In its budget this week, Britain’s Labour Party should commit to investing in a clean transition because it will also boost growth
Dimitri Zenghelis is a former head of economic forecasting at Britain’s Treasury and is now a special advisor to the Bennett Institute for Public Policy at the University of Cambridge and a Visiting Fellow at the London School of Economics
As former head of economic forecasting at Britain’s Treasury, I know that Chancellor (finance minister) Rachel Reeves will receive and assess advice until the last minute, before committing to the first Labour government budget in 14 years.
Talk of investing in a clean transition has prompted some renowned institutes to warn that the cost of investing in clean technologies is alarmingly high and unlikely to pay for itself. This is profoundly wrong.
The Institute of Fiscal Studies has not kept pace with the economics of change when, citing the Office for Budget Responsibility, it recently wrote that “we should be sceptical about claims that [green investment] will pay for itself by providing a major boost to growth”.
In a recent report from the Cambridge Zero Policy Forum and the Grantham Research Institute on Climate Change and the Environment, we show how investing in clean technologies, infrastructure and businesses does not just make good climate sense; it powers the 21st century’s primary economic growth engine.
The global economy is undergoing a major transformation, involving general purpose technologies in clean energy, artificial intelligence and automation. Yet too much of the political debate in the U.K. remains focused on the narrow cost of investing in this clean transition and the debt it incurs. This is accountancy, not economics.
Those arguing that strategic clean investment does not boost capacity, is inhibiting growth or is unaffordable need to provide a clear and credible account of how a high-carbon investment strategy can be expected to prove more resilient, competitive and productive than the low-carbon alternative.
Anyone following technological innovation in renewables, batteries, electric vehicles and other clean technologies will already know of the substantial economies of scale in production and discovery, which have cut the costs of energy and induced creativity and innovation across the global economy.
These effects are so large that analysts have invariably under-predicted the scope for productivity-raising clean innovation. The cost of key technologies, such as solar photovoltaic electricity generation, or lithium-ion batteries for electricity storage, have plummeted by over 80% over the last decade and outcompete fossil fuels in most places at most times.
Delaying climate action and free-riding on technologies made abroad may seem superficially attractive, but it risks the U.K. missing out on supplying some of the world’s fastest growing new markets. Others have been quicker to act; clean energy represented 40% of China’s gross domestic product (GDP) growth in 2023.
No one argues that all clean investment will add capacity or reduce costs. Some activities, such as the need to capture and store carbon or the requirement to limit airport expansion, may add to costs and inhibit growth. But these are peripheral impacts.
For the bulk of the British economy, decarbonisation goes hand-in-hand with creating a more innovative, efficient, productive, and globally competitive economy. One which enables British workers to participate in the high wage economy of the 21st century. The notion that there is a tension between economic growth and environmental sustainability no longer holds sway.
Using fiscal policy to encourage domestic saving and increase public investment by about 26 billion pounds per year, equivalent to 1% of GDP, would make up for decades of underinvestment in core infrastructure assets and could be expected to lift U.K. productivity from the bottom of the G7 (Group of Seven) league table.
Unlocking investment requires assessing the full benefits, not just the costs, of action. Borrowing long-term at reasonable rates to purchase new productive assets, which enhance whole-economy net worth, is fiscally responsible.
Public investment is prone to feast or famine cycles, becoming the soft target that is cut to meet fiscal targets. This has restricted productivity growth for more than 15 years, a false economy perpetuating a doom loop of austerity and further cuts. As a result, U.K. average earnings and living standards have stagnated and underperformed against our major competitors.
The bulk of the required investment will come from the private sector acting in its own commercial self-interest. The government can de-risk this investment through a credible, consistent, and coordinated framework which guides investors. A Growth and Transition Team at the heart of government could integrate strategies on net zero, digitalisation, and artificial intelligence to boost skills, productivity and growth
Success requires understanding Treasury culture as much as it requires robust analysis. I can attest from experience that a weak mission from the Chancellor would likely result in excessive risk-aversion, stasis and missed opportunities.
Major economies such as China and the U.S. have gotten ahead of the U.K. in capturing the economic growth opportunities of a clean transition. But it is not too late for Britain to use its world-leading universities and innate scientific advantage to return to the playing field and reap the opportunities.
