The relationship between net zero policy and productivity is sometimes complex, but with the right policy planning the latter can help drive the former, fresh analysis argues
Sluggish productivity has long been a thorn in the side of the UK economy.
Slow UK growth in output and real wages over the past lost decade-and-a-half has meant these metrics are barely any better than they were prior to the 2008 financial crisis. In fact, the UK’s median real wage was lower last year than it was in 2008, a slowdown since the 1920s, while consumer costs have risen, leaving millions of people worse off than they were 15 years ago.
Yet if real wages had grown at the same rate as they did before 2008, we would be on average almost £200 per week better off. In France and Germany, productivity is stronger despite workers on average putting in fewer hours than those in the UK.
And now, compounded by stretched supply chains from a combination of Brexit and two years of the coronavirus crisis, the situation is likely to get significantly worse this year. UK inflation is soaring alongside living costs such as for food and energy, exacerbated by Russia’s war in Ukraine, and the Bank of England has even warned the country could face a recession later this year.
It entirely stands for reason, therefore, that the Treasury insists it is committed to delivering growth up and down the country, with innovation, infrastructure, skills and ‘levelling-up’ all forming key pillars of its ‘Build Back Better: Our plan for growth’ strategy published just over a year ago.
Net zero is another key tenet set out in that growth strategy. But as Green Alliance and innovation agency Nesta argue in a new must-read joint report this week, while the Treasury refers to net zero as a policy agenda that will benefit from higher growth, the reality is in fact far more the other way around: building a net zero economy can be a driver of growth and productivity.
Indeed, the report makes the compelling case for the government to harness its net zero ambitions as a means of boosting productivity, jobs, wage growth, and investment – precisely the things the Treasury says it wants to stimulate during these intensely challenging times for the economy . The organizations are therefore calling for the Treasury to set out a new, updated plan for green growth.
“Given the predictions of the Office of Budget Responsibility about the future economic and productivity growth, both the Treasury and other government departments should see net zero not just in cost minimisation terms,” it states. “When designed in the right way, climate policies will provide the productivity and, therefore, the economic growth that the Treasury is trying to stimulate.”
Expanding renewable energy capacity, encouraging a wider and faster switch to electric vehicles (EVs), reducing traffic in cities, and designing and constructing greener buildings all provide cases at point. All of these things offer excellent opportunities to boost UK productivity, the report argues.
Having built the policy framework and investment landscape for renewable energy in the UK, wind, solar and other technologies are now far cheaper than fossil fuels, providing electricity, jobs and growth far more productively than coal, gas and oil, it reasons. Similarly, EVs are fast moving towards becoming competitive cost with fossil fuel cars, as component, development and operation costs continued to fall. Lower traffic in cities and greener buildings, meanwhile, also offer health benefits, reduced energy use, and greater efficiencies.
Moreover, the report argues that if these opportunities are not taken, it could actually make the nation’s economic problems worse, while casting the UK adrift as the world rapidly shifts onto a greener, more productive economic footing.
“The high level interactions between climate action and productivity suggest that looking at them together will increase the efficiency of policy making, helping the government to achieve two of its major priorities under one framework,” it explains.
But not every area of the net zero and productivity puzzle is quite that simple to solve. As the report is at pains to point out, these two economic priorities have a “complex” relationship, and different net zero policy areas will require different responses from the government.
Plenty of analysis, even in the past week, has highlighted the huge economic benefits on offer from decarbonising the economy, particularly when compared to the huge costs of inaction. Just yesterday, researchers led by LSE’s Grantham Research Institute on Climate Change and the Environment warned that the UK could be on course to take a 7.4 per cent GDP hit from 4C warming by the end of the century, but that achieving net zero worldwide would provide a 9.1 per cent GDP boost for the UK.
But while some actions, such as expanding renewables and EVs, can boost productivity at the same time as rapidly cutting greenhouse gas emissions, for others the ramifications are more ambiguous, according to the report. While boosting energy efficiency in homes and buildings offers lower bills and emissions as well as healthier lives and a boost to green retrofit jobs, it could mean higher costs for the building industry in the short term that could well be a drain on productivity, it warns . That isn’t to suggest energy efficiency is a bad idea – far from it – but that policy in such cases should therefore largely be focused on innovation to bring down costs and drive-up investment, such as by harnessing public procurement and setting green targets for businesses, it reasons. Productivity is likely to improve in these areas over time as technologies do the same.
Elsewhere, too, there are challenges. Take low carbon aviation and shipping fuels, for example, which are more expansive than traditional jet fuel, and will therefore require government intervention to manage these costs and the potential negative impact on productivity of using these fuels at scale, it argues. Again, decarbonising aviation shipping are necessities which the government has committed to, but they require investment from businesses and, potentially, changes in travel habits to spur demand reduction.
In some cases, it is currently too hard to tell whether net zero will mean better productivity. Heat pumps, for example, are more costly at the moment which could act as a drag productivity, but their rollout therefore also requires more skills and innovation, which could be a boon for productivity. Which will win out overall remains to be seen.
And so far from being Panglossian about the benefits of net zero on productivity, the report invites policymakers and economists to carefully plan and consider where different approaches will be needed to decarbonise the economy while managing and boosting productivity and growth, and therefore hopefully inform the right choices.
But in all cases, it further underscores the clear need for the Treasury – and the rest of government – to consider net zero and productivity together, rather than as the latter simply being a driver of the former.
For report co-author Andrew Sissons – deputy director for Nesta’s sustainable future mission – the best approach for the government is to repeat its success with renewable energy, which saw business and investor confidence grow via regular contracts for differences and have turned clean energy into the most productive power sources the UK now has.
“A variant of this – a mix of innovation, gradually approaching decreasing financial support and gradually increasing regulation – will be needed for most of the different challenges involved in reaching net zero,” he explains. “If governments get this right, they could find that the economy ends up both greener and more productive.”
A fitter, happier and more productive economy may be hard to imagine right now amidst a deepening cost of living crisis and worrying economic headwinds, but if the UK grasps its opportunities, carefully planned net zero policy may well promise just that.