Published on 26 October 2021
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The Treasury needs to hold its nerve: investing in climate action is Britain’s biggest economic opportunity in a generation

As the Treasury prepares to design policies around its review to price up net zero’s costs and benefits to the UK economy, it needs to stop obsessing over the investment costs and notice the biggest opportunity for economic renewal in a generation.

Attacks on net zero are ramping up. A vocal fringe opposing climate action are now levelling accusations that it will hit the least well off the hardest. It’s now clear that in the run up to COP 26 at the start of November, politicians won’t just be working out how to implement the Paris Agreement – they’ll be defending it.

As the Treasury prepares to design policies around its review to price up net zero’s costs and benefits to the UK economy, its decisions need to be underpinned by sound economics and a clear vision for the future, not back-of-an-envelope scaremongering. 

The risk is that obsessing over the investment costs required to deliver net zero results in a failure to notice the biggest opportunity for economic renewal in a generation.

As the UK recovers from the pandemic, we face a choice. Lock back into our old model – dwindling productivity, intergenerational unfairness and left-behind regions. Or build a more resilient economy that brings innovative, future-proofed prosperity to all parts of the UK. Investment opportunities are there for the taking. 

The markets are desperate for returns. Despite mounting public debt levels, they continue to lend to governments at real interest rates which, despite rising, remain at historic lows. This suggests the markets understand that the most promising way to bring down public debt in the medium term is not to introduce austerity prematurely, but to borrow now at favourable rates to invest in growing the economy’s capacity. The markets also recognise that the infrastructure, skills and ideas of the last century can quickly become a liability. To attract private capital, the government needs to make clear its commitment to an innovative and competitive low-carbon economy. The economic risks of being behind the curve on some of the fastest growing markets remains is substantial.

It’s already made a good start with decisions that indicate a clear direction of travel to investors: locking our net zero commitment into law and working with the recommendations of the Climate Change Committee in launching its Net Zero strategy. Issuing contracts for offshore wind which have drastically brought down their electricity prices. Banning dirty internal combustion engines from British roads from 2030 – making it inevitable that electric vehicles will be cheaper to buy in the next few years, as well as cheaper to run. 

The economic transition we need to make is like rolling a boulder down a hill. It needs a burst of energy to get going, but quickly becomes self-sustaining. Analysis from the Climate Change Committee suggests that the initial burst of capital expenditure to make us less reliant on fossil fuels will, within the next decade or two, be eclipsed by the massive operational savings it creates. 

The IEA estimates that economic growth will be around 0.5% higher in a 1.5°C scenario compared to present-day stated policies, because of a surge in spending on clean energy that boosts jobs and economic output. The International Monetary Fund recently argued that an additional £1 in public borrowing to invest in “job-rich, highly productive, and greener activities” would generate an additional £2.7 of additional output. This is not about costs, it’s about opportunity. 

The UK’s future prosperity does not lie with the old fossil fuel economy of the last century. Falling behind on policies and investments to build on the UK’s comparative advantage in clean, knowledge-based production clusters will likely induce irreversible displacement of fast-growing industries, skills and expertise to more proactive, forward-thinking competitors. Moreover, once the UK’s clean innovation engine is up and running, government support can drop away as new industries generate their own global revenues and inward investment.   

Far from the scaremongering that consumers ‘can’t afford’ net zero, climate-friendly innovation means new businesses, resilient jobs and lower costs for all of us. Look at solar panels and battery storage of the electricity it generates: costs have fallen enormously because of policy initiatives to steer investment in renewables. Innovation in electric vehicles means they’re already cheaper to run (with better performance) than petrol or diesel. And they are only going to get better.

This affords great opportunities for investment in new clean, resource-efficient sectors in. But it also presents a growing risk of disruption and devaluation in existing carbon- and resource-intensive sectors and activities in energy, transport, agriculture, manufacturing and construction. People on low income in particular will need support as early investment costs are passed-on. Care must be taken to understand and respond to the differential distributional impacts of different policies.

Government shouldn’t be afraid to use its regulatory muscle to make lower-carbon choices cheaper. The next round of cost savings could come from Government mandates to car companies to produce and sell more electric vehicles – triggering investment in research and development to lower the price of buying one. And Government could introduce a low-income dividend to make sure that when carbon pricing raises costs for polluting activity, the least well off don’t see their costs soar.  It could do away with the controversial fuel duty and design a fairer motoring tax system, discouraging the purchase of polluting vehicles. 

Net zero prosperity includes jobs, too. There’s money and security to be found in some of the fastest-growing industries like broadband and smart connectivity (to more efficiently monitor and manage our use of resources), electric vehicle charging networks, renewable energy and battery storage, and retrofitting buildings to make them greener. Research shows that developing these clusters of British industrial excellence has knock-on effects: knowledge spills over from one technology to another, boosting productivity and strengthening skills and expertise in our workforce. 

It goes without saying that there will be upfront investment costs to deliver net zero and that these should be distributed fairly. All profitable strategies require investment. Investment increases growth. Governments apply tax and other policies to encourage growth. Why should directed green investment be different?

But complaining about the costs of investment is dangerously slow thinking in a world where competitive advantages are already being entrenched, and Britain is losing. Other major economies in Europe and the US are beginning to outdo us in the ambition of their vision for green growth. It’s a competitive race we cannot afford to lose.

The job of a good Treasury is to secure our national prosperity by investing public money in sound and productive assets. This means not only locking into future-proofed physical and produced capital (and not spending public money propping up fossil-fuel intensive assets with limited productivity potential) but also investment in people to secure the skills and jobs necessary for the 21st century economy. It means retooling and reskilling workers to enable those affected by change to participate in the new economy. But most importantly it means investing in new ideas. 

The economy of the 21st century will be shaped by knowledge and innovation. It is the key driver of the growth in total factor productivity and will determine our ability to get more out of the resources we have. Any government that only looks at the short run costs to the exclusion of the vast returns from investment in the new economy is failing its voters and missing the huge opportunity in front of it.

The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.


Dimitri Zenghelis

Dimitri Zenghelis

Special Advisor: The Wealth Economy

Dimitri Zenghelis is a Senior Visiting Fellow at the Grantham Research Institute at the LSE where, from 2013-2017, he was Head of Climate Policy. In 2014 he was Acting Chief...

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