Powering growth: why clean investment could unlock a turnaround in UK productivity
The transition to net zero is not just an environmental necessity, it is a major economic opportunity. Far from being framed as a drag on growth, the net-zero transition, aligned with intelligent technologies, should be seen as the biggest economic boost of our time. The UK has a chance to catch up on and be in the vanguard of the race for cleaner, smarter, more efficient prosperity, argue Nicholas Stern and Dimitri Zenghelis.
On 8 July the Office for Budget Responsibility will publish its 2025 Fiscal Risks and Sustainability Assessment. Its leadership recently met with the authors of this note to discuss the potential role of investment in clean technologies, jobs and markets in driving UK growth.
Background
The global economy is undergoing a profound structural transformation, driven by the twin forces of the digital revolution and the net-zero transition. As general-purpose technologies, they are generating economies of scale and efficiencies, including more productive and secure energy, transport and city systems, while fostering new knowledge hubs and supply chains.
These dynamics are already changing asset values worldwide. The pace of adjustment has been rapid, and inevitably involves some social and political disruption.
Turning risk into opportunity
Taking and managing the opportunities is critical for crafting UK strategies that enhance productivity growth and seize long-term value and avoid stranded assets. This means investment and re-skilling to create high-wage jobs aligned with growing export markets. For governments and investors, the imperative is to build resilient, forward-looking and sustainable economic approaches. That means identifying both risks and opportunities.
While long-term risks and opportunities are harder to measure than short-term costs, ignoring them amounts to assuming their value is zero — an obviously flawed and short-sighted approach. These are not peripheral concerns or footnote issues in the context of others which are more quantitatively tractable. They challenge traditional modelling techniques. Failing to bring them into policy assessment would be analytically derelict and risk major policy mistakes.
The true cost of ‘business as usual’
Crucial to assessing the benefits of the clean transition is a clear-eyed view of the counterfactual. It is a misnomer to identify a path where investment locks in high-carbon physical, human and intangible capital as ‘business as usual’ if that implies it is possible as a sensible option. This path brings escalating risks and costs for which historical precedent offers limited guidance. These risks are absolute, for example where inefficiency and a loss of access to world markets acts as a drag on UK growth, and relative, as the UK loses competitiveness and falls behind a technologically transitioning world.
Understanding network and scale effects
While benefits from the clean transition can be listed individually (and see below), their cumulative effect is systemic.
The scale of the transition drives integration and network effects. Aligning public policy and private investment with this shift fosters the flow of capital to its most productive, resilient uses. Countries and institutions that understand structural dynamics will be best placed to generate strategic advantage and secure long-term value across asset classes, just as China has done in electric vehicles (EVs), solar and batteries.
This transition creates widespread productivity opportunities for the UK, in high-end manufacturing and supportive specialist service sectors.
Key growth drivers
It should be obvious that investing in sustainable assets fit for a twenty-first-century economy will yield greater risk-adjusted returns and greater growth opportunities, than doubling down on those of the nineteenth and twentieth with all their inefficiencies and destructive effects on health and the environment. The main gains include:
- Resource and energy efficiency, including in housing and buildings, which lifts long-run productivity.
- Technology spillovers and induced innovation, generating productivity gains and economies of scale in production and discovery across a range of sectors. This will have a significant impact on the cost of energy and artificial intelligence (AI).
- Clean options are already cheaper than high-carbon ones in power and EVs, with rapid progress in other low-carbon sectors such as industrial processes, haulage, ships, aviation, food and agriculture, and many will soon outcompete high-carbon alternatives, offering further potential growth opportunities.
- AI’s economic potential depends on a massive expansion of cheap, clean electricity and a resilient, integrated grid. AI’s costs will in large measure be shaped by energy costs.
- Increasing returns to scale reinforce agglomeration and clustering effects. Early leadership in building knowledge hubs and supply chains secures durable advantage. The systemic reach of this transition means every UK sector is implicated, including finance, law, engineering and science, and academia — areas where the UK excels.
- Better functioning and connected cities, transport and land systems will improve productivity, enhance liveability and help attract talented, high-skilled workers.
Further near-term gains are also available.
- Trade and import substitution, reducing fossil-fuel imports, lowers income leakage and boosts domestic savings. Clean investment strengthens the UK’s trade position — particularly with the EU — through Emissions Trading Scheme (ETS) alignment which avoids costly carbon border adjustment mechanisms and through access to integrated energy markets. Key markets will increasingly expect clean imports.
- Health improvements offer large productivity and welfare benefits, both in terms of the value of lives lost and productivity and welfare lost through extended morbidity and maiming. These can alone offset any implied costs of decarbonisation by a wide margin. Air pollution was the second largest cause of death globally in 2021, contributing to 8.1 million deaths — more than 1 in 8 deaths. In the UK, nearly 30,000 deaths were linked to fine particulate matter (PM₂.₅), with fossil fuels responsible for nearly half. The monetised cost of premature death due to UK air pollution in 2021 was US$92 billion — dwarfing any implied transition costs, and costs of maiming would be additional to those of death.
Asset revaluation
Asset repricing can occur rapidly as expectations shift, bringing forward intertemporal impacts. If this adjustment coincides with a fragile, leveraged market, it could trigger systemic financial risk. Policymakers must track both the gradual, secular alongside the abrupt, sudden effects of asset revaluation.
The UK needs to augment its capital stock; the above suggests that clean investment should be seen as having a particularly high productivity impact, rather than acting as a drag on growth. Clean investment should be seen not as a cost, but as high-return capital formation. Where it displaces assets, those will typically be the less productive ones.
A note on adaptation
Climate resilience also demands investment. The dispersion of rainfall is rising quickly, widening the tails of risk distributions as droughts and floods are becoming more frequent and extreme. This puts urgent pressure on water management systems and infrastructure which will require strong investment. Failure to do so could cause major losses to capital, productivity and growth.
Pulling it together
Capturing these opportunities and mitigating the associated risks will require an increase in public and private investment of at least 2% of GDP, as argued in Stern (2021), a paper presented by the UK at its recent G7 presidency, and Zenghelis et al. (2024), co-authored by members of the Chancellor’s Council of Economic Advisers.
This investment will drive productivity and growth.
Separately and together, bringing these potential benefits into an assessment of economic risks and opportunities is crucial to policymaking and will likely show real productivity and growth opportunities and how they can be realised. The level effects (efficiency, trade, health) and the growth effects (systems, innovation, economies of scale) suggest a strong likelihood that output and living standards will be higher over the coming decade in a clean-transition scenario, compared with one that locks in legacy, high-carbon infrastructure. The basic science of climate change demonstrates the importance of moving quickly and the rapid advance in technology shows that we can.
It is short-sighted and negligent to score clean investment solely as a cost; this investment drives the growth story of the twenty-first century. The question is less whether we can afford the transition, and more whether we can afford to be left behind. The UK’s future efficiency, productivity and competitiveness depend on the policy frameworks that enable profitable and productive clean investment today. The biggest risk for the UK is inaction.