concern, including entry to practice, interjurisdictional mobility, overlapping services and scope of practice, advertising regulations, and pricing and competition. We can say unequivocally that CMCs enjoy reciprocity not only across the country but in over 25 countries around the world. Our only caveat is that CMC entrants to Canada must complete a short exam on the Canadian code of professional conduct to ensure our cultural norms are adhered to while they are practising in Canada.
On the provincial front, the Province of Ontario has recently recognized the CMC designation as a preferred designation in the request for proposal for professional services. We want to encourage the federal government to incorporate similar wording in its procurement policies, consistent with other designations it already recognizes.
The second challenge: Canadian management consultants frequently have to address entering the United States to work for U.S. clients or to work on projects in the U.S. for Canadian clients. Management consultants are granted reciprocal temporary entry privileges to the U.S. under appendix 1603-D-1 of NAFTA but are too often stopped or detained at the border for what we would characterize as somewhat frivolous reasons.
The frequency of these irritants tends to ebb and flow and is particularly acute at Toronto and Vancouver international airports. These border issues have a disproportionate impact on small firms--I can speak personally on that one--and particularly on sole practitioners, who often lack the infrastructure and wherewithal necessary to navigate the U.S. border control system.
CMC-Canada spends considerable time dealing with the Canadian and American authorities, trying to resolve these issues, but thus far hasn't had a great deal of enduring success. CMC-Canada has also been dealing with Canadian authorities who try to bring the definition of management consultant under NAFTA and GATS into line with the eligibility criteria for certified management consultants that has become the international standard.
The third issue our members often confront is non-tariff barriers while competing for management consulting contracts in some countries, usually in the developing world. CMC-Canada believes that Canada has a competitive and comparative advantage in worldwide management consulting. This is because of our high academic standards, our varied and sophisticated industries, our leadership in certification, our multicultural and multilingual society, and the prudence and probity Canadian professionals characteristically bring to their business arrangements. This is why we have spent significant time trying to make it easier for members to do their business in other countries by expediting members' entry into the United States for temporary business purposes, by reconciling the definition of management consultant under GATS and NAFTA with industry practice, and by trying to level the playing field for foreign contracts.
I would be remiss if I did not mention our existing relationship with two federal government programs.
Here at home, for many years our CMC members have provided management advice in the areas of marketing, strategy, and operations to clients through the National Research Council's industrial research assistance program, IRAP. In support of our members seeking work beyond Canadian borders, we have enjoyed support through the program for export market development, the PEMD program.
Where do we seek support? What might you do for us, or think about? Support our efforts to spread a high standard of professional conduct for the practice of management consulting by Canadian practitioners, whether they are operating within or beyond Canadian borders; support our efforts to ease the flow of qualified Canadian practitioners across the Canada-U.S. border to carry out U.S.-based assignments; support our efforts to inform qualified Canadian management consultants on how to earn assignments in other countries where Canada has a trade presence; and encourage Canada's representatives in these countries to educate the local business community on the benefits of hiring qualified Canadian management consultants.
Thank you for the opportunity to present our perspectives this morning. Either now or later, we welcome any questions or comments you'd like to present.
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Thank you, Mr. Chairman.
Good morning to members of the committee.
I'm going to give you a little bit different perspective. The Conference Board of Canada is the biggest think-tank in Canada by far. We produce about 200 studies a year, whether they're economic research or looking at human resources issues. I'm going to draw upon two or three studies we've done over the last couple of years with respect to services.
I thought I'd start by pointing out the fact that services are about 70% of our national economy right now. Often we're stuck with what I see as a fairly old paradigm, where we think about resource extraction, agriculture, and manufacturing as the core of our economy. That may have been true 50 years ago, but it's not true today.
Everybody in this room today has a service provider. None of us make anything. None of us are knocking down wheat or sawing logs. That is really the face of the modern economy. So as the committee thinks about services, think about the fact that services are the core now of Canada's economy. It's not a little subset; it really is the guts of what Canada does within the world.
I'm just going to say a few words about three studies we've done over the last few years that looked at particular aspects of the service economy. In fact, it links very nicely into Bob's comments about barriers north-south, but I'm also going to talk about barriers across the Canadian provinces that really prevent our service economy from becoming as dynamic, efficient, and competitive as it could be if we could find ways to reduce those barriers.
As to the first study, we have done a report card in Canada for about a decade now. We've just re-branded it. But I'm going to go back to 2005-06. In the fall of 2005, we published a report, called Performance and Potential, which really examined ways in which we could make the Canadian economy more competitive and more effective.
One of those particular segments looked at a Canada-U.S. comparison of productivity by sector. It was based upon work we did with Industry Canada. If you want to call industry officials, Someshwar Rao has been the leader of research in that department for a long time now. He's a first-rate economist.
It was the first time we did a Canada-U.S. comparison of productivity by sector. One of the things we discovered is that in sectors in Canada that are open to international competition—and these are often the traditional sectors, such as forestry, autos, or mining—Canadian productivity is as good as U.S. levels of productivity or even better. But it's in those parts of our economy that are protected—and a lot of those are service sectors, such as financial services, retail, telecom, and frankly, consulting services as well—in those sectors, that we have levels of productivity that are below, and sometimes far below, U.S. levels. A sector like retail, for example, which is a pure service sector, has a productivity level output per worker that is less than two-thirds of the U.S. level.
That might be due to the fact that we have a smaller economy, just a matter of scale, American firms being able to move to scale economies, but it also might be due to different levels of competition between the two economies.
It's very interesting, in the recent debate about whether Canadian retailers should be cutting their prices as the dollar rose up to U.S. levels, what the factors were that led to the slow increase. I would argue that this is a topic definitely worth examining in greater depth, because retail is clearly a service sector that touches all of us. So was it a matter of having inventories that the firms bought when the dollar was at 85¢ or 90¢ and allowing the price to rise slowly, or is there something more fundamental about the nature of our national economy and whether there's adequate competition within retail?
Secondly—and this is a corollary study to it—we put a study out in the spring of 2006, with the wonderful name of Death by a Thousand Paper Cuts. It was really an examination of all the regulatory barriers that exist to competition within Canada, what economists call non-tariff barriers, things other than prices. That gets into the guts of what Bob was talking about, into the design of regulatory practice, standards, whether you need more standardization of standards, whether you need recognition of credentials.
We examined the barriers that exist across the national economy, from east to west, and put a lot of weight on the very many barriers that continue to exist between provinces, and also the misalignment of regulation between the federal and provincial levels. But we looked at the same thing north-south. We looked at the non-tariff barriers that exist, largely in services, between Canada and the United States, hence your point about the barriers that service providers encounter at the U.S. border. You simply don't have free passage to do management consulting in the United States.
The culmination of the study was that we did an econometric analysis looking at the impact of these barriers on Canada's productivity and whether non-tariff barriers really were a factor in explaining the productivity gap already talked about. Its very original research came out with a positive result, that yes, non-tariff barriers, either east-west or north-south, were a contributing factor to the fact that Canada has been slipping in the rankings globally for 20 years now in terms of productivity output per worker. That's an interesting piece of research you might want to refer to.
The third study—and I'm going to spend just a couple of minutes on this too, because my name is on it—was called Opportunity Begins at Home, looking at service exports in particular and what we can do to enhance Canada's service exports.
The facts are a couple years old now, but I think they really do explain a long-term trend. About 13% of Canada's exports are services; 70% of our national economy is services, but only 13% of exports. How do we stack up internationally? Well, for the U.K., it's a third of all British exports; 34% are services. For the U.S., it's 28%. But even for another resource economy, like Australia.... We often use Australia as a reference point. It's roughly the same size as Canada. It has a huge natural endowment of resources. It's a major resource player. For Australia, it's 22%. So the Australians are 50% to 60% higher than Canada in terms of service exports.
We tried to probe into why that existed, and it really came down to three factors explaining why Canada is an underperformer in terms of service exports. And that really does speak, Bob, directly to your comments in terms of management services, but you could apply it to everything from health care management systems to financial services to retail.
It really came down to three factors. One was the desperate need for domestic reform. The fact of the barriers, the fact that we had balkanized our national economy, and the fact that we've had an Agreement on Internal Trade for 13 years now and have made very tepid progress in terms of actually reducing the barriers--that was really an inhibitor in terms of service exports. We looked at sectors like the financial sector, education services, and transportation, as examples of where things like interprovincial barriers have really impeded the ability of Canadian service providers to get to optimal scale.
Second, it was around trade policy, and the fact that the Doha Round has failed now, has collapsed. Services were playing a small part within that. It's been very hard for the global trade community to find a way to reduce barriers in services around the world. We tend to do it on a bilateral basis, or on a reciprocal basis. That is not the basis on which we negotiate free trade for goods. So we're really taking baby steps forward in the whole area of trade globalization around services. And because Canada cannot gain access to other markets, it's no surprise that our service exports have really been impeded.
Third, it was around trade promotion. I think the global strategy that the government has announced in the last few months is a good step forward, but trade promotion is only one part of the agenda. It really starts with reform at home, domestic reform, to allow your service exports to achieve a scale to be internationally competitive and then go forth, combining with market access, which is really critical to success in service exports.
Committee members, that really just gives you a taste of the kinds of work we've done in looking at the service economy and asking questions about how Canada could be more competitive when it comes to both trade and services and the domestic provision of services.
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I would start with the politics of the issue. You have certain skill sets, businesses, and individuals who are gaining an advantage by having protection within their home markets. So even though it would benefit us as a national economy as far as productivity goes, and it would benefit us as consumers because there may be better prices available in the marketplace, it's a classic case where the interests of the few are crowding out the smaller interests of the many.
That is fundamental to what all of you do: trying to decide how to get that balance right, understanding that there will be losers, and whether you're prepared to compensate the losers, even though many of us would gain from the reduction of these barriers.
There has been a little bit of progress. Barriers on government procurement have come down under the AIT. You can buy B.C. wine in an Ontario or Quebec liquor store now, which you couldn't do 10 years ago. But the area where the barriers are probably most acute is around professional services. We still have 10 different standards when it comes to professional credentials. You have to ask yourself pretty profound questions about why nursing skills that are adequate in B.C. are not adequate in Alberta, Quebec, or Ontario.
A lot of this is about political will. I look to what has happened between B.C. and Alberta--the TILMA agreement--as a sign that it is possible to find the political will, the courage, to actually make progress. It is very instructive that Premier Campbell pushed so hard with the other premiers but there was so little uptake.
This is clearly not rocket science. How to make progress on this is quite clear. I'm really struck by the fact that the Europeans, in forming the European Union, have made huge progress. They have come up with a common European standard on everything from cheese to consulting services, and we're stuck in the 1940s and 1950s model in Canada with a balkanized national economy.
The barriers around goods are not that acute. People point to things like Quebec margarine having to be a different colour. So the goods barriers are slim. It's when you get into the transportation of goods--having to take things off a truck in one province and put them on a different truck in another province--that things become truly irrational in the effective functioning of our national economy.
But the biggest area is around professional services and standards.
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I'm actually going to have a piece in
Canadian Business Magazine, I think in their year-end issue, talking about this exactly.
Very quickly, our view on the Canadian economy for the next year is a little more positive, a little more sanguine than others, because of the very strong income growth we see in Canada, which is going, to a great degree, to offset the loss of export growth as a result of the mess that's unfolding in the United States right now. Even in central Canada, we think Ontario and Quebec can achieve growth rates of, say, 2.5% in 2008. Now, that is not potential. That is not as good as they could be. But it is actually better than we've seen for the last year or year and a half, driven by strong real income growth and the tax cuts we're seeing across the board, which put more purchasing power in consumers' hands. That's a little better setting than some others would probably set out for you--western Canada, much stronger; Atlantic Canada, slower, as a foundation.
Tourism is a particular sector that's getting clobbered by the triple whammy of the rising dollar, slowdown in U.S. consumer growth, and security. We've not been able to make more progress to open the border. The United States keeps raising the bar in terms of security. Things like the Western Hemisphere Travel Initiative are really quite crippling to our tourism industry.
We're seeing a bit of an offset in terms of visits from other countries and we're seeing fairly strong domestic growth in tourism, but visits are down 20% from before 9/11, and that's a huge hole to have to fill, as the American consumer is feeling a little under attack right now because of the meltdown of their housing market and is coming to Canada and discovering that prices are the same as back home. So tourism is going through a really rough patch right now.
We think there are actually a few bright clouds in a dark sky, in that as Americans age and as populations age, tourists get a little less enamoured with visiting exotic locations and they might look a little more favourably on visiting Canada than they would on going to the jungles of Brazil. But that's only one positive factor in what's a pretty dark outlook for tourism.
If I were to tell the story around forest products, it would be very much the same story. It's been a very, very tough year for forest products, pulp and paper, in 2007-08.
For autos and parts it's the same, because of that sharp slowdown in demand in the United States, combined with the dollar at par.
We do central analysis. We actually do detailed forecasts for 16 sectors, and I've plucked out three or four that are actually the ones facing the most difficulty, we think, through 2008.
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That's very much an apples and oranges comparison.
China's comparative advantage in the world is what I call standardized labour, standardized process. They can take people who can read and write, who have some number skills, and train them to work in a basic manufacturing setting, where Canada probably was 50 years ago. Our niche within the world, I would argue, is in highly specialized things, in niche markets where we can add huge amounts of value.
We have seen different classes of jobs move from Canada, from the United States, to Asia over the last 20 years. You can see it in the apparel industry in Quebec, for example. You can see what's happened for people who are making pretty basic things that can be reproduced quite easily in China--those jobs are gone. The firms that have succeeded are firms like Perlis or the specialized apparel manufacturers who have found a way to do high-value-added things within Canada.
And I'll go a step further. What has happened? I've had one big idea as an economist. I came up with a brand about five years ago called integrative trade. I tried to explain that in the modern world of trade you don't make things in country A and sell them in country B. Trade is now an integrating process where you link together investment, imports, exports, services, and sales from foreign affiliates--all as part of the equation for businesses to be internationally competitive.
So more and more what you're going to see is that people in apparel, still based in the Montreal economy, for example, where they do the research and development design, will do the sales, the marketing--all the financials will stay in Canada. And they will have shipped out a small portion, which is actually the manufacturing itself, to an offshore facility that will be in Costa Rica or the Dominican Republic or China.
The same thing is happening across global trade. We're doing a study right now where we're trying to measure what we call Canada's missing trade with Asia, because the official trade statistics that we get from Statistics Canada or Industry Canada represent only a small slice of what we're actually doing, if you start to probe a little bit deeper.
The most concrete example of this is the iPod. Our kids are buying iPods. I don't know what they sell for, about $300 in the store. If you take apart the iPod and figure out functionally where the work is actually done.... When the iPod arrives, it says “Made in China” on the box, but only about 2% of the value of the iPod is actually Chinese. There's another 30%, 35%, 40% that's from other countries in Asia that build the components that are shipped to China to be put together, but half the value is actually in the United States. That's where all the thinking happens, to design the thing, to keep advancing the technology, to do the ads, and to take the profit that's coming back.
So your Canada-China comparison is an interesting starting point, but we're at very different stages within the global value chain. Our challenge is how to get people who are doing basic manufacturing into the high-end functions--being management consultants, frankly, because that's where the money is being made.
Mr. Hodgson, you mentioned that you're working on some tax reform proposals now. You also mentioned that you believe it's more rational economically, from a competitiveness perspective, to build a tax base on the consumption side as opposed to taxing either personal or business revenue or earnings.
I'd appreciate more advice from you in terms of the kind of tax reform we ought to be undergoing in Canada. We haven't had real tax reform since 1971, with the Carter commission. Except for the advent of the GST, there hasn't really been significant tax reform.
Other countries—Ireland, Australia, New Zealand, Scandinavian countries, Sweden, and the Netherlands—have undergone massive tax reform to make their countries more attractive to capital and talent, both of which are more mobile today than they've ever been globally.
So I'd appreciate your further insight on the kind of tax reform we should be looking at, with one other consideration, which is how we should be greening our tax system. There's a global consensus among the business community that whether or not you agree with the science of climate change, whether or not you support Kyoto and its framework, there's going to be a price put on carbon by individual countries through carbon taxes and potentially imposed on other countries through carbon tariffs on imports.
So it's going to be broadly based, it's going to be felt, and it's broadly felt that if you're not environmentally ahead of the curve, you're going to be left behind economically once there is a price put on carbon.
I want your input on tax reform, but also on whether or not we ought to be greening our tax system by moving pre-emptively on putting a price on carbon.
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Our research is still a work in progress, but I can speak specifically to two areas and then talk more broadly. The two specific things where we have more or less coalesced....
The way the Conference Board works is that we have quality researchers in-house, but we also turn to the leading experts across the country as readers. We have reached a view around revenues for cities, for example, which is seldom mentioned on Parliament Hill, but cities are the missing partner in the Constitution.
We think the time has come to give Canadian cities access to some form of growth tax, but that's going to have to change from province to province. You'll see our further thinking around that, as well as things like uploading various services back to the provincial or even federal level, all of which was done during the 1990s as we dealt with the fiscal problem at both the federal and provincial levels. That's one element.
Secondly, I agree with your point that we have to find a way to put a price on carbon. The challenge for the next 40 to 50 years is going to be building what economists call negative externalities, putting a price on the negative things that happen as we're creating wealth. We've forgotten to put a price on the bads.
There are only two choices for doing that. You can do that either by setting limits, capping and then allowing firms to trade the permits among themselves to set the price for carbon that way, or through a carbon tax or green tax or a combination. In fact, part of the research challenge, as I read the literature, is finding the best way to do that.
I hope early in the new year we will have some thoughts on how you can link cap-and-trade, particularly for the major emitters, and green taxes across the board. Then of course, there'll be the political challenge of convincing the Canadian public that's going to be a good thing in the long term.
I talked earlier about sales tax harmonization. I think we'll have some thoughts around that and ultimately linking the economic research on productivity to the fundamental tax base, which is the balance between income taxes and consumption taxes, and throwing in corporate income tax as well.
:
We've had research on the environment for a long time at the Conference Board. We have a series of networks where we bring experts together to talk about good practice.
Our view is as follows, and I'll fall back to a brief I did in the spring for our membership.
First of all, the Conference Board is not a great supporter of Kyoto. We don't think it was a good deal because it was not inclusive. It did not include all the creators of greenhouse gases around the world. There were free riders. The United States didn't ratify, but China and India were also left out. China's level of greenhouse gas production is almost as high as that of the United States now, and it's going to get higher very soon. So an agreement that is not global in nature and that allows free riders is not a particularly good one.
In my career I've had a chance to negotiate, on behalf of the Government of Canada, a series of international agreements and comprehensive matters. So I actually see big flaws in Kyoto, and I'm not particularly concerned that Canada has not acted on Kyoto.
That being said, what do we need? We need a global agreement now. We clearly need to make progress and have all parties that are major emitters of greenhouse gases be part of an international agreement.
The second element is that we need attainable targets. There's really no point in going back to 1990. We have to look ahead. I think there is a scientific consensus that we need to find a way to reduce greenhouse gases by between 50% and 80% by 2050. So that's the end state. Then we have to establish mileposts along the way.
I would turn to an American organization that I find quite interesting, called United States Climate Action Partnership, or USCAP. It is a totally private sector affiliation with the environmental groups in the United States. Those radical firms like GE, GM, and DuPont are part of the USCAP, and they're now working with Congress trying to set out the elements of a U.S. plan going forward.
Thirdly—and this is a point Mr. Brison made—the price of carbon has to be established around those credible targets.