Capitalising on technological change and the low-carbon transition in the UK

An overarching strategy for sustainable growth is required to address the dual challenges of restoring productivity growth and managing a transition to a low-carbon economy – priorities in both the UK and other G20 countries. Against the backdrop of an uncertain economic climate as the UK recasts its relationship with Europe and the rest of the world, and as countries gather in Poland this month for the 24th Conference of the Parties to the United Nations Framework Convention on Climate Change, a renewed focus on sustainable growth becomes more urgent.

Promoting strong, sustainable, balanced and inclusive growth requires improvements in labour and resource productivity via more and better investments in innovation, infrastructure and skills. The UK was influential in the creation of the Paris Agreement on climate change and can now reaffirm its leadership by developing credible institutional and policy frameworks that can drive the right investments for achieving a sustainable growth path.

One coherent strategy for sustainable growth everywhere

Today we have published a special report for the LSE Growth Commission which shows why it is sensible for environmental sustainability to be at the heart of the UK’s growth strategy and how this can be achieved – with 16 actionable recommendations for the Government. The sustainable growth strategy we outline focuses on four priority policy areas: innovation, infrastructure, skills and cities. These are all areas that are home to the UK’s key assets, are recognised as crucial drivers of productivity growth, and are also likely to be determinants of the country’s success at managing the transition to a net-zero-carbon economy.

The UK government has shown it recognises the economic opportunities from ‘clean growth’ and a net-zero-carbon economy through its Industrial Strategy and Clean Growth Strategy. However, it is essential that these are integrated into one coherent strategy that considers sustainable growth everywhere.

Policies need to go beyond a static focus on a single, narrowly-defined ‘low-carbon’ sector that contributes around 1 per cent of UK GDP today, while the other 99 per cent of the economy gets on with the real business of growth. Future growth is about sustainable growth and a net-zero-carbon economy that is resilient to the technological and other changes that are likely to characterise the 21st century. It will involve all economic sectors and regions, and has the potential to empower local communities, foster entrepreneurship and improve living standards across society.

The 16 recommendations in our report ensure that a sustainable growth strategy covers the whole economy and gives the UK the best chance of taking advantage of emerging opportunities for sustainable investments across all economic sectors. They include recommendations that government should:

• Create a clear and credible carbon price across the economy
• Support investment in clean innovations that generate economic spillovers
• Establish a National Infrastructure Bank, with an explicit sustainability mandate
• Ensure education institutions are responsive and flexible as the low-carbon transition accelerates and the demand for skills shifts
• Commit to investment in ‘smart cities’ across all UK regions – which could be supported by a national smart city strategy

Government needs to overcome uncertainty and seize new opportunities

Some recent developments have increased policy uncertainty and called into question the extent of government’s overarching commitment to sustainable growth and a net-zero-carbon economy. Examples include the possible relaxation of fracking rules, the continued freeze on fuel duty, uncertainty around the future of carbon pricing, and the end of hybrid vehicle subsidies, to name just a few. This has sent muddled investment signals to the private sector. While government wavering increases policy uncertainty and hinders investment, technological progress and other advances are accelerating, presenting new opportunities for enhanced labour and resource productivity and sustainable growth.

The challenge for UK policymakers is to design effective, clear and supportive institutional and policy frameworks, with coherent incentives that drive improvements in labour and resource productivity and sustainable growth across the economy, while also limiting the risks of disruption and dislocation from the low-carbon transition. These institutions and policies should encourage investment across a diverse set of complementary assets: for example, investment in educational or research institutions located next to transport hubs (think of science hubs locating next to Cambridge railway station or the Crick Institute locating near St Pancras International). They should also promote economic flexibility and the capacity to diffuse and absorb knowledge and innovation.

A well-managed transition to a low-carbon economy can take advantage of the opportunities for investments in innovation, infrastructure, skills and cities. These investments have attractive returns, which can help to reduce or eliminate economic costs and drive productivity improvements and sustainable growth across the economy. Our report provides evidence that shows, with well-designed, coherent policy frameworks, there is greater potential for a sustainable growth path to deliver higher productivity and GDP than a high-carbon counterfactual scenario, while making the UK’s cities and regions better places to live in.

We conclude that although there are uncertainties around any future growth path, a rigorous risk management and hedging strategy should acknowledge the likelihood that the future will be resource-efficient and low-carbon, and therefore the UK should capitalise on its strengths in the development of cutting-edge technologies and financial services, and grasp the opportunities from sustainable growth.

The views in this commentary are those of the authors and not necessarily those of the Grantham Research Institute.

This commentary has also been published on the LSE Business Review blog.