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UK Government policies on green growth must be based on sound economics, says Nicholas Stern

Posted on 15 Jun 2011 in

The Government must base its green growth policies on sound economics if it wants the private sector to have the confidence to invest in low-carbon technologies, according to a new report published today (Wednesday 15 June 2011) by the Centre for Climate Change Economics and Policy and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science (LSE).                  .

The policy brief, by Mattia Romani, Nicholas Stern and Dimitri Zenghelis, on ‘The basic economics of low-carbon growth in the UK’, welcomes the Government’s decision to act on the advice of the Committee on Climate Change about the Fourth Carbon Budget, which sets legal limits on UK greenhouse gas emissions in 2023-27. The legislation for the Fourth Carbon Budget is currently before Parliament.

report states: “The UK has committed to a transition towards a low-carbon economy. This transition could not only contribute to the management of the immense risks posed by climate change, it could also be, with good policy, intensely creative and full of opportunity. This policy must be founded on sound economics, which embodies robust and dynamic analysis of the costs, benefits and risks associated with both low-carbon growth and the alternatives.”

It points out: “The Government has committed to making the transition to low-carbon economic growth. It must continue to show clear decision-making on a range of policy issues, as it has done by following the advice of the Committee on Climate Change on the UK’s fourth carbon budget, in line with the long-term objective of making the transition to a low-carbon economy.”

But the report warns: “Significant investment is required in UK energy infrastructure over the next ten years. Failing to show clarity and confidence now, for instance by being shaky, or appearing shaky, on carbon budget commitments, will damage private sector investment in low-carbon technologies and the prospects for growth, and thus, for employment. Weak or confused government policy, ignoring the multiple market failures in this key area, undermines markets and entrepreneurship, and the ability of the UK to embrace the real growth story of the future.”

The report also notes that the investment in low-carbon technologies can drive the UK’s economic recovery, particularly if Government policies can unlock the current record level of private sector savings. But it stresses: “There must be tough and serious economic analysis of the management of the transition to the low-carbon economy. There will be costs and difficult decisions. Cost are not saved and investment is not promoted by procrastination or by capture by narrow interests.”

The report draws attention to the fact that some standard economic models used by Government departments are structured in ways that can be inherently misleading when used inappropriately, and calls for the spending involved in making the transition to low-carbon growth to be considered as an investment. It identifies four important elements that are not usually reflected properly in standard economic models:

  • the value of reducing greenhouse gas emissions in terms of limiting the risks posed by climate change;
  •  the potential for energy efficiency measures to reduce fuel and electricity costs;
  •  the scope for learning and innovation to reduce the cost of developing new low-carbon technologies compared with conventional technologies; and
  •  the savings associated with a diversified energy system in terms of energy security and reduced vulnerability to fossil fuel price shocks.

The report states: “By failing to take these elements into account, some models predetermine the outcomes and can lead to highly misleading and dangerous conclusions, including the entrenchment of high-carbon assets which would later have to be scrapped, and limiting low-carbon innovation. Growth would be undermined, and the UK would remain exposed to risks associated with volatile fossil fuel prices, to the risks of reduced access to future cleaner markets, and the risks of lagging behind the new technological competition.”

Describing the transition to low-carbon growth as “a new energy and industrial revolution”, the report highlights the importance of learning from history. It states: “The history of previous industrial revolutions indicates clearly that learning and innovation can boost economic growth. Many in the private sector recognise that locking in high-carbon technologies or hesitating in commitment to low-carbon technologies is a very risky strategy in relation to future opportunities and markets.”

The report adds: “History tells us also that early movers are rewarded with higher gains for their economies. The overlap of the clean technology revolution with the revolution in information and communication technologies can offer a particular boost and opportunity to the UK with its comparative advantage in knowledge and research.”

Nicholas Stern will be speaking about the new report and other aspects of climate change in a lecture at Dorchester Abbey on 16 June, with proceeds from the evening going to the Friends of Dorchester Abbey.

Notes for Editors

  1. The Centre for Climate Change Economics and Policy 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.
  2. The Grantham Research Institute on Climate Change and the Environment was launched at the LSE in October 2008. It is funded by The Grantham Foundation for the Protection of the Environment.