The rapid roll-out of clean energy and energy efficiency measures needed to deliver the net zero transition will be capital-intensive upfront but can serve to make the UK economy resilient, productive and competitive in the long term.

In 2020, the Government’s independent climate advisers, the Climate Change Committee, estimated that additional annual investment of over £40 billion would be needed as early as 2025, combining both private and public investment, increasing to around £50 billion between 2030 and 2050. Ensuring the UK can maximise economic and social opportunities from the transition means going beyond bringing emissions to net zero: it will also require designing policy and investments to make up for decades of underinvestment in key assets like public buildings and skills, tackling biodiversity loss and environmental degradation, and developing domestic capabilities in markets of the future. Achieving these objectives will require additional annual investment equivalent to at least 3% of GDP (or £77 billion, at current prices), with at least 1% of GDP (or £26 billion) coming from the public sector, according to a recent estimate.

What evidence is there for clean investment bringing economic benefits?

Investment into a clean economy can have long-term benefits for growth and productivity, as International examples demonstrate. Examples from the UK also highlight the opportunity for investment in clean technologies to induce creativity and innovation across the whole economy and generate new learning and experience along the way. For example, the Government’s investment in offshore wind, which started in the early 2010s when its cost was several times that of existing generation sources, has since supported cost reductions through economies of scale and further technological innovation. As a result, offshore wind now produces almost 15% of the UK’s electricity and has become one of the cheapest forms of energy generation, while also providing new jobs and export opportunities.

The economic gains are even greater when we take full account of the co-benefits that result from joined up deployment of clean alternatives across sectors, such as reduced traffic congestion and air pollution from investment in compact cities connected by public transport and electric vehicles, powered by renewable energy. These problems currently threaten people’s wellbeing and limit productivity, with air pollution costing the NHS and businesses more than £20 billion each year.

How can the net zero transition improve productivity and efficiency?

The majority of the economic activities involved in the transition towards net zero – such as investing in renewable energy and constructing more efficient buildings – have the potential to boost the UK’s productivity. This is achieved through improving energy and resource efficiency, shifting from low productivity sectors to the new, innovative, higher value-added sectors of the clean economy, and through process and product innovation in existing sectors.

Many low-carbon technologies are more efficient, and thus cheaper, to run than their fossil fuel counterparts. For example, electric vehicle drive systems have 15–20% energy loss, compared with 64–75% for petrol cars. Clean technology use will also shield the UK from the volatility of global fossil fuel markets. Even when upfront and running costs are incorporated, certain clean technologies have become almost exponentially cheaper in recent decades, while the real price of fossil fuels has remained roughly constant for more than a century. These cost reductions were made possible by economies of scale and learning by doing, causing an upsurge in demand and encouraging further innovation and cost reductions. In contrast, increased production of fossil fuels triggers the opposite effect, since it becomes necessary to extract a flow of resources that are ever more difficult and expensive to access, tying up expensive labour.

How can the growing demand for clean technologies benefit the UK?

The UK is an innovative economy and can access growth benefits as a centre of finance and services such as consultancy, engineering and design, which will be core to the green transition. It is also specialised in the innovation of several clean technologies that are seeing rapid growth globally, such as offshore wind, carbon capture, usage and storage (CCUS), and tidal stream energy. Further investment in these innovative technologies can unlock export opportunities as well as productivity-enhancing spillover effects into other sectors, with potential for relevant investments to support local prosperity as well, particularly in less productive parts of the country. Major economies like the US, EU, China and India have already introduced strong policy packages to develop the knowledge clusters and supply lines of the future and so there could be a risk that the UK falls behind if its policymakers do not act in this respect.

Some have argued that ambitious climate policy may have inflationary impacts as it drives up demand for materials and labour while supply remains insufficient. Yet recent experience with the energy crisis suggests inaction could be even more inflationary, as continued reliance on fossil fuels would keep the UK vulnerable to inflationary price shocks in global markets. Locking into fossil fuel infrastructure such as new oil and gas fields in the North Sea, and the continued construction of energy-inefficient buildings, also creates the risk of stranded assets, future financial losses and costs for businesses and households that will likely fall back on taxpayers. The Office for Budget Responsibility has estimated that if the UK continues its dependence on gas at the current level, recurring gas price spikes could add around 13% of GDP to public debt by 2050.

This Explainer was written by Dimitri Zenghelis, Special Advisor at the Bennett Institute for Public Policy, University of Cambridge, and Visiting Senior Fellow at the Grantham Research Institute, with support from Esin Serin and editing by Georgina Kyriacou.

UK myth-busting series: This Explainer was produced as part of a UK-focused ‘myth-busting’ project between the LSE and Imperial College London Grantham Institutes. The series of 10 Explainers will be published as a single volume later in spring 2024. The project is designed to deepen understanding of climate change action among current and prospective decision-makers, the policy community and the public in the UK in the run-up to the 2024 General Election. See ‘Related pages’ to the right for further Explainers in this series.

Keep in touch with the Grantham Research Institute at LSE
Sign up to our newsletters and get the latest analysis, research, commentary and details of upcoming events.