New report concludes government policies to increase green investment could boost economic growth in UK and US

Posted on 16 Apr 2012 in

The governments of the United Kingdom, United States and other rich nations can stimulate economic growth through policies that persuade the private sector to invest record surpluses in low-carbon and other ‘green’ technologies and infrastructure, 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 at the London School of Economics and Political Science (LSE).

Published ahead of a crucial meeting on 19 and 20 April in Washington DC of G20 finance ministers and central bank governors, ‘A strategy for restoring confidence and economic growth through green investment and innovation’, by Dimitri Zenghelis, warns that the private sector is not heavily investing in green innovation and infrastructure due to a lack of confidence arising from uncertainty about current energy and environment policy in many advanced economies.

But the report also points out that the current period of low confidence and sluggish private investment presents an opportunity for policy-makers, in the United States, United Kingdom and other countries, to boost employment and economic growth, while encouraging competition and innovation. By supporting markets that depend on public policy, of which the ‘green’ sector of the economy is an exemplar, governments can help to steer record sums of private sector savings to productive use.

The report notes that many governments are concerned about weak growth: “Most advanced economies need to stimulate economic growth to reduce deficits and debt, but growth requires investment, and investment levels have slumped to record lows relative to output. The longer recovery is delayed and capital sits idle, the more skills are lost and the higher the misallocation of resources, making it harder to restore growth.”

Recent figures show that because the private sector is saving heavily while cutting investment sharply, it has generated record annual surpluses (defined as the excess of saving over investment) during the past few years. In the United States this annual surplus amounted to US$1 trillion in 2011, while in the UK the surplus totalled £99 billion last year, the sums in both cases being equivalent to about 6 per cent of national GDP.

The report notes: “Governments are currently limited in their ability to offset private saving by extra borrowing, but they do still have the power to restore confidence by using carefully chosen instruments to stimulate private investment.” It argues that “policies to encourage low-carbon investment offer broad and effective opportunities to restore confidence and to leverage additional, rather than displaced, investment”.

The report concludes: “Low-carbon growth policies alone will not resolve the public debt crisis in advanced economies – but they offer an important part of a credible solution, alongside other measures, including, in particular, broader economic reorganisation, structural reform, promotion of competition and liberalisation. In the short run, credible green policies can boost confidence and increase economic activity, provided policy risks are reduced to the point where green investment is seen as a better means to restoring net worth than sheltering saving in ‘risk free’ assets earning zero real interest. Lots of private money wants to see a successful ‘green’ economy, but it requires credible policy to kick-start investment in renewables and energy efficiency.”

“In an environment in which the private sector is undertaking a dramatic deleveraging, such public sector leveraging through credible policy design can increase economic activity. Crowding-in investment can generate income, create jobs and increase tax revenues which address public indebtedness. At the same time, countries can meet tough emissions targets and leave a long-lasting legacy through the transition to a resource-efficient green economy. There is no lack of private money in the current market. However, there is a widely perceived lack of private sector opportunity. There is a rare and multiple opportunity that should not be missed.”

The report also states: “The private sector is not heavily investing in green innovation and infrastructure because of a lack of confidence in future returns. The lack of confidence in this policy-driven sector is due to uncertainties surrounding current energy and environment policy”. It suggests that “governments should incentivise such investment by themselves taking on elements of this policy risk”.

A study published on 11 April 2012 by The Pew Charitable Trusts found that the G20 countries invested about US$225 billion in clean energy in 2011, with the United States leading with US$48 billion, and the UK in seventh place with US$9.4 billion.

Notes for Editors

  1. 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.
  2.  Lord Stern is also Chair of the Centre for Climate Change Economics and Policy, which is hosted by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council and Munich Re. He is also I.G. Patel Professor of Economics and Government and Director of the India Observatory at London School of Economics and Political Science.
  3. Dimitri Zenghelis is a Senior Visiting Fellow at the Grantham Research Institute and an Associate Fellow at Chatham House. He is also a Senior Economic Advisor to Cisco’s long term innovation group. Previously, he headed the Stern Review Team at the Office of Climate Change, London, and was a senior economist working with Nicholas Stern on the Review of the Economics of Climate Change, commissioned by the then UK Chancellor of the Exchequer, Gordon Brown. Before working on climate change, Dimitri worked at HM Treasury, where he was Head of Economic Forecasting and headed the European Monetary Union (EMU) analysis team. He provided regular briefings to the Chancellor and Prime Minister. He has also worked at Oxford Economic Forecasting, the Institute of International Finance, Washington DC, and Tokai Bank Europe, London.
  4. ‘Who’s Winning the Clean Energy Race?’ 2011 Edition, published on 11 April 2012 by The Pew Charitable Trusts, can be accessed online (PDF).