Green Government policies would boost economic recovery by encouraging investment of huge private surpluses

Policy makers in the UK and other countries could speed up economic recovery through policies to increase private investment in renewable energy, energy efficiency and low-carbon vehicles, according to a report published today by the Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Change Economics and Policy (CCCEP) at the London School of Economics and Political Science (LSE), ahead of the annual meeting of the World Economic Forum in Davos, Switzerland.

The policy paper by Dimitri Zenghelis, a senior visiting fellow at the Grantham Research Institute, points out that huge funds currently exist in the private sector that could be used to invest in low-carbon technologies and infrastructure if governments provide the right signals through policies and regulations. This would help to create jobs and generate tax revenues without the need for a big increase in public spending.

The paper concludes: “There is no lack of private money in the current market. However, there is a perceived lack of opportunity.

“As a result of reduced spending and investment, private sector financial balances (net borrowing or saving minus investment) have reached record, or near-record, post-war surpluses in the United Kingdom (£137 billion in 2009) and United States ($4.8 trillion in 2009).

“This provides a bountiful source of available funds for investment in green technologies and addressing market failures. Private sector investments across the world in clean energy by both the public and private sectors was $162 billion in 2009. Because the market for green investment requires a clear policy signal to become viable, the government has the potential to unleash further huge private investment opportunities.

“If governments can shoulder some policy and regulatory risk through a commitment to clearly identified market-based policy instruments, involving long-term carbon pricing, standards and regulations, together with carefully-designed technology support, the private sector can invest with confidence.

“This would generate profitable new markets and drive private investment without further aggravating public sector deficits or compromising public sector consolidation plans.

“All that is required is that politicians, officials and economists grasp the opportunity. If, instead, governments fail to act, then not only do they risk missing an opportunity to lock in new low-carbon infrastructure, they also risk unnecessarily extending the present economic crisis.”

The paper points out that there was a marked increase in patents for renewable energy technologies after the Kyoto Protocol was signed in 1997, committing developed countries to cuts in greenhouse gas emissions.

The paper states: “The role of environmental policies and policy instruments in setting expectations and providing the right incentives for the development and diffusion of environmental technologies cannot be over-estimated.

“Once the private sector is confident there is a market in which it can generate sustained risk-adjusted returns, it will start to invest.”

Notes for Editors

1. Dimitri Zenghelis is also Senior Economic Adviser at Cisco and an Associate Fellow at the Royal Institute of International Affairs (Chatham House).
2. The Centre for Climate Change Economics and Policy (CCCEP)was established in 2008 to advance public and private action on climate change through rigorous, innovative research. The Centre is hosted jointly by the University of Leeds and the London School of Economics and Political Science (LSE). It is funded by the UK Economic and Social Research Council  and Munich Re.
3. The Grantham Research Institute on Climate Change and the Environment was launched at the London School of Economics and Political Science in October 2008. It is funded by The Grantham Foundation for the Protection of the Environment.