UK's green future...or China's?

A new report by researchers from the University of Cambridge and the London School of Economics and Political Science (LSE) argues the UK government should invest in green infrastructure now or watch productivity lag behind China, the United States and other countries already running away with the benefits.

Is reaching net zero a growth and prosperity plan? by the UK Treasury's former Head of Economic Forecasting, Dimitri Zenghelis, says it's not too late for the UK to lean into its innate scientific advantages and reap the benefits of investing in the infrastructure needed to be a leader in a global economic revolution that is already under way.

Captive economy

The report argues that the Treasury should not be captive to an inaccurate UK narrative which assumes that investing in green infrastructure costs too much and that borrowing to finance the transition to a net zero economy will worsen UK public finances in the long-term.

"Fiscal responsibility requires investing in assets that generate sustainable private and public returns, while encouraging national savings," Zenghelis says.

The report takes aim at the UK’s fiscal rules, combined with the Treasury’s rigid application of “cost benefit analysis” for green investments.

These factors combine to make boosting economic growth virtually impossible and have trapped the UK in a “doom loop of austerity.”

“Public investment is prone to feast or famine cycles, becoming the soft target that is cut to meet the rules every time there is bad economic news,” says Zenghelis, who is currently Special Advisor to the Bennett Institute for Public Policy at Cambridge and a Senior Visiting Fellow at the LSE's Grantham Research Institute.

In the report's foreword, Cambridge Zero Director Professor Emily Shuckburgh and Grantham Institute Chair Professor Lord Stern, say a new model of growth and development is in our hands.

"...the UK has the science and innovation base to lead, but action must be clear, swift and strong," they say.

Wrong tool

Cost benefit analysis is a narrow accounting approach used to assess the advantages (benefits) and disadvantages (costs) associated with a particular decision, project, or policy, assuming the rest of the system stays the same.

“We are already in a large-scale, transformative technology revolution, where the whole system is changing," Zenghelis says. "Marginal cost benefit analysis is the wrong tool.”

Project-by-project return on investment is not the right measure for decision-makers in the midst of a massive transformational economic revolution propelled by AI, automation and climate-related innovation, the report says. 

Investments must complement each other when building a new network that changes the system and creates a cascade of effects across the economy impacting jobs, productivity and costs.

Driving Sustainable Energy Growth

The report from the Cambridge Zero Policy Forum and the Grantham Research Institute on Climate Change and the Environment at LSE shows how China and the United States have leapt out ahead of the UK and other major economies by setting clear strategic industrial targets and spending hundreds of billions on climate change-related investments and tax credits.

Their investments have already driven massive growth in renewable energy sources, electric vehicles, batteries, heat pumps and other climate sectors.

“China and the United States have made strategic and political decisions to use climate mitigation as a tool for growth rather than fixating on cost benefit analysis models that are not appropriate,” Zenghelis says.

The report argues that the multiplying effects of green infrastructure investment are so large that analysts have also systematically under-predicted the scope for raising productivity with clean innovation.

A net zero transition strategy cannot be dealt with as separate from the rest of the economy. Tough policy decisions are also needed on public spending, taxes, debt accumulation and national saving, the report says.

“If the Treasury is serious about dealing with the challenges of growth and productivity and climate mitigation, then it must be willing to reassess its decision-making process,” Zenghelis says.

The report recommends a wider range of complementary approaches and says it is not too late for the UK to tap into the ground-breaking research and innovation of its world-leading Universities to reap the opportunities available.