12.05.2017

Letter from America: Cleantech solutions at the heart of the UK Economy

Professor Doug Crawford Brown has left Cambridge to settle on the West Coast of the USA. He will be keeping in contact by sending ‘Letters from America’ for this Think Piece section of our website. Here, as his parting shot, he puts his views forward on the importance of the cleantech sector to the UK economy and how the Government should support the sector:


1. Cleantech in Context
A successful UK economy with growth in domestic production will reduce the nation’s reliance on imports, restore a healthy import-export balance and create jobs and wealth - especially needed in poorer communities hard hit by the current import-export imbalance.
This sounds as if it is a call to return to practices before the decline in industrial productivity. However, this would mis-interpret the current reality of goods and services and their relationship to both domestic policies and the global market. Before the decline in domestic production, companies were little concerned with rates of use of material, water and energy use, since these resources were abundant and labour was the dominant cost. Ambitious government policies aimed at energy, water and carbon budgets were not in place, so there was no conflict between industrial practices and these national environmental policies.
The reality today is that ambitious national energy and environmental policies are in place, and the global market is increasingly concerned with the environmental impacts of goods purchased from abroad. A return to older methods of production, or even ‘status quo’ methods of modern production, might increase manufacturing within the economy, but at the expense of increasing the distance between energy and environmental targets on the one hand and the environmental intensity of the manufacturing sector on the other.
There need not be a conflict between these targets and the actual environmental performance of the industrial sector in cleantech is placed at the heart of the strategy. Here, we consider two meanings of cleantech:
  • Firms that manufacture low carbon and environmental goods and services that can be sold directly into the domestic and global markets; examples are firms that produce innovations in solar panels or high efficiency vehicles.
  • Firms whose innovations help improve the energy and environmental performance of traditional UK industries; examples are firms that produce innovations in energy efficiency of industrial methods or create a ‘circular economy’ in which materials are reused.    
We don’t distinguish further between these two kinds of cleantech firms in the following. The data support the idea that cleantech firms of the first kind are plentiful and can contribute significantly to economic development throughout the UK. However, the industrial strategy for the nation will continue to be dominated by more traditional industrial activities, where cleantech firms of the second kind will be crucial. Both kinds of cleantech firms are important; both kinds must be supported by the industrial strategy.
 
 
 
 
2. The Scale and Importance of the cleantech sector
In a recent Manifesto, Cambridge Cleantect produced an initial assessment of the size and value of the cleantech sector, both in the region and nationally. The data on this sector are not well developed at the moment, in part because the Low Carbon Environmental Goods and Services (LCEGS) sector is a recent addition to the national economic database, and it is not yet clear how to include firms whose goods and services are not strictly cleantech but might be used in cleantech products[1].
As a first step, consider the 26 categories of cleantech supported by Cambridge Cleantech. All of these produce goods and services that fall into both of the meanings of cleantech mentioned earlier, and hence are part of the national economy.
 

 




















Considering these 26 categories, some reliable data at national scale are available and indicate the following:
  • Cleantech is more than £50B per year in sales of goods and services, which is 3% of the UK total GDP, employing close to 1M people.
  • It produces high value jobs, with more than double the Gross Value Added per job than the average for the current economy (probably slightly less than 2 under the economy likely to emerge under an industrial strategy).
  • It is one of a very few sectors of the economy that grew in strength during the most recent recession and recovery, growing by 4.5% per year.
  • It is one of the leading sectors in creating jobs per £ invested, being 50% higher than even the traditionally strong area of defence investment.
  • It shows global strength for innovations in controls/IT, building technologies, low carbon vehicles, solar PV, energy systems management and smart cities.
These data indicate that the cleantech sector is large, capable of supporting a wide array of other industrial activities to make them lower energy and carbon, is high added value in the economy, and is resilient to economic fluctuations. The cleantech sector will therefore improve the performance of a more general industrial sector, ensuring that investment in growing and restructuring the economy is not at the expense of energy and environmental goals.
3. Using cleantech to harmonise economic, energy and environmental goals
Consider the figure below produced from data available to DECC as of 2013. It is used here only as an indication of the issue raised below; a similar figure could be produced for any of the relevant energy, environmental or resource problems facing the nation. It shows the carbon footprint of the UK, divided between carbon produced by households, carbon produced by UK industries for domestic consumption, and carbon ‘imported’ into the UK when the nation buys goods and services from abroad. 

From these data, the ‘imported’ carbon is approximately 35% of the total carbon footprint of the nation. Under current international climate policy, this imported carbon is not part of the territorial carbon reported by the UK. If an industrial strategy were to increase domestic manufacturing in part to replace imported goods, and if the industrial processes were those currently used in the rest of the UK industry, the territorial carbon of the nation could increase by up to 38%. The UK would fall far behind carbon reduction targets.
The solution: Do not use only existing industrial practices within the growth of the economy spurred by the industrial strategy.  Cleantech innovations have the potential to significantly reduce the energy, carbon, environmental and resource intensity of industrial processes. By coupling cleantech support to industrial growth, the nation can achieve the economic growth sought from the industrial strategy while improving the environmental performance of the economy.
This improvement in environmental performance will be critical in increasing exports of UK goods. Most developed nations, and especially those of the EU, consider the carbon intensity of imported goods when selecting tariffs, procurement practices etc. Linking cleantech innovation and application to more general industrial development ensures the goods produced by those industries remain attractive in a global market where environmental credentials of production are a factor in consumer choice.
The conclusion: Increasing industrial output and improving environmental performance are not at odds with each other IF cleantech is welded to industrial growth. One further indication of this is in the figure below, produced at the University of Cambridge Centre for Climate Change Mitigation Research[2]. It is often argued that high environmental performance is incompatible with economic growth; that the nation must choose between maximising economic growth or maximizing environmental performance. Macroeconomic modelling at Cambridge shows that reducing carbon emissions can stimulate economic growth, removing the trade-off of economic and environmental goals, but only if an industrial strategy includes a component of national investment in cleantech innovation. In the figure below, the GDP is shown in blue (Scenario 0) for a case of no change in industrial processes, while the GDP curve in green (Scenario 12) shows the case of GDP growth when energy efficiency and low carbon industrial innovation is included in a national strategy. Note that the green line is above the blue line, with decarbonisation producing a slight increase in GDP. The nation need not face a trade-off between environmental performance and industrial growth if cleantech is in the mix.



4. Where to invest in cleantech
All of the 26 categories currently supported by Cambridge Cleantech are viable areas of support nationally as part of an industrial strategy in the first meaning of ‘cleantech’ as firms that produce goods and services that can be sold directly to the market. However for the second meaning of the term – firms whose goods and services improve the efficiency of more traditional industrial practices and the infrastructure supporting them – there is a more narrow focus on innovations for which the UK has both a national need and a strategic international advantage. The specific areas of innovation that should be supported are:
  • High efficiency vehicles for both personal and goods transport, innovations that will be essential for ensuring the civil infrastructure of industrial growth is compatible with targets for fuel and carbon in the transport sector.
  • Smart buildings, innovations that will be essential in load-levelling to improve the efficiency of the power sector supplying industrial growth.
  • Power storage, innovations that will be essential in the growth of renewables as part of the mix of energy sources required to decarbonise the national grid.
  • Creating a circular manufacturing process, innovations that will be essential in closing the material cycle in industrial processes so resources are conserved. This includes innovations in water conservation to ensure high quality water remains available for households and agricultural use. 
Other innovations are needed, but these four stand out as especially promising in allowing for large growth of the industrial sector while maintaining national energy, environmental and resource targets.
 
 
5. Government policy
Government policy will be critical in supporting cleantech both as a vibrant economic sector in itself and as an adjunct to other sectors whose growth requires cleantech advances if environmental and climate targets are to be met while the economy grows. There are six ways in which government policy can promote these roles of cleantech:
Don’t bet on a technology!
Innovation – including in cleantech – is difficult to foresee. Therefore, the nation must provide opportunities for innovators to meet with supported industries and government backers, identify where environmental performance is high or low, agree the target environmental performance sought by the industries, and develop shared confidence in the ability of the innovations to help meet those targets. This is turn requires greater public-private agreement on how to calculate ‘clean’ credentials of an industry, and a supporting database. Public-private partnerships have been created in the building sector to establish methods of performance evaluation, and these might serve as a template for a more robust system of environmental assessment to be used more generally in the UK. 
  1. Keep the innovation pipeline open: Innovation is at the heart of cleantech. Government policy must continue to support both academic and applied research, and to create venues such as the Knowledge Transfer Networks to bring those innovations to established and emerging cleantech firms.
  2. Walk the talk in public procurement: Local and national government should use their procurement processes to stimulate market development of green products with high environmental performance, giving weight to performance and innovation criteria that supplement the usual least cost criterion.
  3. Create more reliable credentials: There remains a surprising lack of clarity about the environmental and low carbon credentials of goods and services in the market. Government should work with the business community to better inform producers, consumers and cleantech innovators of the current environmental performance of industrial processes in the UK, the ranking of a specific product against target cleantech standards, and how much improvement would be required to make a product ‘best in class’.
  4. Make prices reflect cleantech performance: The cost of manufacturing and consuming a good or service must include a price on the environmental impact, and then leave it to the market to determine who ultimately pays this price after trading in the market. ‘Non-clean’ goods and services are ultimately a drag on the economy, and should carry the cost of poor cleantech performance.
  5. Carry emerging cleantech firms over the early stages of growth: Cleantech begins with innovation, but it must then grow into a viable company if it is to have an impact on national economic and environmental performance.  Government programmes can give SMEs the early stage support needed to grow into a viable business that can help reach national targets. That support can be in grants, in requirements that industrial processes improve their environmental performance as the economy grows, in the procurement processes mentioned earlier, or in featuring key cleantech sectors in global marketing of the UK economy. This must all be supplemented by a greatly improved base of information on the size and vitality of the cleantech sector, since at the moment the rate of growth is impossible to measure reliably.
  6. Stability of policy: All activities based on innovation are long-term games. Whatever policies are put in place must similarly be long-term. Innovators and SMEs must have confidence that their support will remain central to government policies aimed at improving the UK economy over the next several decades. At the moment, such policies come and go too quickly to attract significant levels of investment in innovations that may require a decade or more for payback.

 
[1] An example is a firm that produces ladders, some of which are used on the sides of wind turbines, but others of which have no connection to cleantech products
[2] These results can be seen in the recent book: Barker and Crawford-Brown, Decarbonising the Global Economy, Imperial College Press, 2015