REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19REPORT FOR THE ALDERSGATE GROUP

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 2

CONTENTS

1. EXECUTIVE SUMMARY 6

2. INTRODUCTION 14

3. COVID-19 AND THE ECONOMIC LESSONS FROM PAST RECOVERY PLANS 19 3.1 Demandandsupplyafterlockdown:anambitioustwo-prongedrecoveryplan 21

3.2 Confidence,expectationsandfiscalspacetosupportrecovery 23

Box1 Mindthefiscalgap:publicdebtsustainabilitydynamics 26

Box2 Mindovermatter:theimportanceofexpectations 28

3.3 Multipliers:leveragingprivateactivityandmaximisinginvestmentreturns 30

3.4 Handlingshockanddisruptionandprovidingliquidity 33

4. WHY BRITAIN NEEDS INVESTMENT IN SUSTAINABLE, RESILIENT AND PRODUCTIVE ASSETS 35 4.1 Investingincomplementaryproductiveassets 35

Box3 Buildingresilience 37

4.2 Cleansectorshaverelativelyhighmultipliers 38

Box4 Windsofchange:innovationinwindtechnology 39

Box5 Giveway:thecarbonstatusofroads 40

4.3 Cleansectorsgeneratelargeco-benefits 42

4.4 Drivingproductivitythroughcleaninnovation 43

4.5 Investinginsocialcapital,fairnessand‘levellingup’ 49

5. MACROECONOMIC STRATEGY AND INVESTMENTS FOR BUILDING TO LAST AFTER COVID-19 51 5.1 Macroeconomicstrategy 51

5.2 Targetedinvestment 53

Box6 Energyefficiencyattheendofashovel 58

6. INSTITUTIONS AND POLICIES FOR BUILDING TO LAST AFTER COVID-19 60 6.1 Keyconsiderations:clearandcrediblepolicysignalsandinstitutions 60

6.2 Keyconsiderations:buildingcapacityandmanaginglongrunrisk 62

6.3 Institutions:anewNationalInvestmentBank 64

Box7 ThestrengthsofaNationalInvestmentBank(NIB) 67

6.4 Institutions:arevisedIndustrialStrategy 68

6.5 Policiesforcarbonpricing 70

6.6 Standards,regulations,andpublicprocurement 74

Box8 Standardissue:thepoliticalacceptabilityofstandards 76

6.7 Policiestoinduceinnovation 77

6.8 Policiestore-skillandlevel-up 80

6.9 Policiestoprotectnatureandbiodiversity 84

Box9 Naturalchoice:natureprojectsandjobs 85

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 3

CONTENTS

Box10 UKregulationfornaturalcapitalinvestment 87

6.10 Policiesforscalingupprivatefinance 89

Box11 WisdomofCrowdfunding:municipalbondsforthetransition 91

Box12 Unlockingprivatedebtfinancefornewenergyinfrastructure:ZenobēEnergy 94

6.11 UKCompetitiveness 97

6.12 Bailoutconditionalities 98

6.13 Competitionpolicy 99

6.14 Policiestolockinbehaviouralchange 100

6.15 GlobalBritaininapost-pandemicworld 101

7. RECOMMENDATIONS 103 7.1 Recoverystrategy 103

7.2 Targetedinvestment 104

7.3 Institutionalreformtosupportinvestment 106

7.4 Industrialstrategyreformtosupportinvestment 106

7.5 Policyreformtosupportinvestment,bypolicyarea: 107

7.5.1 Enabling,reskillingandlevelling-up 107

7.5.2 Fiscalpolicies 108

7.5.3 Standards,regulationsandpublicprocurement 109

7.5.4 Innovationpolicies 110

7.5.5 Scalingupprivatefinance 111

7.5.6 Conditionalbailoutsandcompetitionpolicy 111

7.5.7 Behaviouralchange 112

7.6 GlobalBritain 112

7.7 NextstepsfortheEuropeanUnion 113

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 4

FOREWORD

TheCOVID-19crisisisaprofoundstructuraldislocationfortheUKandtheworld.AnditcomesatachallengingtimefortheUK,withmultipleotherforcesofchangereshapingtheeconomy,includingglobalisation,technology,thenetzerotransition,andtheUK’sexitfromtheEuropeanUnion.

Weareinadangeroussituationwitharealriskofmassunemployment,severesocialstressandeconomicdepression;nationalGDPdeclinedby20%inAprilandarapidrecoveryisfarfromguaranteed.Inthiscontextitwouldbeaveryseriousmistaketotrytoreturntothedangerouseconomicmodelofthepast;thatmodeldidnotdeliverstrong,inclusive,sustainableandresilientgrowthandwasfailingtomanagetheforcesofchange.

StronganddecisiveactionisneededtobuildabettereconomyandsocietyafterCOVID-19.Fortheimmediaterecoveryperiod,theUKneedsinvestments–supportedbysoundinstitutionsandpolicies-thatarefast,labourintensive,havehighmultipliers,andcanbetargetedattheplacesthatneedthemmost.Thesesameinvestments,institutionsandpoliciescanlaythefoundationsforthetransitiontonetzeroandtheinclusive,resilientandsustainablegrowthwemustpursuefromnowonforourownwell-beingandthatofgenerationstocome.

Thisreport,commissionedbytheAldersgateGroup,setsoutthevision,strategy,investments,institutions,andpoliciesweneedtorebuildafterCOVID-19.CentralwillbestrongUKinstitutionsthatcanbringforwardthenecessaryinvestments.EstablishinganewNationalInvestmentBanktoreduceriskandunlockprivatefinanceshouldbeanimmediatepriorityfortheUKgovernment.Itcouldplayitspartinthenecessaryfinancingandliquiditywhichwillbecrucialtorecovery.Withstrongleadershipitcouldbeupandrunningbylate2020.

ThisisapivotalmomentinUKhistory.OuractionsnowwillhaveprofoundimplicationsforthefutureofBritain.Astrongandsustainablerecoverypackagewillrequirenewandinnovativethinkingandleadership.Nowisthetimetobeambitiousinourvisionanddeterminedinourresponses,guidedbythesensible,clear,andevidence-basedanalysisthisreportcarefullysetsout.Weknowwhattodo.Weneedtoactwithasenseofpurposeandurgency,andonthenecessaryscale,todeliveraninclusive,resilientandsustainablerecovery.OuractionsnowwillshapetheprospectsfortheUKfarintothefuture.AndifwegetitrightintheUKourleadership,includingthroughthepresidencyofboththeG7andUNFCCCCOP26nextyear,couldhelpshapetheworld.Thatis“GlobalBritain”.

Professor Lord Nicholas Stern IGPatelProfessorofEconomicsandGovernment,andChairoftheGranthamResearchInstitute,LondonSchoolofEconomicsandPoliticalScience.

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 5

AUTHORS AND ACKNOWLEDGEMENTS

AUTHORS

Dimitri ZenghelisisSpecialAdvisorfortheWealthEconomyProjectonsocialandnaturalcapitalcentredattheBennettInstitute,CambridgeUniversityandaSeniorVisitingFellowattheLondonSchoolofEconomics(LSE).HewasuntilrecentlyHeadofPolicyattheGranthamResearchInstituteattheLSEandActingChiefEconomistfortheGlobalCommissionontheEconomyandClimate.Previously,heheadedtheSternReviewTeamattheOfficeofClimateChange,London,andwasaleadauthorontheSternReviewontheEconomicsofClimateChange,commissionedbythethenChancellorGordonBrown.Beforeworkingonclimatechange,DimitriwasHeadofEconomicForecastingatHMTreasury.

James Rydge isaPolicyFellowattheGranthamResearchInstituteonClimateChangeandtheEnvironment,LondonSchoolofEconomics(LSE),whereheworksontheLSE-Brookingsjointprogrammeonsustainableandinclusivegrowththroughclimateactionandinternationalfinance.PreviouslyhewasLeadEconomistfortheGlobalCommissionontheEconomyandClimateandaDahrendorfResearchFellowatLSE.Beforeworkingonclimatechange,JamesworkedinfinancialmarketsattheBankofNewYorkMelloninLondonandinvaluationsatPriceWaterhouseCoopersinSydney.HehasaPhDinfinancialmarketsfromtheUniversityofSydney.

ACKNOWLEDGEMENTSTheauthorsaregratefulforthehelpandguidanceofNickMolho,AnaMusat,SigneNorberg,NickRobins,NickStern,CharlotteTaylor,andBobWard.ThepaperhasbenefittedfromfeedbackfromAldersgateGroupmemberorganisations.

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 6

COVID-19 represents a dramatic shock to the UK and global economy. Weareinuncharteredterritoryandafastbounce-backisfarfromcertain.Itcouldtakeseveralyearstorecoverfromthiscrisis,withlong-lastingeffects.Reducingtheriskofprotractedrecessionandrebuildingonapathofinclusive,resilientandsustainablegrowthwilldependsignificantlyonpolicychoicesinthecomingmonths.

A clear macroeconomic vision is required to restore confidence, create quality jobs and grow the UK economy out of post-COVID recession and debtbysupportingactivityintheshorttermandexpandingproductivecapacityinthemediumterm.Therewillbeaneedtoensurefiscalandmonetarypolicyworktogethertoguideliquidityandsavingstowardsthegrowthofproductivesectors.Afocuswillbenecessaryindealingwiththeimmediateimpactsofjobslosses,butalsomanagingthestructuralchallengesaheadthatwillseearapidshiftinskillsandlabourmarkets.

A recovery package based on sustainability and resource efficiency can generate a sustained economic recovery, withstrongjobcreationandultimately,publicsectordebtsustainability.Properlymanagedandimplemented,itcansimultaneouslyreduceexistingwelfareinequalitiesthatwillbeexacerbatedbythepandemicandimproveeconomicandsocialresiliencetofutureshocks.Itcanalsoacttodecoupleeconomicgrowthfrommaterialsuseandgreenhousegasemissions.Therightchoicesnowcoulddrivealong-termdownwardtrendingreenhousegasemissionswhileboostingtheproductiveefficiencyandlong-termcompetitivenessoftheeconomy.Thiswillprovidebetterjobsacrossthecountry.

There is however a real risk that recovery packages try to return the UK economy to the old model that has proved so unproductive and has not delivered better living standards for all. Thiswouldmakeachievingthegovernment’seconomic,socialandenvironmentalobjectivesmuchmorechallengingintheyearsanddecadesaheadandharmtheUK’sinternationalreputationatatimewhenitistryingtoforgeanewroleintheworld.Therecanbenogoingbacktotheoldnormal.

There is mounting evidence that green investments have better prospects for generating jobs, productivity and levelling up than traditional stimuli. Therearemanyexamplesofgreeninvestmentsthatcanstartquicklyacrossarangeofcapital.Thepackagecantargetinvestmentinproductive,sustainableandresilientphysical,human,social,intangibleandnaturalcapitalinregionsthatneeditmost.Humancapitalinvestment(skillsandtrainingcompatiblewithlow-carbonresourceefficientproduction)andintangiblecapitalinvestment(theideas,knowledge,managementandtechnicalprocesses,andinstitutionsthatmustaccompanyalow-carbontransition)needtobeprioritised.Buildingsocialcapitalbyrestoringtrustininstitutionsisnecessarytoenablecitizenstoholdpolicymakersaccountableformakingdecisionsintheirlong-terminterests.Naturalcapital,theresourcesandservicesprovidedbynature,willneedtobebettermeasured,monitoredandnurturedtoavertenvironmentalstress.

1. EXECUTIVE SUMMARY

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 7

Central to the recovery and meeting the government’s objectives – levelling up, net zero, productivity, infrastructure, Global Britain – will be guiding expectations through credible policy while securing institutional flexibility to respond to rapid and accelerating technological and structural change. Thisreportoutlinesthespecificinstitutionsandpolicyprioritiesnecessarytobringaboutaclean,resilientandinclusiverecoveryandmeetlongertermeconomic,socialandenvironmentalobjectives.Thepolicymixmustbebroad,comprehensiveandcoherent,ifitistoguideinvestmentandrapidlyscaleupfinancialflows.Mostimportantly,itmustbeclear,credibleandenduring.Thisisthemosteffectivewaytogenerateinvestorconfidenceandtoaccelerategreeninnovation.Bycontrast,mixedandmuddledsignalsdelayaction,andraisethepolicyriskpremiumattachedtogreeninvestments.

Policymakers and business expectations are aligningaroundtheviewthatinvestmentsandpoliciesdirectedataddressingtheUK’spersistenteconomic,societalandenvironmentalchallengesmaybepreciselythepost-COVID-19medicinetheeconomyneeds.Surveyssuggestthattheyseeinvestmentsandpolicieswiththehighestimpactandhighestgrowthmultipliersbeingthecleanestandmostsustainable.Thefutureisourstodesignandtobuild,andnowistheperfecttimetoputunemployedresourcestogooduse.

The costs of failing to tackle the government’s long term objectives, especially net zero, means there is no place for complacency or delay, for example by waiting for new technologies to emerge. Manycost-effectivetechnologiesareavailablethatcanbedeployednowintherecoverytoboostresourceproductivityandcleangrowth.Inaddition,technologicaldynamicssuggestthatthepaceofcost-effectivedecarbonisationislikelytoaccelerate.Stronginertiaandhighswitchingcostsoftenmakeitdifficultatfirsttoshifttheinnovationsystemfromdirtytocleantechnologiesandnetworks,evenwherethelatteraremoreproductiveandefficient.Butstrongandsupportivepoliciescaninfluenceboththedirectionandpaceofchangeandsteeracomparativeadvantageingreenmarkets.Thiscanstimulatespendingandcreateenduring,future-proofed,jobsintheshortrunandputtheeconomyatacompetitiveadvantageinthemediumterm.

There is an opportunity today for the UK recovery package to lay the foundations for the future by leading the world in the development, manufacture and use of new low-carbon technologies, systems and services that cost less than high-carbon alternatives. TheUKshouldbuildonexistingcomparativeadvantages:itiseasierfortheUKtobecomecompetitiveinnewgreenproductsthatrequiresimilarproductioncapabilitiesandknow-howtoexistingsectors.TheUKiswellplacedhereinseveralindustriesincludingchemicalsandEVs.ThereisnoreasoninprinciplewhyadecarbonisedUKeconomywouldnotbecleaner,quieter,moreefficient,innovative,andproductive,inthefaceofchangingglobalmarkets,thananyalternative.

1. EXECUTIVE SUMMARY

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 8

Managing such change confers great opportunity but it will not be without challenges. Ouractionstodaycanensureastrongrecoveryandhelplevelup,boostproductivity,deliverinfrastructuretowhereitismostneededoverthemediumtolongrun,andhelpdelivertheGlobalBritainagendaontheground.Buttheadjustmenttoalow-carboneconomyintheUKwillinevitablybeuncertainandcomplex.Therewillbewinnersandlosers.Manyofthebehaviours,technologiesandinfrastructuralnetworksofthelastcenturylooksettobedevaluedorstranded.Ensuringajusttransitionwillbecrucialformaintainingsocialcohesionandeconomicjustice.Thisputsinvestmentinadaptiveandflexiblehumancapitalatthefore,includingthetrainingandre-trainingofcurrentworkersandtheprovisionofcontinuingeducation.

The European Union has also made a strong start in its recovery packages, but future success will require continued coordination among key economic actors and sectorsincludingmemberstates,theECBandtheUK.Itmustcontinuetofollowmanyofthesameprinciplessetoutinthisreport,includingtheneedtoboostshortandlongrungrowthmultiplierswhilefocussingon‘levellingup’,innovation,regulation,bailoutsandcompetition.Thiswillrequirelearning-by-doingandfeedbackdrawingonthebesttechnicalandeconomicknowledgeandlocalexpertise,whereveritislocated.

There is a unique window for the UK and Europe to rebuild to last after COVID-19 and generate employment and activity that locks in a more inclusive, resilient and sustainable, growth path. MissingitmeansalegacyoftheCOVID-19pandemicwhichcouldleadtoaseriesofdamagingsocial,environmentalandeconomicemergencies.TheconsequencesofaprolongedUKdepressioncouldbeprofoundlydamaging,theconsequencesofenvironmentaldegradationandunmanagedclimatechangecouldbecatastrophic.

The recommendations in this report can deliver a sustainable, resilient and inclusive recovery that helps governments rebuild to last after COVID-19. Theydonotformanexhaustivelist,butshouldbeprioritiestodeliverastrong,sustainableandfairrecovery,whilealsobeingconsistentwitharesilientandjusttransitiontonetzerooverthenextfewdecades.Afullsetofrecommendations(seeSection7)accompanytheheadlinerecommendationspresenteddirectlybelow.

1. EXECUTIVE SUMMARY

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 9

RECOMMENDATIONS: STRATEGY AND INVESTMENTThe strategy underpinning the UK recovery package should be based on ambitious fiscal policy torestoresupplyanddemandintheshortterm,boostconfidenceanddeliverastrong,sustainable,resilientandinclusiverecovery.Aiming to balance budgets in a recession, as a means to achieve debt sustainability, is self-defeating and counterproductive.

The strategy should also directly advance the government’s long-term objectives and be assessed against these:

� ‘Levellingup’opportunitiesandtacklingregionalinequalities;

� Low-carbonandenvironmentallyresilientinfrastructureandinvestment;

� Increasedproductivity;

� Ajusttransitiontonet-zero;

� DeliveringtheGlobalBritainagendaontheground,bygrowingtradeinlow-carbongoodsandservices;andstrengtheningtheUK’sdiplomaticstatusasaleaderinthefield.

The government should make a clear long-term commitment to the net zero transition and the environmental agenda. ThiswouldinvolveacrediblepolicyplantoputtheUKontrackfornetzero,completingtheEnvironmentBillandAgricultureBill,andputtinginplacecomprehensivenaturalimprovementtargetsundertheEnvironmentBill.

There must be a focus on the strength of growth multipliers in the short and long run, includingco-benefitswhichenhanceefficiency,healthandwellbeing,andtheaimtolevel-upacrossthecountry.Thespeedofimplementation,thelocationofinvestment,andlabourintensityintheshortrunwillbeimportanttoabsorbunemployedlabourinthewakeofCOVID-19.Basedonthesecriteria,thegovernmentshouldprioritiseinvestmentin:

� Broadband and smart connectivity toenablevirtualisationandfacilitatehomeworkingaswellasexpandconnectedhealthcare,educationandsecurityplatforms.1

� Accessible EV charging networkswillbecriticaltoincreaseincentivesforbuyingelectriccars.TheUKandEUshouldbringforwardinvestmentsinEVinfrastructurethatcouldcreatedemandandjobswhilealsoenablingthefastertake-upofEVswithpositiveimpactoncarbonaswellaslocalairquality.

1 BTDigitalimpact&sustainability

1. EXECUTIVE SUMMARY

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 10

1. EXECUTIVE SUMMARY

� Upgrading and retrofitting homes and buildingsthroughbuildingefficiencyspendingforrenovations and retrofitsincludingimprovedinsulation,heating,anddomesticenergystoragesystems.

� Energy and heat networks and the circular economy (reducingrecyclingandreusingmaterialinputs)tocreatenewskillsandnewjobs.

� Expanding rail and bus transport tobetterconnectlow-incomeregions.

� Natural improvement projects such as planting trees, restoring wetlands, greening cities and improving biodiversity, employingthesharpriseinavailableyoungworkerspreviouslyemployedintheretail,entertainment,foodandcateringsectors.

RECOMMENDATIONS: SUPPORTING INSTITUTIONS AND POLICIES

INSTITUTIONS AND INDUSTRIAL STRATEGY

� Establish a new National Investment Bank (NIB)with£20billionpaidincapital–£5billionperyearfor4years–thatcanhelpthegovernmentdeliverinvestmentforastrong,sustainable,inclusiveandresilientrecoverytonet-zeroin2050.

� The NIB should work with the National Infrastructure Commission, usingitsNationalInfrastructureAssessmentandthenewNationalInfrastructureandConstructionProcurementPipelinefor2020–21asaguide,todevelopandpublishanupdatedpipelineofcleanandsustainableinfrastructureinvestmentsconsistentwithrecoveryobjectives,meetingtheUK’s2050decarbonisationtargetandfutureenvironmentaltargetsestablishedbytheforthcomingEnvironmentBill–thiscanbereflectedinthegovernment’sNationalInfrastructureStrategy.

� Deliver greater policy and fiscal autonomy to cities and regions, buildingontheCitiesandLocalGovernmentDevolutionAct2016.Thiscanensurestimulusinvestmentsarealignedwithlocalrecoveryplans,aresuitedtolocalcharacteristics,andaretargetedwheretheyareneededmost.

� Bring together the existing Industrial Strategy and Clean Growth Strategy tocreateasingleforward-lookingandcoherentplanforstrengtheningtheUK’shumancapitalfortherecoveryandthelow-carbontransition.2Thereisalsoaneedtoreassessandbetterintegrateclimateadaptationinthisplan.

� Develop research missions based on a range of metrics,includingpositivetechnologyspill-overs,aspartofaforward-lookingIndustrialStrategytoretaincomparativeadvantageinfuturemarkets.3Pushnewinnovationwhilesupportinglarge scale trialsofnewtechnologiesandbusinessmodels.

2 UKIndustrialStrategy3 LSEGrowthCommissionReport(December2018)Sustainable growth in the UK: Seizing opportunities from technological change and the transition to a low-carbon economy

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 11

1. EXECUTIVE SUMMARY

� Extend and integrate the focus of the UK Industrial Strategy on securing strong domestic supply chainstosupportthefullspectrumofdecarbonisationactivities.

� Aim to support intrinsically low-carbon industries across the regions. Thisshouldincludesectorssuchaseducationandfinancialservices,andnotjustindustriesintheenvironmentalgoodsandservicessector,whichisimportantbutarelativelysmallpartoftheeconomy.Forexample,developingfurtherincentivestoencouragethetake-upandUKproductionofelectricvehicleswhilesupportingzerovehiclemanufacturingandsupplychainsacrosstheregionstosecurecompetitiveadvantagecouldcreate80,000regionaljobsby2030andanadditional 150,000 jobsby2040.

CARBON PRICING, STANDARDS AND INNOVATION POLICIES

� Reinforce the UK’s carbon pricing regime to ensure prices are consistent with net zero. Thissuggestsapoliticallyfeasiblecarbonpricestartingataround£40pertCO2in2020andrisingto£100pertCO2,ormore,in2050.ThegovernmentshouldmoveforwardwithplanstoreplaceparticipationintheEU-ETSwithaUKETS.Thisshouldbealignedwithnetzero,containapricefloor,andtheinitialcapshouldbesetatalevelconsistentwithfutureadvicefromtheCommitteeonClimateChange.

� Adopt standards and regulations where market failures reduce responsiveness to prices to promote efficiency and drive innovation. Forexample,introducingminimumenergyefficiencystandardstobringnewandexistingbuildingstoEPCbandCby2035(2025forlow-incomehouseholds)woulddriveinvestmentinenergyefficiencyretrofits.

� All public expenditure, including procurement, should be aligned with net zero, tocreateincentivesatscaleforproductsandtechnologiesthatmeetbothfinancialandenvironmentalneeds.

� Scale up innovation policy, research, development and deployment, toachievethegovernmenttargetof2.4%ofGDPearly,priorto2027,andensureagreatersharefortheregions.StrengthentheUK’sresearchanddevelopmentcapabilitiesaspartoftherevisedIndustrialStrategy.Thiswillrequireamixofincreasedfundingandfurtherincentivesforbusinessinnovation,includingenhancedincentivesforcleaninnovation.

� Accelerate the establishment of a clean innovation mission, inarevisedIndustrialStrategy,whichcanacceleratelearning-by-doingatscale,andhonourtheelectioncommitmentfor£800milliontofundanequivalentinstitutiontotheUS Defense Advanced Research Projects Agency.4

4 DefenceAdvancedResearchProjectsAgency

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 12

1. EXECUTIVE SUMMARY

JOBS, SKILLS AND LEVELLING UP POLICIES

� Adopt “ just transition” employment measures to avoid workers falling into long-run unemployment after the crisis, including:jobguarantees;retrainingandreskillingforthefuture;incentivesforemployersviahumancapitaltaxcredits;andboosttrainingforworkers,includingapprentices,innewandemergingsectors.

� Develop a national low-carbon skill strategy togivetheexistingandfutureworkforcetheskillstheyneedtoprosperinacompetitivelowcarboneconomy.Thisrequiresinvestmentinfurthereducationandlifelonglearning,andcouldincludeembeddingsustainabilityacrosstheeducationalcurriculum.ThiscouldstartwithareviewofapprenticeshipstandardsandTlevelsandthesettingupofsustainabilitystandards,metricsandlabelsfortertiaryleveleducationcourses.

� Where workers become unemployed, adopt Active Labour Market Policies (ALMP) and target these policies in areas that need it most. Forexample,focusemploymentpoliciesinregionsseverelydisruptedbyCOVID-19andotherforcesofchange,suchasNorthwestandNortheastEnglandandSouthWales.Targetthesepoliciesatvulnerableanddisadvantagedgroups,includingyouth,women,disadvantagedstudents,apprenticesandthoseathighriskoflong-termunemployment.

� Coordinate labour market policies with regionally targeted stimulus investmentsthatcreateshorttermdemandforlabourandsupportlocalSMEs.Nationalandlocalgovernmentandbusinessesshouldworktogethertoseektoattractlowcarboninvestmenttowardsregionsinneedofeconomicregenerationandwheretransferrableskillsandinfrastructureexist.SuchanapproachwassuccessfullyadoptedtoattracttheSiemens/ABP/ØrstedinvestmentsintheHumberandtheMHIVestasinvestmentsontheIsleofWightwhereBEIS,LocalEnterprisePartnerships,manufacturers,projectdevelopersandhighereducationinstitutionsallworkedtogether.

� Ensure adequate funding for education institutions and skills/training providers, especially in the regions hard hit by COVID-19, includingforuniversities,collegesandschools,toeffectivelyreskillandretoolworkersforthejobsofthefuture(alllow-carbonjobs,notjustgreenjobs).

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1. EXECUTIVE SUMMARY

BEHAVIOUR CHANGE AND BAILOUT POLICIES

� Explore policies to embed climate- and productivity-positive behaviours that were brought on by the response to COVID-19, forexampleinvestinginchangestotravelroutines,virtuallearningandhealthcare,theuseofurbanspaceandinvestmentinthecirculareconomytoreducerelianceonfragilesupplychains.

� Bailouts should be conditional on improvements against climate-positive criteria, includingrequirementstoembracenewer,yetproven,standards,technologiesandbusinessmodels.TheyshouldfurtherincludecommitmenttomandatorydisclosureandstresstestingunderTCFDbyCOP26,andcommitmenttocollaboratethroughglobalR&Dpartnerships,e.g.inaviationandshipping.

RECOMMENDATIONS: GLOBAL BRITAIN

� Empower and give credibility to the UK COP26 Presidency and the G7 Presidency through a strong green recovery programme at home. IdentifykeyareasofmutualinterestwiththeEUoneconomicrecoveryandnetzerotransitionandprioritisekeyareasoffuturecollaboration.

� Ensure Official Development Assistance (ODA) is effective and Paris aligned. ThemergeroftheDepartmentforInternationalDevelopment(DfID)andtheForeignandCommonwealthOffice(FCO)presentsanopportunitytoensureUKODAismoreeffectiveandbettercoordinated,includingbeingalignedwiththeParisAgreementgoals.

RECOMMENDATIONS: EUROPEAN RECOVERY

� The EU is also designing large recovery packages that will need to follow many of the same principles set out in this report. WorkingwiththeEUtoensurestrongcoordinationinareasofmutualinterestwillraisethebenefitsofstimulusinvestmentsintheshortandlongterm,andboostgrowthmultipliers.Clearlysettingouttheargumentsforstrong,sustainablegrowthlessensthelikelihoodthatvestedcorporateandnationalinterestswillpushbackonambitiousdecarbonisationprogrammesand/orseeksupportforfossilfuelsectors.

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 14

2. INTRODUCTION

The UK has been transformed by the COVID-19 crisis. Beyonditstragichumancostsandlossoflife,thepandemicandthenecessarylockdownshaveresultedinasharpcontractionofaggregatedemand,supplydisruptions,lossofrevenuesformanyservicesectorbusinesses,andunprecedentedincreasesinunder-andunemployment.Structuralchangesalreadyunderwayarebeingacceleratedbythecrisis,includingdigitisationoftheworkplace.Somebehaviourchangesinducedbythecrisis,suchastheshifttocyclingandworkingfromhome,areexpectedtopersistlongafterthecrisis.Whilesomesectorsareprovingresilienttothecrisis,e.g.technologyfirms,mostfirms,especiallyhigh-carbonfirms,havebeenhithard.Theeconomyisinuncharteredterritoryandafastbounce-backacrossallsectorscannotbeguaranteed.Itcouldtakeseveralyearstorecoverfromthiscrisis,withlong-lastingeffects.

Even before the pandemic, the UK economy was performing unsatisfactorily. Thedecadeafterthefinancialcrashof2008wascharacterisedbylowwagegrowth,stretchedpublicservices,stagnantproductivityandrisinginequality.Althoughemploymentheldupremarkablywell,anincreasingnumberofjobswereinsecure,part-timeandpoorlypaid.Trustininstitutionsdeclined sharply.5

At the same time, the global climate crisis has not gone away and requires urgent action. Globalemissionsarealreadyreboundingfromtheirtemporaryreductionandthisdipisunlikelytohavemuchimpactonconcentrationsofgreenhousegasesintheatmosphere,thekeyfactordrivingclimatechange.TheimportanceofprotectingnaturehasalsobecomemuchclearerintheCOVID-19context;failuretoprotectnaturehasincreasedtherisksofinfectiousdiseaseemergenceandledtoimmensesocialandeconomicdamage.Meanwhile,theglobaltechnologyrevolutiontowardsresourceefficientlow-carbonproductionremainsunstoppable.

As the UK emerges from the crisis phase of the pandemic, the UK government will need to rapidly introduce a comprehensive stimulus packagetopromoterecovery,restorejobs,and Rebuild to Lastonapathofstrong,sustainable,resilientandinclusivegrowth.Riskandresiliencewillneedtobecentrestage,aswillarecognitionofthegrowingopportunitiesfrombuildingtheeconomyofthetwenty-firstcentury.

Pulling the UK and the world out of recession means framing a much better vision of the future. Akeyobjectiveofanyrecoverypackageistostabiliseexpectations,restoreconfidence,andtochannelsurplusdesiredsavingintoproductiveinvestment.Restoringconfidencerequiresharnessingthegrowthpotentialofaninclusive,resilientandresource-efficienteconomy.Previous studieshavehighlightedopportunitiesassociatedwithsustainablegrowthintheUKandtheworld,butCOVID-19increasestheurgencyofshiftingtoabettergrowthmodel.6Layingthefoundationsforamoreresilient,cleanerandinclusiveeconomycangenerateincreasedresourceefficiency,innovationandproductivityinthelongterm;thiscanleadtoamorecompetitive,durableandprosperouseconomy.ThisreportwillexaminethedegreetowhichUKresilienceand

5 MORISocialResearchInstitute(2003)Exploring Trust in Public Institutions, Report for the Audit Commission6 NewClimateEconomy(August2018)Unlocking the inclusive growth story of the 21st century: accelerating climate action in urgent times;GranthamResearchInstituteonClimateChangeandtheEnvironment(August2016)Building 21st century sustainable infrastructure: Time to invest;GranthamResearchInstituteonClimateChangeandtheEnvironment(August2016)Building 21st century sustainable infrastructure: Institutional Reform;LSEGrowthCommission(December2018)Sustainable growth in the UK. Seizing opportunities from technological change and the transition to a low-carbon economy

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2. INTRODUCTION

competitivenesscanbeenhancedbystayingaheadofmajortrendsinglobalmarketsastheworlddecarbonises,cleansupurbanandruralenvironmentsandseekstouseresourcesmorecleverly.

This report sets out a clear strategy for such a stimulus plan, one that can help the UK grow out of the present crisis and build resilience to future crises, creating well-paid resilient jobs in the short and long term. TheUKdidnotseizetheopportunitytolaystrongfoundationsforasustainableandresilientrecoveryandlong-termtransformationinresponsetothe2008GlobalFinancialCrisis.ThistimethereisarealopportunitytoavoidreturningtheUKeconomytotheunproductive‘cutspending’policiesofthepastthatledtomoreinequality,historicallylowproductivitygrowth,andfailedtosupporttheUK’sclimateandlong-termnetzeroobjectives,withhighlevelsofpublicsectordebttoGDPremainingadecadeon.Therecanbeno going backtotheoldnormal.Theonlysensibleoptiongoingforwardisgrowth-orientedstimulusmeasuresthatpromoteinvestmentandcreatejobsinsectorsthataresustainableandresilient7andcontributetobudgetdeficitreductionoverthemediumtolongterm.

THE INVESTMENTS WE NEED AFTER COVID-19

Stimulus investments need to have several key characteristics to rebuild to last after COVID-19: theyshouldbefast(quicktoimplement);labourintensive(tosoakuptheexcesssupplyoflabour,particularlyinvulnerableanddisadvantagedgroupsandregions);havestrongmultipliersintheshortandlongterm(each£investedneedstomaximisetheimpactonGDPnowanddriveproductivityinthelongrun),anddeliverstrongco-benefitsintermsoflocalpollution,health,congestion,efficiency,innovationandresilienceinitsbroadestsense,includingadaptationandlevellingupopportunityacrossthecountry.ItisworthnotingthatbiodiversitylossincreasesthelikelihoodthatdiseaseslikeCOVID-19emergeandinfecthumans.Inaddition,theUKandothercountriesfailedtoprepareforthepandemicdespitenumerouscrediblewarnings,includingtheUK’sExerciseCygnusprogramme.COVID-19thenproceededtoexpose inequality,includingthepoortreatmentofessentialworkersandairpollution.8

There is mounting evidence that sustainable, resilient and inclusive investments have some of the highest short- and long-run multipliers in a recession, meeting the most important criteria for a strong and sustainable recovery. Intheshortrun,greeninvestmentsperformsubstantiallybetteronjobsthantraditionalstimulusinvestments,e.g.cleanenergyinfrastructureisparticularlylabourintensive,creatingtwiceasmanyjobsperdollarspentthanfossilfuelinvestments.Constructionprojectslikeinsulation retrofitsandbuildingwindturbines(orinstallingbroadbandnetworks,plantingtreesandrestoringwetlands)arelessimportintensivethanmanytraditionalstimulusmeasuresandleadtohighermultipliers.Someprojectslikebuildingnewroadshavehighmultipliereffects,butriskhigheremissionsandlocalpollution,andthreatentolockinresource-hungryandinefficientformsofurbandevelopment.

7 E3G(April2020)Briefing Summary- Recovering Better: A Green, Equitable and Resilient Recovery from Coronavirus; GranthamResearchInstitute onClimateChangeandtheEnvironment(April2020)From rescue to recovery, to transformation and growth: building a better world after COVID-19; LSEBusinessReview(May2020)Covid and climate – building a strong and sustainable recovery

8 Quigley,E.(2020)Universal Ownership in the Age of COVID-19: Social Norms, Feedback Loops, and the Double Hermeneutic

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2. INTRODUCTION

Evidence also suggests that sustainable and productive investments are available across a range of complementary assets,includinginskillsandhumancapital,naturalcapital,socialcapital,andphysicalcapital.Theserangefromwetlandrestoration,offshorewindprojects,energyefficiencyretrofits,andlow-carbonindustrialclusters,toinvestmentinlow-carbonskillsandembeddingsustainablebehaviour.Inthiswayrecoverypackagescangofarbeyondphysicalinfrastructure,althoughthisisessential.

SustainableinvestmentscanalsoboostUKcompetitivenessinthenewmarketsofthefuture.TheyofferasoundbasisforlevellingupnationalwealthanddeliveringhigherandmoreresilientlivingstandardsforallatatimewhentheUKisfacingarangeofchallengesfromstructuralchange,andnotjustfromtheclimatetransitionbutalsoacrossseveralseculartrendsincludingautomation,digitisation,bigdata,AIandchangingdemographics.

THE VISION AND STRATEGY WE NEED AFTER COVID-19A clear macroeconomic vision is needed to restore confidence, drive investment, create jobs and grow the economy out of post-COVID-19 recession and debtbysupportingactivityintheshorttermandexpandingproductivecapacityinthemediumterm.Themacro-fiscalvisionwillbecrucial.Thegovernmentwillneedtocometoaclearunderstandingthatanambitiousrecoverypackageisbothaffordable–concernsarounddebtsustainabilitycanbemanaged–andcandeliverontheneedtoboostjobs,restoreconfidence,innovatetodriveproductivityandwell-being,buildcapacity,manageriskandgrowtheeconomyoutofthedepressedstatethatitisin.Fiscalandmonetarypolicywillalsoneedtoworktogethertoguideliquidityandsavingstowardsthegrowthofproductivesectors.Coordinatedmacroeconomicpolicyisrequirednotonlytorestoreproductivitygrowthbuttosimultaneouslyaddressglobalsurplussaving,raiserealandnominalinterestratesabovezero,stabilisepublicdebt(withcurrentpublicbudgetsapproachingbalanceovertheeconomiccycle)andmaintainstableinflation.

A coherent strategy for Building to Last after COVID-19 involves long-term commitments from which policies and institutions will flow. Suchastrategysetsthedirectionforthenecessaryrecoveryinvestments,andpolicyandinstitutionalframeworks,sendsclearsignalstoprivatemarketsandalignsexpectationswhichlowerstheriskassociatedwithtargetedinvestment.

This will include a credible and coherent clean industrial strategy in the COVID-19 context, where the state has assumed a larger role in the economy, toensurethatalltargetedrecoveryinvestmentsareconsistentwithrestoringdemandandsupplyandachievingnet-zero.ThecurrentCleanGrowthStrategy,focussedontherelativelysmall“low-carbongoodsandservicessector”,around1%ofGDP,istoonarrowandoutdated.9

9 LSEGrowthCommissionReport(December2018)Sustainable growth in the UK: Seizing opportunities from technological change and the transition to a low-carbon economy

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2. INTRODUCTION

It must also include a credible plan to put the UK on track for net zero emissions. Amongotherthings,thiswillinvolvethecompletionofambitiousEnvironmentandAgricultureBills.Theywouldallsetacleardirectionforcurrentandfuturepolicymaking.Suchmeasurescouldgeneratestrongreturnstoinvestmentinnature,aslongastheEnvironmentBillisunderpinnedbyasetofcomprehensiveandambitiousenvironmentalimprovementtargetsandtheAgricultureBillgenuinelydeliversastepchangefromtheEU’sCAPandputsinplacea“publicmoneyforpublicgoods”subsidyregime.

THE INSTITUTIONS AND POLICIES WE NEED AFTER COVID-19A new institutional structure and policies will be needed to tackle market failures and barriers that prevent the scaling up of private finance sources. These will effectively mobilise private finance and channel it into the right investments. Supportivepublicfinancefoundationswillbeessential,butthedominantrolewillcomefromprivatefinancegiventhescaleoftheinvestmentchallenge.Thereisnoshortageofprivatefinance,eveninthecrisis–investorsareactivelyseekinginvestmentswhileprivatesavingisontherise,butgeneratingcompetitiverealrisk-adjustedreturnsrequiressharingandcontainingperceivedpolicyrisk.

A National Investment Bank (NIB) is well placed to directly tackle these market failures and barriers, largely related to risk, and offers great value for money to taxpayers. Thereisanecdotalevidencethatviable“shovelready”projectscanprovidejobsbutarestrugglingtoraisefinanceduetotheabsenceofsuchaninstitution.ANIBcanplayanimportantpartinthenecessaryfinancingandliquiditywhichwillbecrucialtorecoveryanditwillbeparticularlyhelpfulastheUKwithdrawsfromtheEuropeanInvestmentBank.

Policy reform is also needed to maximise the benefits of green investments. Astrongercarbonpricingframeworkwillbecentral,butalsomaintainingandstrengtheningstandardsandcomplementary,ambitious,andwellenforcedregulations.TheUKhasanestablishedcarbonpricingframework,butreformscouldenhanceitseffectiveness,efficiencyandfairness.DisruptionfromCOVID-19andleavingtheEUhascreatedanopportunitytoadjustUKcarbonpricelevelsandintegrateexistingpolicieswiththedevelopmentofanewUKETS.Carbonpricescanbeanimportantpartofwiderfiscalreformsthathelpboostpublicfinancesnowandsetclearexpectationsonthelong-termdirectionofstructuralchangeintheeconomy.

Policies to address other market failures can also be tackled head on, includingtoinduceinnovation,tore-skill,andtoprotectnatureandbiodiversity;thereisaparticularlystrong“bangforyourpolicybuck”frompoliciestoinvestinnature.Allpolicywillneedtocontributetolevellingup,enhancingwell-beingandbeconsistentwithajusttransitiontonetzero.ThereportexamineshowUKpoliciescanbeamendednowtobetterachievetheseobjectives.

A recovery package that is quick, inclusive, and labour intensive in the short run, can also build wealth across the regions over the longer term. Aswellasinvestinginamoreproductiveandresilienteconomylongterm,therecoverypackagecanhelptheUKtoovercomedeep-seatedinequalitiesacrossregions,whicharemanifestnotjustinincomebutinwealth,healthandaccesstopublicandprivateservices.Everyonewillneedtobenefitfromtheopportunitiesfromchange

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2. INTRODUCTION

throughcoordinatedreskillingandretoolingpolicies.Spendingoninfrastructureprojectssuchasbroadband,greentechnology,transportandhousingcoulddeliveran additional 1¼ millionresilient jobsoverthenexttwoyears,replacingthosedestroyedbyCOVID-19.10

Building to Last after COVID-19 will not be easy and will require a radical change in thinking across all arms of policy and government that is not yet evident. Nationalgovernment–withHMTreasurytakingonacoordinatingleadershiprole–localgovernment,regionalmayors,theprivatesector,includinginvestorsandcivilsociety,willallneedtoworktogethertoinnovateandmovequickly.Thereisawidespreaddesirenottoreturntoaneconomicmodelthatwasdeficient.ButamuddledandpoorlycoordinatedresponsewithnoclearstrategycouldleavetheUKinafarweakerpositionthanbeforethecrisis.Thesummerstatementisafirststepintherightdirection.Thequality,contentandstrengthofthenextstimuluspackagewilldetermineeconomic,socialandenvironmentaloutcomesfordecadestocome.

GLOBAL BRITAIN AND EUROPEAN RECOVERYA strong, inclusive, sustainable and resilient UK recovery package will set an important foundation for international engagement and resetting Britain’s role in the world. ItcansecurecredibilitytotheUKCOP26PresidencyandprovideafocusfortheUK’sG7Presidencyin2021.“GlobalBritain”meansactionsnowthatcanhelpshapetheworld.

Many if not most of the recommendations and analysis in this paper will also be applicable, in principle, to other countries, including across the EU. FollowingtheEuropeanCommission’sstatedambitiontoalignits€750bnrecoverypackagewiththeobjectivesofitsGreenDeal,thisreportcanprovideguidanceforthatworkandformthebasisfordiscussionsaroundpossibleareasofcollaboration.TheUKandtheEUshouldmaintainagoodworkingrelationshipwithoneanother,sharingandcollaboratingaroundrecoveryplans.CooperationcanincreasetheeffectivenessofstimulusinvestmentsandhelpallEUcountries‘rebuildtolast’afterCOVID-19.

The report is structured in three sections. Thenextsection willsetoutthebackgroundtothepresentcrisisandwhatcanbelearntfrompastrecoveryplans.Section4examinestheimportanceandbenefitsofgreenpublicinvestmenttobuildamoreresilient,sustainableandproductiveeconomy,alongwithoptionsformaximisingreturns.Sections5and6discussthemacro-economicframework,investments,institutionsandpoliciestoputdecarbonisation,resourceefficiencyandwell-beingattheheartoftherecoverypackage.Theyalsocoverpolicytodriveinvestmentandmobilisetheprivatesourcesoffinancethatwillbeneeded.WhilethereisafocusontheUKeconomicandpolicyenvironment,manyoftheissuesdiscussedareimportantinternationally,especiallyinEUcountries.Afullsetofrecommendationsarepresentedinsection7.

10 TransitionEconomics(2020)Can an infrastructure stimulus replace UK jobs wiped out by COVID19 crisis?

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 19

Recovery plans following the global financial crisis (GFC) in 2008 failed to deliver. Fiscalpolicywasusedlittleatthegloballevelafterthefirsttwoyearsfollowingthe2008crisis:theburdenofsupportingaggregatedemandfelllargelyonmonetarypolicy.Quantitativeeasingwasemployedinmostcountries,includingtheUK,andofficialinterestrateswerereducedprogressively,induecoursealmostreachingthezerobound.

For more than a decade, too much global saving was chasing too little productive investment in the UK: 11or,puttingthemattertheotherwayaround,andperhapsmoretellingly,desiredinvestmentgloballywasmodestrelativetothelevelofdesiredsaving.Theresultwasthatproductivitygrowthlanguishedandaggregatedemandwasweak.TheUKeconomygrewonlyslowly,butglobalemissionskeptrising.Sectorborrowing,bothcorporateandpersonal,expandedonthebackofcheapcredit,whilegrowingdebtleverageinflatedassetprices.Astherichgrewwealthier,realearningsgrowthforthemajoritystagnated.Inequalityandfailuretoinvestinpublicservices,whichfurtherexacerbatedinequalityundermined the social contract,spawnedpopulardiscontentandcontributedtotheriseinsaving.12

For many companies, high leverage on the back of cheap credit has been a deliberate strategy over the past decade, aimedatmaximisingreturnsthroughsharebuybacksandlargedividends.OthersblamemoralhazardassociatedwithGFCbailoutsfollowedbyultra-loosemonetarypolicy.Eitherway,thecurrentcrisishashadasignificantimpact.A20%globalslumpinsharepricesinthefirstquarterof2020hitcorporatebalancesheetshard(seeOptionsbelow).AccordingtotheInstitute of International Finance,theratioofglobaldebttoGDPreachedanall-timehighof322%towardstheendof2019(withmorethantwothirdsofthedebtinprivatehands).13Theglobalstockofnon-financialcorporatedebtwasatrecord levelsof$74ninQ32019.14Thequalityofcorporatebondsisalso lower–creditratingsarelowerandmaturitiesarelonger–sothepossibilityofcontagiontothebankingsystemcannotbediscounted.15Thisdebtleveragealmostcertainlymakestheglobaleconomyevenmorevulnerablethanitwasin2008.

Recovery Packages after the GFC in 2008 failed to embody sustainability in most countries, including the UK. Accordingtoaleading study,globallyonlyaround16%ofstimuluscouldbeclassifiedas‘green’;15%intheUK.16Theother84%ledtoaspikeinemissionsandairpollutioninmanycountries,includingChina.Itwasanopportunitylosttoprotecthumanhealth,buildresilienceandrespondtoclimaterisk.Inothercountries,greeninvestmentsfailedthroughpoorly

11 BankofEngland(December2015)Secular drivers of the global real interest rate12 OECD(2020)Coronavirus (COVID-19): Joint actions to win the war13 InstituteofInternationalFinance(January2020)Global Debt Monitor – Sustainability Matters14 InstituteofInternationalFinance(January2020)Global Debt Monitor – Sustainability Matters15 OECD(February2020)Corporate bond debt continues to pile up16 Citedin:TheEnergyandClimateChangeCommittee(March2010)Energy and Climate Change – Fourth Report: Low carbon technologies in a green economy. OriginalHSBCsourcenotavailableonline.

COVID-19 AND THE ECONOMIC LESSONS FROM PAST RECOVERY PLANS3.

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COVID-19 AND THE ECONOMIC LESSONS FROM PAST RECOVERY PLANS3.

targetedinvestments.Forexample,theUSgovernment’sinvestmentinthesolarmanufacturerSolyndra,intheformofloanguarantees,turnedbad.Thelessonherewasthatgreen technologiesaresubjecttosignificantex anteuncertainty,e.g.intechnology,price,marketandcommercialtrends.Thismeansitisbettertoprovidefinancialsupportpoliciesacrossawidegroupofprojects/firms,whichincreasestheprobabilitythatsomeareviableex post,enablingtheprogrammetoprovidenetbenefitsoverall.17

Avoiding a return to this model that produced unsatisfactorily slow and dirty growth – or worse, avoiding a downward spiral into depression – will require careful management. Office for National Statistics datashowedthatbetweenFebruaryandApril,theUKeconomyshrunkbyaquarter,acontractionthree-and-a-halftimesasbigasthe6.8%decline(peak-to-trough)intheGreatFinancialCrashof2008.18TheBank of England Monetary Policy Reportexpectstheunemploymenttoriseto9percentbytheendofthe2ndquarter.19Evenwithasharprecovery,theIMFinitsAprilEconomic Outlookpredictsinthat,in2021,advancedeconomies’GDPwillbe6.1% lowerthanitwouldhavebeenintheabsenceofthepandemic.20Andsucharecoveryisfarfromguaranteedinthenearterm.

The clear risk, as seen in other recessions, is that the combination of uncertainty and reluctance to spend, particularly on investment, proves self-fulfilling, deliveringaweakereconomythroughclassic‘multiplier’and‘accelerator’effects.Workerslosetheirjobs,businessescutbackoninvestment,whichthentriggersmorejoblosses,consumptionfallsandsavingsrise,andsoon.Thiscausesexpectationstoalignaroundlowgrowthandacycleisentrenched.

But a bit like Tolstoy’s unhappy families, downturns differ in their own way: no two economic crises are the same and demand different responses. Thefinancialcrashof2008–09requiredparticularmeasurestoextendliquidityandrestorethehealthofthebankingsystem.TheCOVID-19crisisandthepost-pandemicenvironmenttooarelikelytoproveuniqueandrequireresponsestailoredtothecharacteristicsofthecrisis.Thebankingsystemandcorrespondingfinancialplumbingremainsfunctional,butbusinessactivityandphysicalsupplylineswillneedrebuilding.Increasedcorporateindebtednesswillexacerbatethestrains.The2008reasonforbailingoutthebankswastheircentral,butnotdirectlyvisible,roleintheintermediationprocessbetweensaversandlenders.Bycontrast,theimpactofthepandemicisbeingfeltdirectly,rightacrosstheeconomy,byhouseholds,businesses,andconsumersalike.SomeofthisimpactmaybedelayedbytheUKgovernment’sfurloughscheme,whichwillbefeltastheschemewindsdown.Itwillalsobefeltacrossgovernment,asittakesonhigherdebtliabilities.Joblossesandunemploymentwillunderminehealthandwellbeing,stretchpublicservicesandspending,anddamageskilllevels–someofwhichwillbelost irretrievably21.Movingfromrescuetorecoverywillthereforerequireaction,simultaneouslybothtorestoredemandandbolstersupply.

17 DaniRodrik(2014)Green Industrial Policy18 Office for National Statistics, GDP monthly estimate, UK: April 202019 BankofEngland(May2020)Monetary Policy Report20 IMF(April2020)World Economic Outlook, April 2020: The Great Lockdown;seealsoaccompanyingblogIMFBlog(April2020) The Great Lockdown: Worst Economic Downturn Since the Great Depression

21 Brookings(2012)Fiscal Policy in a Depressed Economy

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COVID-19 AND THE ECONOMIC LESSONS FROM PAST RECOVERY PLANS3.

RESCUE

RECOVERY

GROWTH

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3.1 DEMAND AND SUPPLY AFTER LOCKDOWN: AN AMBITIOUS TWO-PRONGED RECOVERY PLAN

A distinction is often made between the rescue and recovery plan. Rescuepolicyseekstoputtheeconomyonlifesupportuntilthepandemicisundercontrol,soastominimisedamagetoeconomiccapacity.Itseekstoprotectincomesandjobs,particularlyforthemostvulnerableandthepoorest.Economicrescuepackagesimplementedaroundtheworldalreadytotalmore thanGBP 5 trillion.22

Rescue plans keep the economy on life support for later resuscitation. TheUK,likeallG20nations,hasimposed restrictions23ontravelsuchas‘self-isolation’ and ‘social-distancing’.24Theserestrictionshavebeen effective25inslowing the spread of the virus26but,togetherwithvoluntarychangesinspendingbehaviour,havegeneratedsevereeconomicconsequences.Thecostoflockdownalone–thedeliberateactiontakentolimitcontagionfromthepandemic–is£2½billion per day.27Arecentstudyidentifiedover300 implemented policiesofsignificantmagnitude.28Thevastmajorityofthesepoliciesareoftherescueratherrecoverytypology,includingsignificant

22 OxfordSmithSchoolofEnterpriseandtheEnvironment(May2020)A net-zero emissions economic recovery from COVID-1923 IMF(2020)Policy Responses to COVID-1924 Wilder-SmithandFreedman(March2020)Isolation, Quarantine, Social Distancing and Community Containment: Pivotal Role for Old-Style Public Health Measures in the Novel Coronavirus (2019-nCoV) Outbreak

25 CanHouetal.(April2020)The effectiveness of quarantine of Wuhan city against the Corona Virus Disease 2019 (COVID-19): A well-mixed SEIR model analysis26 JoelKooetal.(March2020)Interventions to mitigate early spread of SARS-CoV-2 in Singapore: a modelling study27 CentreforEconomicsandBusiness(April2020)As the UK remains in lockdown, Government may need to target more support at manufacturing sector 28 CameronHepburnetal.(May2020)Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 22

COVID-19 AND THE ECONOMIC LESSONS FROM PAST RECOVERY PLANS3.

workerandbusinesscompensationschemeswhichdefendlivelihoods.AnexampleistheUK’sCoronavirusJobRetentionScheme(UKCoronavirusAct,2020)whichallowsfirmstoapplyforgovernmentassistancetocoverupto80%offurloughedworkers’wages,cappedat£2,500monthly,atacostofover £10bn a month.29Thesepolicieshavenotpaidmuchattentiontosustainability,buttheUKisdoingbetter than many other countries,presumablyreflectingthatmuchofthesupportgoestoitslower-emissionsservice-orientedeconomy.30

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The focus of this paper is on strategy and policies for recovery, butcarefulaccountistakenofthetransitionfromtherescuephase–whichwearenowin–torecovery.Althoughtheboundarybetweenrescueandrecoveryisblurry–wavesofdiseaseandresponsemayimpactsocietyandtheeconomyuntilavaccineortreatmentisfound.Bythetimethepandemichasbeendeemedtobelargelyundercontrolandcontained,bothdemandandsupplycapacitywillhavetakenaknock.Andevenafterbusinesseshavebeenallowedtoreopen,uncertaintyandlackofconfidenceintheeconomicoutlookwilllikelypersist.Consumerswilllikelyholdbackonspending,

29 InstituteforFiscalStudies(May2020)Extending the Coronavirus Job Retention Scheme: trade-offs and balancing acts30 VividEconomics(April2020)Green Stimulus Index31 TheGreenStimulusIndex(July2020version)examines17majoreconomiesandtheEuropeanCommissiontoassessthegreenvs.brown orientationoftheirstimulusfundingbasedon:thescaleoffundsflowingintoenvironmentallyrelevantsectors;theexistinggreenorientation ofthosesectors,andtheeffortstosteerstimulustoward(orawayfrom)sustainability.Whatisbeingcapturedintheindextodateisaflow ofrescuefundingintoexistingsectors,which,formanycountries,reinforcesastatusquothatissignificantlytiltedtowardbrown.

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 23

COVID-19 AND THE ECONOMIC LESSONS FROM PAST RECOVERY PLANS3.

businessesmaybecautiousaboutinvesting,andmaybeevenshedlabour,whilebankscouldbecomeevenmorecautiousinextendingcredit.Allthiswillalmostcertainlyleadtoavisibleneedforpolicyactiontorestoreeconomicactivityandgetpeoplebackinsufficientnumberstopaidwork.Therewill,naturally,besignificantvariationwithinthisaggregatepicture:thedurationoflockdownswillalmostcertainlyvaryfromsectortosector,andregiontoregion,withsomealreadystrugglingregionshitparticularlyhard.

Recovery packages seek to rebuild the economy to last and prosper . Aswiththerescuephase,recoverypackagesseektoprotectincomesandjobs,particularlyforthemostvulnerableandthepoorest,butthereisanopportunitytogomuchfurthertoavoidreturningtheUKeconomytotheunproductivemodelofthepastthatwasnotresilientanddeliveringbetterlivingstandardsforall.There is also an opportunity to ensure that rescue packages do not worsen a bigger and longer-lasting crisis – climate change. Thechallengeistorestoredemandandsupplyinawaythatbuildsastrong,inclusive,sustainableandresilientrecoveryfromtheCOVID-19crisis.Thisisgoingtorequireradicalchangeandthinkingacrossallarmsofpolicy.Arecoverypackageisneededthatisambitious,coherentproductiveandjobsrich.Thisreportoutlinesthekeyelementsofsuchapackage.

3.2 CONFIDENCE, EXPECTATIONS AND FISCAL SPACE TO SUPPORT RECOVERY

Viable businesses will go bust, while human and knowledge capital will depreciate as a result of lockdown. Unlikeinconflict/war,fewrealassetswillhavebeenphysicallydestroyed.Butskillswillhaveatrophied,andoptimismmaybethin.Fearofeconomicdepression,orofcontinuedrecession,canalltooeasilybecomeaself-fulfillingprophecyasbankscutlending,businessestrimjobs,andinvestmentandindividualscurtailspending.Quitepossiblythereforethegreatestneedwillbetorebuildconfidence,notingthattheimpact on expectationsmaybeshapedasmuchbyemerginghealthrisksasbyfinancialresponses.32

In the short run, the world faces a classic Keynesian paradox of thrift . Thisiswhenfearofdownturnleadsbusinesstocutinvestmentandshedlabour,bankstoretrenchcreditandconsumerstoclawbackspending.Wheneveryonerespondsinthisway,expectationsbecomeself-fulfillingingeneratingtheverydownturnthatwasfeared.Expansionaryfiscalpolicyinaslumpcanarrestthesenegativereinforcingfeedbacks.Theprimarymacroeconomictaskistooffsetthisandstimulateprivatespending/lending/hiringintheshortrunandthisrequiresrestoringconfidence.

32 RooseveltInstitute(April2020)Four Priorities for Pandemic Relief Efforts

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COVID-19 AND THE ECONOMIC LESSONS FROM PAST RECOVERY PLANS3.

Concerns about repaying enlarged public debt and limited ‘fiscal space’ must be addressed head on. UKpublicborrowingin2020–2021islikelytoexceed£200bnwithpublicdebtapproaching 100% of GDP.Inthelongterm,itisimportanttorecognisethatincreasesingovernmentspendingarelikelytocrowdoutprivatespending,especiallyiffinanced bydistortionary taxesorifpolicyencouragesrent-seekingbyvestedinterests. 33Moreover,iflendersbegintofearthatthegovernmentmayrenegeonrepayingpublic-sectordebtinfull,defaultriskpremiaandinflationpremiaongovernmentbondsmayrisesharply,exacerbatingthetighteningofcreditconditionsandincreasingthecostofpublicinvestment.

It is important to set out clearly the macroeconomic arguments and the options for fiscal and monetary policy in these unprecedented circumstances. Thepointofdeparturehastobethatrealbondratesinhighpercapitaincomeeconomiesremainclosetozero.Thisreflectscontinuedlowprivatesectordesiretoinvest,anditscounterpartisanabundantinvestorappetiteforpublicdebt.Despitetheriseingovernmentborrowingandtheprospectofextendedpublicborrowing-basedsupportforeconomiesacrosstheworld,themarketscontinuetobuyupgovernmentpaperatpriceswhichkeeprealriskfreeinterestratesclosetozero.TheUKsoldnegative-yieldinggovernment bonds 34for first time in May and the markets expect real bond rates toremainbelow zero 35for the rest of the decade.

33 MarianneBaxterandRobertKing(June1993)Fiscal Policy in General Equilibrium34 Bloomberg(May2020)U.K.’s First Negative-Yielding Bond Sale Sharpens Focus on BOE35 BankofEngland(2020) Yield curves

REBUILDING TO LAST: HOW TO DESIGN AN INCLUSIVE, RESILIENT AND SUSTAINABLE GROWTH STRATEGY AFTER COVID-19 25

COVID-19 AND THE ECONOMIC LESSONS FROM PAST RECOVERY PLANS3.

PER CENT

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FIGURE 2: UK INSTANTANEOUS IMPLIED REAL FORWARD CURVE (GILTS)

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Figure2showthatfuturesmarketsexpectrealrisk-freeratestoremainbelowzerofordecadestocome.Thebondmarketisn’tjustpricinginarecessionasaresultofthecoronavirus,italsoexpectsthepolicyratestobenearzeroforthelongterm–markingaprolongederaof‘secularstagnation’whereproductivitygrowthandinflationremainsubduedandinterestsstayonthefloor.36Deleveraging,agingpopulations,inequality,corporateshort-termismandgrowingmonopolypowerandthebuild-upofforeignexchangereservesareamong the reasonscitedfordrivingatrendtowardsgreaterdesiredsavingandlowerproductivity.37Greaterprecautionarysavingintheeventofaglobalpandemicandrecessionislikelytoexacerbatethedownwardpressureinrates.

Into the medium term, provided recovery plans avoid depression, debt remains historically affordable. A premature tightening public budgets is likely to undermine debt sustainability in the long run.

36 LarrySummers(2020)Secular Stagnation37 GranthamResearchInstituteonClimateChangeandtheEnvironment(August2016)Building 21st century sustainable infrastructure: Time to invest

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BOX 1: MIND THE FISCAL GAP: PUBLIC DEBT SUSTAINABILITY DYNAMICSDebtdynamicsarecurrentlyveryfavourableasthestandardequationfordebtdynamicsillustrates:

Changeind=-p+(r — g)*d(-1)Whered=debt/GDP,pistheprimarybalance(publicborrowingafterinterestpayments),ristherateofinterestandgtherateofnominalGDPgrowth.Thisbasicallysaysthat,allelseequal,ifaneconomygrowsfasterthantherateofinterestchargedonitsstockofdebt,itsdebttoGDPratiowillfall.Thisisbecausethenumerator(debt)growsmoreslowlythanthedenominator(GDP).

Growth lowers debt/GDP by swelling the denominator.Iftherecoveryplancanrestoregtoitstrendrateofaround4%andrisaround2%suggestingtheUKcanrunaprimarydeficitoftheorderof2%ofGDPwhilekeepingdebt/GDPunchanged.Thiscanbespentongrowthboostingpublic investment in green infrastructure,R&D,skillsandeducationwhichcanfurthersupportgrowth.38Onceoneaddsbackinterestpayments,themedium-termsustainabledeficitintheUKisoftheorderor4–5%GDP.

But growth also drives the debt/GDP numerator. Forexample,iftargetedinvestmentgeneratesamultiplierof3,then1%ofGDPinextraborrowingcanbeexpectedtoraiseGDPby3%therebygeneratingpublicrevenuessufficienttoreducethepublicdeficitbyaround1%ofGDP.Thiscombinedeffectonboththenumeratoranddenominatorofthedebt/GDPratioexplainswhy,under the right conditions, borrowing to invest can be so much more sustainable in terms of public debt management than seeking to directly target balanced budgets. Fromapoliticaleconomyperspective,nottomentionthatofgoodgovernance,growingoutofdebthastheadditionalmeritofgeneratingmorejobs,boostingproductivityandwagesandbestowingamorecontentelectorate.

38 GranthamResearchInstituteonClimateChangeandtheEnvironment(August2016)Building 21st century sustainable infrastructure: Time to invest

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Financial assets however are not national net wealth. Everydebtor/liabilityhascorrespondinglender/asset.Incircumstancessuchasthepresent,governmentsarenotborrowingfromthefutureandtheriseinpublicborrowingismatchedbyanalmostequalandoppositeriseinprivatesaving.Withmanywealthierhouseholdsbeing‘forcedtosave’(asspendingoptionssuchastravel,restaurants,entertainmentandholidaysareclosedtothem),economistsexpectthehouseholdsavingratiotorisefromitsnormalpostwarrangeof5–10%to20%.39Totalglobaldebtisonlyrelevantinthatitreflectsunderlyingchallenges,suchasgrowinginequality,orinsofarasincreasedleveragecreatesfinancialandpublicsectorvulnerabilities.Sofar,asnotedabove,themarketsarenotundulyconcerned.By contrast, offices, factories, people as well as ideas and natural capital are real assets. The preservation, and building up, of these assets should be the priority in order to safeguard future prosperity and ensure that there are valuable assets in people’s savings and pensions.

Concerns around the supply of private capital drying up also need careful consideration.Theshutdownoftheeconomy,drivenbygovernment,hasbeenaccompaniedbyahugeboostinliquiditytokeeptheeconomyonice.Thereissignificantuncertaintyoverthefutureviabilityofmostindustries,withthecrisisacceleratingstructuralchangesthatwerealreadyunderway(seebelow).What is important is that capital is available for businesses that survive and have good prospects, particularly SMEs, so they can innovate, restructure, and improve their productivity. There is ample private capital around with investment funds buying up billions in new corporate debt;thesefundsarelookingforproductiveinvestments.Highforcedsavingsduringthecrisiswilladdtothedomesticsavingsinvestorshavetoinvest.Thegovernmenthasalsosteppedintoprovide capitalforhigh-growthandinnovativecompaniesthatwilldrivetheproductivityandlivingstandardsofthefuture.40

39 Cambridgeeconometrics(May2020)Support for consumer spending is needed to lift UK economy out of recession40 HMTreasury(May2020)Future Fund launches today

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BOX 2: MIND OVER MATTER: THE IMPORTANCE OF EXPECTATIONSCarbonfromfossilsourceshaspoweredmostoftheworld’seconomicactivityformorethan200years,sincetheuseofcoaltofiresteamenginesfirstgavebirthtotheindustrialrevolution.Itisestimatedthatbetweentwothirdsandfourfifthsofglobalprovenandpossiblefossilfuelreserveswillneedtoremain in the groundiftheworldistohavea50–80%probabilityofkeepingglobalwarmingbelow2°C(or,iftheyarecombusted,thegreenhousegasesmustbecapturedandstored).41 Almost all new fossil fuel related infrastructure built now will need to be prematurely scrapped or subject to costly retrofit.42

Nevertheless,anetzerotransitionisinevitable.Itisinevitablebecausetheextentofglobalwarmingdependsonthestockofgreenhousegassesintheatmosphere‒nottherate ofemissions.Greenhousegases(GHGs)stayintheatmosphereforyears,decades,orcenturies(dependingonthegas),sothestockwillkeepgrowingforsolongastheflowofGHGemissionsexceedstheearth’scapacitytoabsorbthem,andtemperatureswillkeeprising.Thismeansthattohaltcontinualtemperatureincreaserequirestransitioningtoanetzeroemissionsworldthatallowsconcentrationsofgreenhousegasestostabilise.43Thealternativeisthatnaturedoesthisforusbycreatingsuchahostileclimateitcausesvastmovementsofpeople44andthenrapidlydepopulatestheearth.Thisinevitabilitycanguideinvestoractionsandhelpovercomestrategic complementarity 45problemsandinferior Nash equilibria.46

Theyoccurwhenthepay-offtoaparticularactiondependsonwhatothersdo.Evenifasuperioroutcomeisattainablewhenallacttogether,individualsmayholdbackiftheyfeartheywillbeactingalone.Expectationsregardingthetransition,anditsinevitability,arethereforecruciallyimportant.Amayor,politicianorbusinesspersonwhobelievesthatnoonewillinvestincleantechnologiesisunlikelytotaketheriskofbeingthefirsttoinvest.However,iftheybelieveothersareinvestingatscalethentheywillexpectthecostofthenewtechnologiestofall,thefinancetomovefromnichetomainstream,and

41 ChristopheMcGladeandPaulEkins(January2015)The geographical distribution of fossil fuels unused when limiting global warming to 2 °C42 AlexanderPfeifferetal.(May2018)Committed emissions from existing and planned power plants and asset stranding required to meet the Paris Agreement43 COVID-19isunlikelytohaveasignificantimpactonconcentrationsofgreenhousegasesintheatmosphere,despitetemporaryfallsinflowsofemissions.44 Recentresearch,assumingascenarioofunmanagedclimatechange,findsmeantemperatureriseexperiencedbyhumanpopulationsby2070couldbeashighas7.5 °Ccomparedtothepre-industrial,about2.3timesthemeanglobaltemperaturerisebythistime.Upto3billionpeople(roughly30%oftheprojectedglobalpopulation)wouldhavetomove.ChiXuetal.(May2020)Future of the human climate niche

45 BennettInstituteforPublicPolicy(2019)Mind over matter – how expectations generate wealth46 LombardOdier(February2020)Canwebegreenandgrow?

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substantialnewmarketopportunitiestoemerge.Therefore,theywillinvest.Buttheveryactofinvesting,ifeveryonedoesthesame,meansthecostsofnewtechnologiesfallquicklyandsoforth–makingtheexpectationsbecomeaself-fulfillingprophecy.Socialpsychologistshavelongunderstoodthatsolvingcoordinationproblemslikethisrequiresbuildingexpectationsintomodelsandgenerating‘common knowledge’.47ThebiginnovationoftheParis Agreementisthatitdroppedthelanguageof‘burden-sharing’andfocussedinsteadonnationallydeterminedvoluntarycontributions.48Thisreflectstherealitythatself-interest,notsharedsacrificeforthegreatergood,breedscooperation.Thisinturnbuildsonagrowing appreciation of the opportunities associated with a low-carbon transition.49Policymakersmustproactivelyacttoidentifypotentialco-benefitsduringthepolicydesignstageandshapeimplementationcriteriatomaximiseimpact.The role of credible and durable policy in driving a cost-effective and productive low carbon transition cannot be over-emphasised.

47 KyleThomasetal.(October2014)The Psychology of Coordination and Common Knowledge 48 UnitedNations(2020) The Paris Agreement49 TheGranthamResearchInstituteonClimateChangeandtheEnvironmentandTheCentreforClimateChangeEconomicsandPolicy(December2014)Taming the beasts of ‘burden-sharing’: an analysis of equitable mitigation actions and approaches to 2030 mitigation pledges

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3.3 MULTIPLIERS: LEVERAGING PRIVATE ACTIVITY AND MAXIMISING INVESTMENT RETURNS

What matters at this juncture is to invest the borrowing wisely, to generate resilient output and sustainable capacity. Thistaskismadeeasierbythefactthat,inpresentconditions,themultipliersthatattachtopublicspending–i.e.theultimateincreasesinbothincomeandcapacitythatresultfromhigh-qualitygovernmentinvestment–arefarlargerthaninmorenormaltimes,wheneconomiesarerunningatornearfullcapacity.50

Multipliers matter. Shortrunexpendituremultipliersaregeneratedbyoffsettingdeficientaggregatedemand.Longrunmultipliersapplyto,andderivefrom,structural investmentinkeyassets(physical,human,intangible,naturalandsocialcapital)toincreasetheirresiliencetofutureshocksandtoexpandcapacitytogenerateamoreproductivegrowthpath.51

The size of short run ‘expenditure multipliers’ depends on several factors, includingthestanceofmonetarypolicy(themultiplierislikelytobehigherinthecurrentaccommodativeenvironment);thedegreeofsparecapacityintheeconomy;andthespeedandextenttowhichtheinitialexpenditurespillsoverintootherdomesticsectorsratherthanintoimports.Theglobalreachofthepandemichasmeantasynchronisedglobalslowdownthelikesofwhichhasnotbeenseeninrecenthistory.Multiplierswillthereforebestrongerifthereisaconcertedstimuluseffortacrosscountries,giventheUKeconomy’srelianceonexportsandglobalsupplychains.Themost-connected general-purpose suppliersinproductionacrosstheeconomy,whicharesusceptibletobottlenecks,arerefineries,energysuppliers,andcoremanufacturers.52Thecurrentlylowelasticityofsubstitutionamongthosereliantonthesesectorsmeansthat,whentheyarestimulatedbyaboostininvestment,theeffectsarepropagatedacrossGDPeventhoughtheyaccountforamodestfractionofgrossvalueadded.

There are two important features to investment funded by public borrowing in a downturn.Theinitialinvestmentgivesrisetosuccessive(multiplied)roundsofexpenditurethroughouttheeconomy.Theultimateincreaseintotalspendingistherebygreaterthantheinitial,first-round,effect.However,theincreaseininvestmentexpenditurealsoaddstocapacitygeneratingwhatJohnHickscalleda super multiplier (seeFigure3).

50 Themultipliermeasurestheratioofachangeinnationalincometothechangeindebtfinancedgovernmentspending.Forexample,amultiplierof2meansthateach percentagepointofGDPofdebtfinancedinvestment,ifsustained,canbeexpectedtoincreaseUKGDPbyaround2percentinthelongrun.

51 IMF(October2014)World Economic Outlook: Legacies, Clouds, Uncertainties52 VascoCarvalhoandAlirezaTahbaz-Salehi(May2019)Production Networks: A Primer;DaronAcemoglufortheRoyalEconomicSociety(April2020) Economic approaches for analysing the short, medium term and long run impact of the COVID-19 crisis

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Empirical estimates show that, particularly during a severe downturn, each dollar of public borrowing is likely to raise output by £2–£3, the result of a short-term income/expenditure effect and a longer-term capacity-increasing effect. ThusstudiesfromNBER53andtheIMF54suggestthatfiscal multipliers55associatedwithgovernmentspendingrangefromnearzero,whentheeconomyisoperatingclosetocapacity,toabout2.5duringrecessions.Governmentspendinginaslumpnotonlygeneratespositivebenefits,italsoprevents negative hysteresis56effectsonfuturesupply,wherebycapitalisscrappedandlabourskillsarelostasaresultofprotractedunder-utilisation.LlewellynConsultingconclude,onthebasisofthreequitedifferentmodelsfortheUKthatundercurrentcircumstancesdebt-financedfiscal injections probably have UK multiplier effects in a (narrow) range of 2.5 to 3.0.57AnotherIMF studyfoundthatinthemediumrun(threeyears),theaveragemultiplierfortheEUisabout1innormaltimes,butbetween1.6and2.8wheninterestratesareclosetothezerobound,astheypresentlyare.58TheOECDestimatesasimilarrange.59

EU output losses in the context of the COVID-19 shock could turn out to be permanent without strong fiscal action. Arecent studyconcludesthata1percentagepointlossinactualoutputisassociatedwithalossinpotentialoutputofabout0.6percentagepoints(whichistosaymostthelostoutputwillneverberecovered).60Theyarguethatfocussingonbalancingbudgetswithoutrecognisingtheimpactoffiscalpolicyonexpandingpotentialoutput,riskspro-cyclicalfiscaltighteningwithdamaginglong-termimpact.

Government consumption matters too. Itcanhelptobuffercurrentdistressandpayforhealtheducationandsocialservices,whichexpandcapacity.Likegovernmentinvestment,itcanalsoraisethelonger-termgrowthpotentialandboostresiliencetofuturepandemics.Furthermore,itboostsaggregatedemandthroughtheexpendituremultiplier.Italsoaddstocapacity,directlyand,giventhecomplementarynatureofbroadassets,crowdsinfurtherprivateinvestment.

53 AlanAuerbachandYuriyGorodnichenko(2012)Fiscal Multipliers in Recession and Expansion54 OlivierBlanchardandDanielLeigh(2013)Growth Forecast Errors and Fiscal MultipliersIMFWP1301IMF(January)55 LawrenceChristianoetal.(May2009)When is the Government Spending Multiplier Large?56 Brookings(2012)Fiscal Policy in a Depressed Economy57 Llewellynfocusesonlyonmodelresultsinwhichspendingwasadditionalandfundedbynewborrowing.TheOECD,averagingacrossthreedifferentmodelestimates, hasestimatedthatasustainedincreaseinpublicinvestmentintheUKof½percentagepointofGDPleadstoalong-termoutputgain(potentialGDP)ofaround1½ %ofGDP(i.e.a3%increasefora1%increaseininvestment).SeeOECD(November2016)Can an increase in public investment sustainably lift economic growth?, paragraphs26–31.,andFigure8. TheIMFhasestimatedsimilarfigures,withthecaveatthatunderlyingeconomicconditionsaffectthevalueimportantly:“Themacroeconomiceffectsofpublic investmentshocksareverydifferentacrosseconomicregimes(Figure3.6,panels1through4).Duringperiodsoflowgrowth,apublicinvestmentspendingshock increasesthelevelofoutputbyabout1½percentinthesameyearandby3percentinthemediumterm,butduringperiodsofhighgrowththelong-termeffectisnot statisticallysignificantlydifferentfromzero.”SeeIMF(2014).World Economic Outlook October 2014. Chapter 3. Is it time for an infrastructure push? The macroeconomic effects of public investment ElsewheretheIMFhasfoundstatisticalevidenceforavalueof2.5:seeIMF(May2015)The Macroeconomic Effects of Public Investment: Evidence from Advanced Economies,especiallyp.19.

58 Amendola, A., di Serio, M., Fragetta, M. and Melina, G. 2019 The Euro-Area Government Spending Multiplier at the Effective Lower Bound. IMF59 Mourougane,A.,Botev,J.,Fournier,J-M.,Pain,N.,andRusticelli,E.,2016.Can an increase in public investment sustainably lift economic growth?OECDEconomics DepartmentWorkingpaper,24November,paragraphs26–31,andFigure8.

60 Heimberger, P. Potential (2020) Output, EU Fiscal Surveillance and the COVID-19 Shock. Intereconomics 55, 167–174.

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Governments must provide companies with the clarity and confidence they need to unlock low carbon investments. Thisgeneratestheambition loop–apositivefeedbackmechanisminwhichstringgovernmentpoliciesandprivatesectorleadershipreinforceeachother.Thesizeofthemultiplierswillbeafunctionofthedegreetowhichcredibleandstablepolicyguidesexpectationsandlowersperceivedriskbysignallingdirectionoftravel(seeBox2andSection6).Crediblepolicyplaysavitalcoordinationroleingeneratingsuchreinforcingfeedbackswherebythegovernmentsendstherightsignalstoindustryandbusinesses.Itisimportanttorecognisethatthekeyobjectiveisnottochuckpublicmoneyatinvestment,buttobuildapolicyframeworkthatgeneratesprivateactivityandattractsprivatecapital.

If policy is successful in generating growth, interest rates and debt servicing costs can be expected to rise. But this would be a symptom of success.Policymakerscantightenthefiscalscrewsasglobalprivatesectoractivitynormalisestoraiserevenuesandbalancedemand.

3.4 HANDLING SHOCK AND DISRUPTION AND PROVIDING LIQUIDITY

Boosting demand will be particularly challenging in the current environment.Asnotedabove,theslowdowncomesattheendofalongperiodofslow productivity growthandrealpolicyinterestratesclosetozero.61Withratesalreadysolow,andsavingspushingratesevenlower,thelimitationsofmonetarypolicyarepromptingevermoreunorthodoxapproaches,whilealsoputtinganemphasisonfiscalsupport(seeabove),withtheprospectinsomecountriesofatleastsomedirectmonetisationofpublicdebt.

Like many central banks, the Bank of England has been buying up new issues of government bondsbyissuingreserves.AstheBank’sbalancessheetswells,theBankcancancelthedebtorkeepinterestrateslowtoassistdebtsustainabilityevenifthatcausesinflation,whicherodestherealvalueofnominalpublicdebt.Yieldcurvecontrolisalsobeingconsidered,wherebytheBankbuysuplonger-termbondstolowerlong-terminterestrates.Alloptionsincludingnegativeinterestratesareonthetable.

61 BankofEngland(December2015)Secular drivers of the global real interest rate

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However, fears of debt monetisation may be overstated.62WhatmattersforinflationandcredibilityisoperationalindependenceoftheBankofEngland,ratherthantheinstrumentinuse.Providedanoperationallyindependentcentralbankcanmodifyitsstanceinaccordancewithitsobjectives,intheformofatransparentreactionfunction,thereisnoreasonwhyanti-inflationarycredibilityshouldbeundermined.Withinflationundershooting,radicalmeasuresarejustifiedprovidedtheyaretemporary.ThereremainstheneedtoaccountforbiasesintheCentralBank’sassetpurchaseprogrammeswhichmayfavour carbon intensive sectors.63Bybuyingsecuritiesanddebtissuedbybigcompanies,theydisproportionatelyinvestintheincumbentsectorsofyesterdaytotheexclusionofsmallerlowcarbonsectorsthatwilldefinetheeconomyoftomorrow.Itisimportantthataddressingsuchbiasesisnotconfusedwithattemptsatagreenquantitativeeasingprogramme.It is actually about keeping the playing field level and not biasing it in favour of carbon intensive sectors loaded with climate transition risks.

The importance of monetary policy is heightened.Itisimportanttorecognisethatbroadmoneyisendogenous.ConsiderforexamplethefamousquestionputbyProfessorNicholasKaldoronobservingtheannualsurgeinmoneysupplyeachChristmas:doesthemoneysupplycauseChristmas;ordoesChristmascausethemoneysupply?Thus,inaconfidencecrisis,andwheninterestratesarealreadyneartheirzerobound,boththefiscalandthemonetaryauthoritiesneedtoacttosustainspendingandensurethatliquiditygoesintonewproductiveinvestment–ratherthaninflatingthepriceofexistingassetsheldbythewealthy.Tosumup,theneedtoaddresstheclimatechallengeandbuildaresilientandinclusiveeconomy,properlypursued,mightprovetobetheverymacroeconomicmedicinethepost-COVID-19economyrequires.

62 BlanchardandPisani-Ferry(April2020),VoxCEPRPolicyPortal(April2020)Monetisation: Do not panic63 GranthamResearchInstitute,LSE(May2017)The climate impact of quantitative easing

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4.1 INVESTING IN COMPLEMENTARY PRODUCTIVE ASSETS

In the short run the key aim of macroeconomic policy is to restore confidence,stimulatespendingandreanimatetheeconomy;howevergeneratingHicks’ssuper-multiplierandsettingtheeconomyonarapid,sustainable,inclusiveandresilientpath,requireframingavisionofthebenefitsofgovernmentaction.IntheUKthatvisionneedstobelinkedtothecarbonbudgets,environmentaltargetsandthenetzerogoal.

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DEFINITION OF SUSTAINABILITY

FOUR TYPES OF CAPITAL THAT ARE ESSENTIAL TO HUMAN WELL-BEING AND WEALTH

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In the long run, inclusive sustainable growth means investing savings in an array of complementary assets which ‘crowd in’ capacity. This includes:

� Physical capital:Lockingintofuture-proofedproductiveandresilientinfrastructure,describedbyCarbon Tracker,64andforexamplenotspendingpublicmoneyproppingupfossil-fuelintensiveassetswithlimitedproductivitypotential.

� Human capital:Tosecuretheskills and jobsnecessaryfor21stcenturyeconomy,65 andretoolingand,reskillingworkerstoenablethoseaffectedbychangetoparticipateintheneweconomy–‘levellingup’opportunitiesandregions.

64 CarbonTracker(April2020)COVID-19 and the energy transition: crisis as midwife to the new65 GranthamResearchInstituteonClimateChangeandtheEnvironment(October2019)Financing inclusive climate action in the UK – An investor roadmap for the just transition

WHY BRITAIN NEEDS INVESTMENT IN SUSTAINABLE, RESILIENT AND PRODUCTIVE ASSETS4.

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WHY BRITAIN NEEDS INVESTMENT IN SUSTAINABLE, RESILIENT AND PRODUCTIVE ASSETS4.

� Natural capital 66, COVID-19showstheinteractionbetweenourenvironment,economyandtheurgentneedtostrengthenthequality and resilience of natural assets67notingthatbiodiversityandhabitatlossincrease the likelihood68ofdiseases.Economicactivitythatleadstounsustainableuseofnaturalcapitaltherebycontributestopandemics.

� Knowledge and intangible capital notingtheeconomyofthe21stcenturywillbeshapedbyknowledgeandinnovation.Ideasarethekeydriverofthegrowthintotalfactorproductivity(TFP,seesection4.4).

Dematerialisation is going to play an increasing role in reducing carbon emissions and resource intensity .JohnStuartMillwasamongthefirsttorecognisethatevenifthematerialeconomyattainedastationarystate,ourintellectual developmentwouldincreaseindefinitely.69MartyWeitzmanshowedhowbringingexistingideastogethergeneratesapotentiallylimitlesssupply of new ideas.70Thisisreflectedintheincreasingimportancetonationalincomeofintangible,knowledge-products–software,newmedia,databasesandlibraries,creativecopywriteandonlineservices.Intangiblesalsomakeupanincreasingpartofthecapitalbasenecessaryforproduction.

The valuation of the world’s largest firms is now based mostly on their intangible capitalandnotthevalueoftheirpeople,buildingsorcapitalequipment.In1975,around20%ofthevalueoflistedcompanieswasintangible–theideas,processesandnetworksthecompanyhasnurtured.By2015,thatlevelhadrisentoaround 80%.71theWorldBankmeasuresthe‘True Wealthof Nations’72andestimates73thatintangiblecapitalmaymakeupbetween60%and80%oftotalwealthinmostdevelopedcountries.Today,about four out of five dollars spent in the leading OECDeconomiespurchaseservicesorintangiblegoods.74

66 BennettInstituteforPublicPolicy(2020)Valuing Wealth, Building Prosperity: The Wealth Economy Project on Natural and Social Capital 67 IPBES(April2020)COVID-19 Stimulus Measures Must Save Lives, Protect Livelihoods, and Safeguard Nature to Reduce the Risk of Future Pandemics68 Settele,J.,Díaz,S.andBrondizio,E.,andDaszak,P.,(2020)COVID-19StimulusMeasuresMustSaveLives,ProtectLivelihoods,andSafeguardNatureto ReducetheRiskofFuturePandemics.IPBES,27April.Availableat:https://ipbes.net/covid19stimulus

69 AlexBowenandCameronHepburn(October2012)Prosperity with Growth: Economic Growth, Climate Change and Environmental Limits70 MartinWeitzman(1998)Recombinant Growth71 OceanTomo300®PatentIndex72 WorldBank(2020)The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium73 WorldBank(2020)The Changing Wealth of Nations 2018: Building a Sustainable Future74 OECD(2020)Value added by activity

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WHY BRITAIN NEEDS INVESTMENT IN SUSTAINABLE, RESILIENT AND PRODUCTIVE ASSETS4.

BOX 3: BUILDING RESILIENCEA key feature of the recovery plan is to secure resilience.Therecoveryphaseaffordsanopportunityforpoliciestocreatejobsassoonaslockdownisliftedandexpandtheproductivecapacityoftheeconomy.However,thelessonsofCOVID-19alsohighlighttheimportanceofaneconomywhichiscapableofrespondingflexiblytounexpectedshocks,withadegreeofredundancy,available‘justincase’theworsthappens.

A prerequisite for resilience is investment in the capacity of state institutions. Hyperderegulationanddrivesforefficiencyhaveleftsomeinstitutionsthreadbarewithlimitedcapacityforsurprises.ThelackofprotectiveequipmentintheNHSprovidesperhapsthemostgraphicexamplebutothersabound.Forexample,theoverwhelmingdependenceofLondon’sentiretransportinfrastructureonTFL’sfundingmodel,whichisbasedonpackingincommuterstogeneraterevenues.

Green investments will also create resilience as they reduce risks of climate impacts in the long-term and strengthen adaptation to climate impacts we are already experiencing today.Backedbystrongemploymentlaws,theycancreateattractivejobsandskillsintherecoverythataremorelikelytopersistovertimeastheeconomytransitionstonetzero.Adaptionalsocreatesabroaderrangeofbenefits,forexamplewaterretention,preservingbiodiversityandimprovinghealth(see6.9investing in nature).

Increased localisation and self-sufficiency as well as reducing reliance on fragile supply chains are ways to improved resilience, but it is important not to mistake independence for security.Globalconnectivityandcollaborationenhance resilience,whetheritbecollectiveactiontotackleglobalpandemicsorlimitthescopeandimpactofclimatechange.75Asymmetricshocksaffectingcountries,forexamplefrompandemics,droughtsorrestrictedenergysupplies,alsorequirecross-bordercollaborationtosupplyfood,energyandemergencysupplies.TheUKisconnectedtotheworldeconomyandreliantuponit,sobuildingresiliencerequiresbuildingcollaborationinternationally(seesection6.15GlobalBritain).

75 IPCC(2014)International Cooperation: Agreements and Instruments

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WHY BRITAIN NEEDS INVESTMENT IN SUSTAINABLE, RESILIENT AND PRODUCTIVE ASSETS4.

Measuring wealth provides a more comprehensive understanding of the modern economy .BysupplementingGDPwithcomplementarymeasuresofnatural,social,andhumancapital,ourworkprovidesadeeperassessmentoftheunderlyingwealthofnations.Manyofthechallengeswefacetoday,includingclimatechange,the‘productivityparadox’plaguingmanyadvancedeconomies,andevenpoliticalupheaval,canbetracedtoanerosionofnatural,human,socialandinstitutionalcapital.Butthesetrendsarenotreflectedinstandardofficialstatistics.

AssessingthewealththatwilldrivetheUK’sproductivecapacityinasustainablemannerrequires additional support for the ONStobettermeasurethestockofbroadassets,againstwhichtoassesssustainabilityandprosperity,alongsideflowsofGDP,somethingagroupofushavebeenworking on in Cambridge.76

4.2 CLEAN SECTORS HAVE RELATIVELY HIGH MULTIPLIERS

Against this framing, sustainable, resilient and inclusive investments have some very appealing short- and long-run characteristics in a recession. Intheshortrun,cleanenergyinfrastructureisparticularlylabour intensive,77creatingtwice as many jobsperdollarspentthanfossilfuelinvestments.78Constructionprojectslikeinsulation retrofitsandbuildingwindturbines(orinstallingbroadbandnetworks,plantingtreesandrestoringwetlands)arelessimportintensivethanmanytraditionalstimulusmeasuresandleadtohigher multipliers. 79

For example, wind turbine blades are made in Siemens’ Hull manufacturing plants, one of the most deprived regions of the country, rather than being imported. ØrstedandSiemensGamesahavealsoinvestedinlocaleducationandtrainingfacilities.Acrosstheeconomyasawhole,theswitchtoEVsisestimatedtocreatebetween7,000 to 19,000 jobs,dependingonthelevelsofdomesticproductionandimports.80Acirculareconomy,focusedonreducing,repairing,reusingandrefurbishingcouldcreate205,000 jobsintheUK.81With unemployment expected to more than double from its level at the end of last year, there is likely to be limited displacement or pressure in wages: gross jobs will approximate net jobs. Meetingthenetzerotargetonthehousingconstructionsectorcouldseethecreationof108,000net new jobsbytheendofthisdecade.82

76 BennettInstituteforPublicPolicy(2020)Valuing Wealth, Building Prosperity: The Wealth Economy Project on Natural and Social Capital77 UKEnergyResearchCentre(November2014)LowCarbonJobs:TheEvidenceforNetJobCreationfromPolicySupportforEnergyEfficiencyandRenewableEnergy78 PoliticalEconomyResearchInstitute(September2008)Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy79 World Resources Institute (February 2009) A Green Global Recovery? Assessing US Economic Stimulus and the Prospects for International Coordination; GranthamResearchInstituteonClimateChangeandtheEnvironment(October2012)Green Growth: Economic Theory and Political Discourse

80 TransportandEnvironment(September2017)How will electric vehicle transition impact EU jobs?81 WRAP(September2015)Economic Growth Potential of More Circular Economies82 CambridgeEconometrics&VercoforCustomerFocus(October2012)Jobs, growth and warmer homes: evaluating the economic stimulus of investing in energy efficiency measures in fuel poor homes

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BOX 4: WINDS OF CHANGE: INNOVATION IN WIND TECHNOLOGY Thefollowingexampleillustratesthepaceatwhichtechnologyhasimprovedproductivity.MesaWindprojectnearPalmSpringsintheUSwasinstalledin1983andwasoneofthefirstinthecountry.Ithas460turbinesanda30megawattcapacity.Theyareabouttobereplacedwithanew30megawattinstallation.

Whilelargeintheearly1980s,todaytheMesaWindprojectislessthan3%thesizeofthelargestUSwindfarmprojectcurrentlyunderconstruction.Whatisreallystrikingthoughisthattocreatethesame30megawattstoday,those460oldturbineswillgivewayto,atmost,11newones.Thenewturbineswillalsohavethesamepeakgeneratingcapacityastheold,30MW,butonnon-peakdays,theywillalmostcertainlyoutperformtheirpredecessorsthankstovastlyimprovedhardware,software,andadaptabilitytodifferentwindconditions.Eventhoughthenewturbineswillbebiggerinsize,therewillbesofewofthemthattheentireconfigurationwillshrinkby10acres.

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WHY BRITAIN NEEDS INVESTMENT IN SUSTAINABLE, RESILIENT AND PRODUCTIVE ASSETS4.

In the long term, the economic multipliers are high, as the operation and maintenance of more productive renewable technologies makes them less labour-intensive, whileenergy cost savingsare passed on to the wider economy.83Bygeneratinggrowth,publicdebtbecomessustainableandeasily repayable.84Overthecomingyearsthedistinctionbetween‘green’jobsandotherjobswilldisappear–all jobs that survive will in some sense be ‘green’,butduringtheperiodoftransitiontheconceptremainshelpful.85Investmentinsmall,modularrenewabletechnologiesprovidenumerousco-benefitsandtheirsmallsizesimplyshorterprojectleadtimesandlarger jobcreation potential.86

Criteria for ranking recovery plan investments is important. Withinthebroadercategoryofinfrastructureinvestment,itisnecessarytounderstandwhetherthestimuluspropertiesoflow-carbonandhigh-carboninvestmentsignificantlydifferent.Iftheyare,thiswouldsuggesteitheroneortheothercategoryshouldbeprioritisedforstimulusreasons.Iftheyarebroadlysimilar,thedecisiononinfrastructureinvestmentwouldbebasedontheirlong-termstructuralproperties.Weexplorethequestionbasedonthestimulusframeworkintroducedabove(targeted,timely,temporary),butsuggestrefinementswhereappropriate(forexamplewhereshortrunandlongjob creationobjectivesdiffer).Not all high multiplier investments are unambiguously clean, and where they are not, they need to be considered on their merits in terms of whether they fit into the country’s long term economic strategy (seeBox5onroads).SomesectorssuchasaviationareofstrategicimportancetotheUK,butconditionalsupportcanacceleratetheprocessofdecarbonisation(Seesection6.12below).

BOX 5: GIVE WAY: THE CARBON STATUS OF ROADSTheUK’sstatedlong-termaimistodecarboniseroadtransport,largelythroughtake-upofelectricvehicles,withbans on the sale of new hybrid and petrol carsplannedfrom2035.87Oncevehiclesare‘clean’,roadinvestmentsshouldinprinciplebecarbonneutral.However,duringthetransitionphaseoverthenext15years,there are complex links between road investments and emissions.Someprojectslikebuildingnewroadshavehighmultipliereffects,buttheymaynotbebestsuitedforlargescaleinvestment.Ontheonehand,theconstructionofnewroadsrelievesthepressureoncongestedroads.Sincevehiclesoncongestedroadsconsumemorefuelthanfreeflowingvehiclesasusersareforcedtodriveinlower

83 CommitteeonClimateChange(May2020)Building a resilient recovery from the COVID-19 crisis84 CameronHepburnetal.(May2020)Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?85 GranthamResearchInstituteonClimateChangeandtheEnvironment(October2019)Financing inclusive climate action in the UK – An investor roadmap for the just transition

86 Wilson,C.Grubler,A.,Bento,N.,Healey,S.,Stercke,S.D.,andZimm,C.,(2020) Granular technologies to accelerate decarbonization. Science. 368, 36–39

87 Reuters(February2020)Electric dream: Britain to ban new petrol and hybrid cars from 2035

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WHY BRITAIN NEEDS INVESTMENT IN SUSTAINABLE, RESILIENT AND PRODUCTIVE ASSETS4. gears,itmightbeassumedthatroadbuildingcanlowertransportemissions.Ontheotherhand,newroadsarecomplementarygoodstocarsmakingcarsandtheusageofcarsmoreappealing.Newcarpurchasesresultingfromalargerroadnetworkwillnotoccurimmediatelybutwillbespreadovertime.Increasingly,thecarfleetwillbelowcarbonandelectric.Consequently,evaluatingthelikelyimpactofroadbuildingeveninqualitativetermsisadifficulttask.

Apurelytheoreticalcost-benefitanalysisbyAffuso, Masson, and Newbery (2003)suggestedbuildingnewroadshadarelativelysmalleffectontheincreaseindemandforvehicleuse:buildinganewroadintheirmodelonlyresultsinanincreaseindemandof1.3to1.6percentfromrailswitching,whileforacarriagewaywidening,thestatisticis3.2percent.88However,thisdoesnotincludethepossibilityof,forinstance,individualschangingtheirplaceofgeographicresidenceinresponsetothenewlevelofroadaccess.Therelevantshort-andlong-runelasticitiesmaybeverydifferent.Moreover,lockingintocar-basedsprawlingurbandevelopmentincreasesthecarbon and resource intensityof citiesingeneralbyrequiringmoreextensiveconnectionstoutilitiessuchaselectricity,waterandbroadband.89

Moregenerally,itcouldbethecasethatroadbuildingdoesnotkeeppacewiththegrowthinvehicles.Historic transport trendsfortheperiod1960–2000revealthatintheUK,thelengthofroadgrewatarateof0.5percentperannum,whiletrafficincreasedby3.1percentovertheperiod1980–2000(Affuso,Masson,&Newbery,2005),resultinginanetdecreaseintheaverageamountofroadspaceavailablepercar.90

Economicanalysisusuallysuggeststhatcongestioncanbetackledmostefficientlythroughdemandmanagementintheformofroadpricingandroadtolls.However,thesearecurrentlyrelativelyuncommonintheUK.

88 InstituteforFiscalStudies(September2003)Comparing Investments in New Transport Infrastructure: Roads versus Railways?89 CoalitionforUrbanTransitions(2018)Integrating National Policies to Deliver Compact, Connected Cities: An Overview of Transport and Housing 90 InstituteforFiscalStudies(September2003)Comparing Investments in New Transport Infrastructure: Roads versus Railways?

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4.3 CLEAN SECTORS GENERATE LARGE CO-BENEFITS

Many and perhaps most of the policies required to decarbonise the global economy generate co-benefits. Muchofthisbooststandstocomefromaddressingmultiplemarketfailures–situationswhereapuremarketoutcomemisallocatesresources,forexample,becausepollutersescapepayingforthedamagetheycause(seeSection6).Co-benefits of climate policies 91oftenincludereducedwasteandinefficiency(seebox6),includingfood waste,92reducedurban congestion,93andimprovedhealth outcomes,94biodiversity 95andecosystem sustainability 96.Theyincludecommercialopportunitiesassociatedwithdeploying(andfabricatingandexporting)cheapandincreasinglycompetitivenewcleantechnologies.

The benefits of reducing air pollution alone are eye-opening. IntheUK,congested,pollutedcities,withleakybuildings,usingoutmodedenergytechnologies,andill-servedbypublictransport,areinefficientandwasteful.Urbanairpollutionisamajorcauseofrespiratoryillness,cardiovasculardisease,andearlymortality.TheCommitteeontheMedicalEffectsofAirPollutants(COMEAP)estimatesthat,intheUK,prematuredeathsresultingfromasingleparticulatepollutant,PM2.5,currentlytotalaround29,000 per year.97TheEuropean Environment Agency,usingdatafromitsAirQualitye-reportingdatabase,putsthefigureatapproximately37,800prematuredeathsayearintheUKand432,000in2012inEurope,withanadditional75,000peopledyingeachyearfromexposuretoNO2airpollution.98/99Globalwelfarelossesduetopollutionareestimatedbyonestudytoamountto6.2 percentofglobaleconomicoutput.100ArecentstudybytheLondonSchoolofEconomicsevendrawsalinkbetweenincreases in crime 101withLondon’sgrowingairpollutionandrecentlinkssuggestthatpollutionincreasesvulnerability to COVID-19.102

A number of authoritative studies have shown that policies to decarbonise the global economy boost economic growth, not reduce it. ArecentWorld Bank studyfoundthat,comparedwithbusiness-as-usual,greengrowthwouldproduceimmediatepositiveeffectsontheeconomy,whentakingproperaccountofco-benefits(e.g.reducedlocalpollution);growthinnew‘green’sectors;andreducedenergypricevolatilityviareduceddependenceonfossilfuelimports.103TheGlobal Commission on the Economy and Climatefoundthatmorethanhalf,andperhapsasmuchas90%,oftheglobalemissionsreductionsrequiredtomeetanambitious

91 MikaelKarlssonetal.(February2020)Climate policy co-benefits: a review92 YosukeMunesueetal.(2015)The effects of reducing food losses and food waste on global food insecurity, natural resources, and greenhouse gas emissions93 Portugal-Pereiraetal.(2013)The Sustainable Mobility-Congestion Nexus: A Co-Benefits Approach to Finding Win-Win Solutions94 EricChivianandAaronBernstein(2008)SustainingLife:HowHumanHealthDependsonBiodiversity;MikaelSkouAndersen(August2017) Co-benefits of climate mitigation: Counting statistical lives or life-years?;VivianQuametal.(April2017)Assessing Greenhouse Gas Emissions and Health Co-Benefits: A Structured Review of Lifestyle-Related Climate Change Mitigation Strategies

95 BrettBryanetal.(2016)Designer policy for carbon and biodiversity co-benefits under global change;HenryWüstemannetal.(April2017) Synergies and trade-offs between nature conservation and climate policy: Insights from the “Natural Capital Germany – TEEB DE” study

96 CherylPalmetal.(April2014)Conservationagricultureandecosystemservices:Anoverview97 CommitteeontheMedicalEffectsofAirPollutants(August2018)Mortality effects of long-term exposure to air pollution in the UK;EuropeanEnvironmentAgency (April2016)Premature deaths attributable to air pollution

98 EuropeanEnvironmentAgency(April2016)Premature deaths attributable to air pollution99 AnotherrecentstudybytheWorldResourcesInstitute(WRI),basedonfairlystandardapproachestothestatisticalvalueofalife,estimatesthehealthimpactsof PM2.5exposure(includingprematuredeaths)inChinaat10–13percentofannualGDP.SeeNewClimateEconomy(2014) Better Growth, Better Climate

100 PhilipLandriganetal.(February2018)The Lancet Commission on Pollution and Health101 MalvinaBondyetal.(April2018)Crime is in the air: the contemporaneous relationship between air pollution and crime102 XiaoWuetal.(April2020)Exposure to air pollution and COVID-19 mortality in the United States: A nationwide cross-sectional study103 StéphaneHallegatteetal.(February2012)From growth to green growth—a framework

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climatetargetcouldgeneratenetbenefitstotheeconomy.104Theseincludehealthbenefitsfromreductionsinurbanpollution;fallsintrafficcongestion;increasesinefficiency;improvementsinenergysecurityandsupply.TheOECD arguessimilarly:

“…bringingtogetherthegrowthandclimateagendas,ratherthantreatingclimateasaseparateissue,couldadd1%toaverageeconomicoutputinG20countriesby2021andlift2050outputbyupto2.8%.Iftheeconomicbenefitsofavoidingclimatechangeimpactssuchascoastalfloodingorstormdamagearefactoredin,thenetincreaseto2050GDPwouldbenearly5%.” 105

In June, the International Energy Agency (IEA) published its Sustainable Recovery Plan. WorkingwiththeIMF,itoutlinedtheonpoliciesgovernmentsshouldimplementinthenextthreeyearstosimultaneouslyspureconomicgrowth,createmillionsofjobsandputemissionsintostructuraldecline.Thefocuswasonacceleratingglobalstructuralchangetoalow-carbonenergyandtransportsystemwhileboostingenergyefficiency.Itestimatesthattheplanwouldadd1.1%toGDP,create9millionjobs,eliminate4.5metricgigatonsofgreenhousegasemissionsandmake2019thepeakyearforglobalemissions.

4.4 DRIVING PRODUCTIVITY THROUGH CLEAN INNOVATION

The economy of the 21st century will be shaped by knowledge and innovation. Itisthekeydriverofthegrowthoftotalfactorproductivity(TFP).Itwilldeterminetheabilitytogetmoreoutoftheresourceswehave(resourceefficiency)bydirectingthe‘weightless’economytofosterdematerialisationanddecarbonisation.The scale of the low-carbon transition means networkeffects and economies of scale in production and discovery , are so large that we invariably underpredict the scope for productivity-augmenting clean innovation. 106Overthepastdecade,therehasbeena near tenfolddeclineinthecostofbothsolar photovoltaic generationandbatterystorage,necessarytoaddressintermittencyofsupply.107/108Bothsectorsbenefittedfrom substantial supportintheformofpubliclyfundedR&Danddirectdeploymentsupport(suchastherenewablesobligationintheUKandfeed-intariffsinGermany).109Thereisalsoevidenceofsignificantlygreaterspill-oversintootherpartsoftheeconomy,comparedwithmorematurefossilfuelsinvestments.110AstudyofOECDpatentdatashowsthatbothwindandsolartechnologiescreateknowledgespilloversatthenationallevel.111Thisdynamictechnologicalchangealsodeliverslowerenergycostsinthelongtermaftertheupfrontcostsarepaid(Figure4).

104 NewClimateEconomy(2014) Better Growth, Better Climate105 OECD(May2017)Investing in Climate, Investing in Growth106 GerardvanderMeijdenandSjakSmulders(November2017)Carbon Lock-In: The Role of Expectations107 BloombergNewEnergyFinance(2019)New Energy Outlook 2019108 Vox(October2015)The International Energy Agency consistently underestimates wind and solar power. Why? https://www.vox.com/2015/10/12/9510879/iea-underestimate-renewables

109 IRENA2018,RenewableEnergyPoliciesinaTimeofTransition110 PhilippeAghionetal.(February2016)Carbon Taxes, Path Dependency and Directed Technical Change: Evidence from the Auto Industry; GranthamResearchInstituteonClimateChangeandtheEnvironment(October2017)Knowledge spillovers from clean and dirty technologies

111 FraukeBraunetal.(June2010)Innovative Activity in Wind and Solar Technology: Empirical Evidence on Knowledge Spillovers Using Patent Data

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As a result, clean technologies are rapidly outcompeting fossil fuels. Inmanypartsoftheworld,renewableenergyisnowcheaper than fossil fuel-based energy.113Withinthecomingdecade,itwillbecheaperalmosteverywhere.Regardlessofwhetherpolicymakerscareaboutcarbonornot,theworldwillnowhavecheaperenergy;andthisistheresultlargelyofpolicyinitiativestosteerinvestmentinrenewables.Themarketsalonewouldnothavedeliveredthis.Applyingpolicyearlytoovercomesuchdynamicmarketfailureshasthepotentialtochangetheglobaleconomy.Thisunderstanding,firstoutlinedbytheNobelprizewinningeconomistRomerandotherswhentheypostulatedthetheoryofendogenous technological change,iscentraltothetaskofefficientlymanagingalow-carbontransition.114

Investment in renewable generation, excluding nuclear and hydroelectricity, is already outstripping investment in coal, gas, and oil powerthe world over, withrenewablesnowontracktopowerthebulkofglobalelectricityinthesecondhalfofthecentury.115ThereisevensomeevidencethatCOVID-19isacceleratingtheenergytransitionintheUK,withthegridcoalfree for a record 68 daysduringlockdown.SomethingsimilarhappenedtotheEuropean electricitysector over the 2008 recession.116Demandforfossilfuelpoweredelectricitycollapsed,andneveragainrecoveredto2007levels.Thisisbecausebythetimeelectricitydemandbouncedback,renewableswereabletosupplyallthegrowth.Asimilarstoryislikelythistime.Whiletheuseofcoal,oilandgasfellprecipitouslyinQ12020,theshareofrenewablesinglobalelectricitygenerationjumped to nearly 28%infrom26%inQ12019(seeFigure5).117Transformativecostreductionsarealsooccurringinotherkeytechnologies,suchasfuelcells,electricvehicles,andevenelectricaviation.

113 BusinessGreen(May2019)Cheaper than fossil fuels: Global renewables costs hit record low114 PaulRomer(1990)Endogenous technological change115 BloombergNewEnergyFinance(2019)New Energy Outlook 2019 116 CarbonTracker(April2020)COVID-19 and the energy transition: crisis as midwife to the new117 International Energy Agency 2020 Global Energy Review 2020: The impacts of the Covid-19 crisis on global energy demand and CO2 emissions

WHY BRITAIN NEEDS INVESTMENT IN SUSTAINABLE, RESILIENT AND PRODUCTIVE ASSETS4.

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WHY BRITAIN NEEDS INVESTMENT IN SUSTAINABLE, RESILIENT AND PRODUCTIVE ASSETS4.

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The productivity potential of the low-carbon transition is immense, but it is also just one of many 21st century secular megatrends that are already starting to reshape our lives. AI,automation,machinelearning,bigdata,theinternetofthings,nanotechandbiotechrevolutionshavealreadydeliveredsignificantdisruption.Some,suchasautomation,couldbeacceleratedbyCOVID-19asfirmsinvestinnewtechnologytoboosttheirresilienceandrespondtoariseintherelativecostoflabour.Thisislikelyinmanufacturingautomation,theshiftfromtraditionaltoonlineretailing,automationofdistribution,remoteworkingandroboticprocessautomation,andhorticultureautomation.

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Strong inertia and high switching costs often make it difficult at first to shift the innovation system from dirty to clean technologies. Innovationishighlypath dependent in three ways.118Firmsandscientiststend to direct innovationtowardwhattheyarealreadygoodat.119

� First,scientistsworkinareasthatarewellfunded,whereothergoodscientistswork,leadingtogeographicalclusteringofresearchandknowledgeproduction.

� Second,deployment,wherebyinnovationsleverageexistinginfrastructureandideas,ratherthanriskinvestmentinpotentialnewsectors.120

� Third,incentivesfortechnologyadoption,wherebythenetbenefitsofunilaterallyswitchingtoanalternativenetwork,risewiththenumberofothersusingit.

However,oncetheyreachatippingpointwhereexpectations change rapidly,technologiescanswitchquicklyfromonenetworktoanotherwhensupportedbycrediblepolicyintervention.121

A key feature of network dynamics is that it is easier for countries to become competitive in new green products that requiresimilar production capabilities and know-how to existingsectors. 122Afirm’schoicewhethertoinnovate‘clean’or‘dirty’isinfluencedbythepracticeofthecountrieswhereitsresearchers/inventorsarelocated.Moreover,firms tend todirect innovationtoward what they are already good at. 123As a result, green transitions are highly path-dependent: countries that successfully invest early in green capabilities have greater success in diversifying into future green product markets. 124MealyandTeytelboym(2017)showthatthe“greencomplexity”oftheeconomy,thatis,thesophisticationoftheproductioncapabilitiesofgreenproductsishighlypath-dependent.Theyshowhowresearchandknowledgeproductionarealsogeographicallyclustered.MealyandTeytelboym(2017)suggestthatitispossibletoidentify“nearby”opportunityforexpanding the green industrial base.125Therefore,policymakersmightconsidertargetingstimulustowardsindustriesthatare“greenadjacentpossible”wheretheUKalreadyhascomparativeadvantages,forexampleinpharmaceuticals,chemicals,126andelectricvehicles(EV).127

118 CentreforClimateChangeEconomicsandPolicyandGranthamResearchInstituteonClimateChangeandtheEnvironment(November2014) Path dependence, innovation and the economics of climate change

119 PhilippeAghionetal.(February2016)Carbon Taxes, Path Dependency and Directed Technical Change: Evidence from the Auto Industry120 Forexample,conventionalcarshavehistoricallybeeneasiertosellthanelectricvehiclesbecausetheexistingnetworkofpetrolstationsisfarlarger thanthatofchargingstations.

121 PaulKrugman(May1991)History Versus Expectations122 CesarHidalgoetal.(July2007)The product space conditions the development of nations 123 PhilippeAghionetal.(February2016)Carbon Taxes, Path Dependency and Directed Technical Change: Evidence from the Auto Industry https://dash.harvard.edu/handle/1/27759048

124 PennyMealyandCameronHepburn(October2017)Transformational Change: Parallels for addressing climate and development goals125 PennyMealyandAlexanderTeytelboym(December2017)Economic Complexity and the Green Economy126 CentreforClimateChangeEconomicsandPolicyandGranthamResearchInstituteonClimateChangeandtheEnvironment(September2012) Who will win the green race? In search of environmental competitiveness and innovation

127 LSEGrowthCommission(February2020)Seizing sustainable growth opportunities from zero emission passenger vehicles in the UK

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The UK’s comparative advantage on EV innovation is greater in connected and autonomous vehicle technologies,thaninEVpowertraintechnologies(e.g.batteries).Recent researchrevealsthatdevelopmentandcommercialisationactivityforthesetechnologies(e.g.firmslikeOxbotica)isconcentratedintheSouthEastofEngland,createdviaspin-offsfromUK’suniversity-relatedR&DactivitiesaroundOxfordandCambridge;thisisanexampleofdirectinginnovationtowardsthingswe’realreadygoodat. 128TheMidlandsarealsohometosignificantEVinnovationactivity,bothasashareoftotalcarinnovationandalsocleanandautonomoustechnologies.Forexample,firmslikeJaguarLand-RoverbasetheirR&Dthere.Therearealsoclustersofgovernment,industryandresearchbodiesworkingtogether,e.g.theAdvanced Propulsion Centre,whichincludestheUniversityofWarwick,DepartmentforBusiness,EnergyandIndustrialStrategy(BEIS)andothers.129Astrongsenseofregionalidentityisformedaroundtheseautomotiveactivities.

Productive clusters are emerging. Teesside,whichaccountsfor58%oftheUK’schemicalsindustryandisresponsiblefor20,000jobsand£4bnofexportsperyear,isdevelopingaclusterofleadingenergyintensiveindustriestocreatethe‘Teesside low emissions industrial zone’,throughthedevelopmentofsharedemissionreductioninfrastructure.130Bysharinginfrastructure,logistics,energyandutilities,andbyexchangingrawmaterials,productsandresidualandwastematerials,companiesintheclustercanoperatemoreefficiently.Thisenablesthemtoreducetheircostsandstrengthentheircompetitiveposition.TheUKchemicalssectorisalsowellplacedtorespondtoincreasingdemandforEVbatteries.Itisestimatedthatchemicalsforbatteriescouldrepresenta£2.7 billion per year opportunityfortheUKchemicalindustry,justforUK-builtcars.131

A third featureisthat,becauseinnovationispath-dependent132andpronetotipping pointsand reinforcing feedbacks133,conventionalmodelssystematicallyoverstatethecostsofdecarbonisation.Thismeansthatratherthanpredictthefuture,oureffortsarebetterspenttryingtomanage and steer the transition.134Investmentsinenablingassetscanspurtechnologytippingpointsandgeneratenetworkexternalities.135The UK has lagged behind other major economiesininvestmentinR&Doverthepast25years:

� Ontotalinvestment(GFCF),theUK’sperformanceisevenworse,averaging17.1%ofGDPover1995–2018,comparedwith20.8%and21.6%inGermanyandFrance,respectively,and23.6%forOECDcountriesasawhole.

� GrossR&Dexpenditure(GERD)averaged1.6%ofGDPovertheperiod1995–2017,comparedwith2.6%and2.2%inGermanyandFrance,respectively,and2.2%forOECDcountriesasawhole.

128 LSEGrowthCommission(February2020)Seizing sustainable growth opportunities from zero emission passenger vehicles in the UK129 AdvancedPropulsionCentreUK130 InstituteofCivilEngineers(October2017)Teesside: creating one of Europe’s first clean industrial zones with carbon capture and storage131 E4tech(June2018)The UK chemicals and process supply chain for battery manufacture132 CentreforClimateChangeEconomicsandPolicyandGranthamResearchInstituteonClimateChangeandtheEnvironment(November2014) Path dependence, innovation and the economics of climate change

133 DaronAcemogluetal.(February2012)The environment and directed technical change134 WorldResourcesInstitute(2018)The Role of Modelling and Scenario Development in Long-Term Strategies135 Forexample,onceelectricvehicleinfrastructureisrolledout,theincentivestoconductresearchanddevelopmentonelectriccarsincreaserelativetocombustion engine,orfuelcell,vehicles.Volvowillstopproducingcombustionenginecarsfrom2019andstartfocusingitsR&Donelectricvehicles;othersaresuretofollow.

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This suggests that harnessing opportunities of the sustainable economy can ‘kick start a productive innovation machine’ and keep the UK competitive in a rapidly transitioning world. TheUKisarelativelysmallplayerandhastotakethepaceoftheglobaltransitionasmostlygivenandexogenous(althoughtheeconomyisbigenoughtoinfluencetechnologycoststhroughinnovationanddeployment).However,thefactthatthedynamicsoutlinedaboveareplayingoutatthegloballevel,asbigplayerslikeChinainvestindecarbonisation,meansthattheUKmustbeawareoftherisksandopportunitiesassociatedwithafasttransitionandplanforthisstrategically.

4.5 INVESTING IN SOCIAL CAPITAL, FAIRNESS AND ‘LEVELLING UP’

A key part of intangible capital is social and institutional capital, which is required to deliver effective and functional governments andrebuild trust in the social contract. 136Thereisastronggeographical/incomedimensiontosocialcapitalintheUK,andthesectorhasgeneratedupto£200billionofvaluetotheUKeconomy,oraround10 per cent GDPinrecentyears.137Toensurethisvitalservicecontinues,itwillbenecessarytoreinvigoratethecash-starvedsocialsector(e.g.charitiesandenterpriseswithsocialobjectives).

Governments need to work with institutional investors through dialogue and experimentation to produce social impact metrics that can help channel investment to areas that need more social capital. Buildingsocialcapitalalsomeanstackling inequalities(notjustinincomebutinwealthandin‘access’togoodsandservicessuchashealth,housing,transport,educationandjustice–inequalitiesexacerbatedbyCOVID-19).Itisnoteworthythatpre-existinginequalitiesmadetheCOVID-19crisisworsewithBAMEpeoplemorelikelytobeaffected.Thiswasduetopoorersocioeconomiccircumstancesandadeficientsocialcaresystemwhichmeantmanycarehomeswerenotpreparedtodealwiththispandemic,withhugesocialconsequences(seeBox3).138Measuring broad asset stocks,includingsocialcapital,requiresadditionalsupportfortheONStoprovideaccuratemetricsagainstwhichtoassesssustainabilityandprosperity.139

136 OECD(2020)Coronavirus (COVID-19): Joint actions to win the war137 AndyHaldane(May2019)The Third Pillar and the Fourth Industrial Revolution138 Itisnoteworthythatpre-existinginequalitiesmadetheCOVID-19crisisworsewithBAMEpeopleaffectedmoreseverelyduetopoorersocioeconomiccircumstances andadeficientsocialcaresystemwhichmeantmanycarehomeswerenotpreparedtodealwithsomethinglikethispandemic,withhugesocial consequences(seebox3)

139 BennettInstituteforPublicPolicy(2020)Valuing Wealth, Building Prosperity: The Wealth Economy Project on Natural and Social Capital

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The crisis will impact inequality in the UK, exacerbating existing trends and further setting back the government’s efforts to level up across the regions. Recoverypackageswillneedtokeepthelevellingupagendaattheforefront.Theywillneedtopayparticularattentiontolow-skilled,low-incomeandsociallydeprivedareas–notonlyintheregions,butalsoingreaterLondon.Particularlyimpactedwillbewomen,youthandBAME.140Thesegroupsarelikelytonotonlybehitharderbythevirus,theyaremorelikelytobeinjobsthatcannotbedigitallyconverted,e.g.cleaners,waiters,andsecurityguards.Consequently,whilethoseinrelativelyunaffectedindustriesorfirmsworkfromhomeandbuildwealththroughforcedsavings,theseothergroupsofworkersarefarmorelikelytobecomefurloughed,under-orunemployed.Afterthecrisis,notallwillreturntotheirjobs.Someliquidityconstrainedfirmswillnotbeabletoaffordtoreinstateorrehire(theproductivityoflabourwillgodownanditsrelativecostriseduetosocialdistancing)andotherswillrespondtostructuralchange.Structural change could be exacerbated by customers’ behaviour changes or an accelerated shift to automation and digitisation, as discussed earlier. The social and individual costs of these workers becoming long-term unemployed is high. Policies to tackle this problem are discussed in Section 6.8.

Asnotedabove,somesustainableinvestmentprojectscanhelpastheycanbejobintensiveintheshortrun–relativelysmallscaleandquicktogetoperational,targetedatthemostimpactedregions.Manycanutiliserelativelylow-skilledworkers,youngandagileworkers,(particularlyfromhardhitsectorssuchasretail,entertainmentandaviationwhoarealsonimbleandabletoadaptandlearnnewskillsmoreeasily)andonlyrequireminimalpre-jobtraining(e.g.landscaping,naturerestoration,upgradingparkswithbetterexercisefacilities,andwideningfootpaths).Wheretrainingisneeded,itwillbeimportanttomakethisavailableon-the-jobandtoaddressskillsmismatch.Tohelpmaketheprojectsoperationalquicklyandgetthejobstotheregionswheretheyareneededmost,furtherdevolutionofresponsibilitytolocalgovernmentmaybeneededtoensureinvestmentgoestolocalprojectsthatsuitthetypesoflabouronoffer,forexamplearegionwithmorelow-skilledyouthcouldmoreeasilybematchedtolandscapeandcyclewayconstructiontypeprojects.Thiswillthenrequirestrongergovernancestructuresaroundlocalgovernmenttoensuresensiblefinancialmanagementinrecovery.141

140 CentreforEconomicPerformance(May2020)Work, care and gender during the Covid-19 crisis141 SomesmalllocalauthoritiesareusingsubsidisedloansthatareavailablefromthePublicWorksLoanBoard(abodyattachedtotheTreasurythatfundscouncils’ infrastructurespending)toinvestininfrastructureincludingcommercialpropertyandrenewableenergy.See:FinancialTimes(April2017)UK public finance: councils build a credit bubbleandFinancialTimes(May2020)Revealed: an Essex council’s £1bn borrowing spree to fund investment in solar power

WHY BRITAIN NEEDS INVESTMENT IN SUSTAINABLE, RESILIENT AND PRODUCTIVE ASSETS4.

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5.1 MACROECONOMIC STRATEGY

A priority for governments in the wake of the pandemic is to adopt a clear strategic framework for the recovery package. Thisneedstobesetinthecurrentmacro-fiscalcontext,provideaclearvisiontorestoreconfidence,boostdemand,createcompetitiveandproductivejobsandgrowamoreresilienteconomy.Theaimistogrowtheeconomyoutofpost-COVID-19debtbysupportingactivityintheshorttermandexpandingproductivecapacityinthemediumterm.Fiscalandmonetarypolicymustworktogethertochannelliquidityandsavingstogrowproductivesectors.

A recovery based on fiscal austerity driven by spending cuts and weak links to sustainability and resilience failed post 2008 and further locked in the unproductive fossil fuel economy. Itledtoincreasedinequality,historicallylowproductivitygrowth,andfailedtoachieveitsobjectives,withhighlevelsofpublicsectordebttoGDPremainingadecadeon.Thistime,thereisanurgentneedtopreventhysteresisandlostcapacityandmeetthegovernment’soverarchingobjectives.Thiswillrequireaclearstrategyonstimulusandpublicpolicysignalstoguidetheprivatesectorconfidenceandexpectationsinordertogetprivatecapitalflowing,includingclaritythatthebestwayoutofthiscrisisisgrowth,clearregulations,stronginstitutions,androadmapsfordecarbonisingindustries,asdescribedinthissectionofthereport.

A thought experiment can help reinforce the notion of debt affordability. Assumeamacroeconomicpolicymakerdoesnotknowthelevelofpublicdebt.Theyhavetodecideonanappropriatefiscalstanceforaneconomyonthebrinkofrecessionandconcludethatafiscalcontractionwouldbeeconomicsuicide.Theyarethentoldpublicdebtisrelativelyhigh.Towhatextentwouldthatmateriallychangetheirviewontheappropriatefiscalstance?Theanswerisitshouldnot,exceptinsofarashigherdebtimpactsaffordabilitybypushingupriskpremiumsonpublicborrowingrates.Section3.2describedscantevidenceforthisthusfar.Indeed,ifpublicdebtleverageishigh,therisksfromprematurelycrashingtheeconomybyfailingtosupportprivatesectoractivitycouldbeevenhigherthanifpublicdebtislow.

The evidence suggests growing out of this slump is a far superior policy (seeSection3above).Thekeyiscreatingfiscalspacetofundthebestgrowthandjobenhancinginvestmentsandleverageprivatefinancewherepossible.Inthiscontext,thecrisishasrevealedstructuralweaknessesintheUKtaxsystemandopportunitiesforfiscalreformtoincreasefiscalsustainability,whichcanhelprepairbudgetdeficitsinthelongerterm.Thiswillinvolvecarbonpricereformandmayinvolvehighertaxesforaperiodontheforcedsavingsofthoseluckyenoughtobebenefitingfromthecrisis.Carbonpricingreform,includingthroughtheproposedUKETS,maybeagoodwaytoincreasetaxrevenuesasthiscanbedoneinawaythatincreaseseconomicefficiency,includingbyreducingdistortionarytaxes.

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The macroeconomic difficulties in the EU are no less challenging. Theeurozonehasnocentralisedfiscalcapacityorco-ordinationtooffsetasymmetricshocksthroughautomaticstabilisersordiscretionarytransfers.Thebankingandcapitalmarketunionsremainworkinprogress.Theunevendistributionofperceivedsovereigndebtriskreflectsanincomplete euro area bankingunion(withECB commitmentstoactaslenderoflastresortproxyingforanEU-widedepositinsurancescheme)andnearabsenceofautomaticanddiscretionarystabilisersderivedthroughcross-borderfiscalflowsunderasinglecurrency.Thesystemicrisktothosecountrieswithhighpublicdebt(whichinthecaseofItalyandSpainhavealsobeenhithardbyCOVID-19)highlightstheimportanceoftargetedpoliciestoboostgrowthandretainsolvency.

European policymakers have made a strong start in delivering a strong and sustainable recovery. TheEUwasoneoftheearliestandhardesthitregionsaffectedbyCOVID-19.YetEUgovernments,theECBandtheEuropeanCommissionhaveputinplacestrongmeasurestosustainincomeandemployment,easefinancialrisksandmaintaintheflowofcredit.TheEuropean Commission Recovery StrategyislikelytoinjectEUR2.4trnovertheperiod2021to2027.142Theplansprioritiselow carbon sectors 143anddigitalspending,wheremultipliereffectscanbeexpectedtobehighest.Theseplansmustbemaderobusttolobbyingbyvestedinterestsormemberstatesseekingtoslowambition(seeSection6.15).

The European package is aimed disproportionately at higher debt and lower income southern European economies, and is thereby promoting resilience and ‘levelling up’. Thisisalreadyhavingapositive effect on business and consumer confidence.Inaddition,LlewelynConsultingestimatethatindividualmemberstates’fiscalstimulusplansrangefromaround3%ofGDPinRomania,toanotable50%ofGDPinGermany.Insupportofthesemeasures,theECBhasrecentlyexpandeditsassetpurchaseprogrammebyaround€1.4trillion.

142 ThisincludesfigureincludesSURE,theESMPandemicCrisisSupportScheme,andtheEIBGuaranteeFund,theNextGenerationEURecoveryPlanandthereinforced MultiannualFinancialFrameworkaccordingtoLlewellynConsulting.SeeRecoveryPlanforEurope,2020.EuropeanCommission

143 EuropeanGreenDeal,2020.EuropeanCommission

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5.2 TARGETED INVESTMENT

The next step for the UK government is to design investments that contribute to both its short-run and long-run objectives. Theshort-termmacroeconomicmeritofaninvestmentcanbejudgedbasedonestablishedcriteriaofwhatconstitutesagoodeconomicstimulus.Thishasbeenoutlinedinsimilar researchbeforeandincludeswhetheraninvestmentis: 144

� timely (anti-cyclicalandexecutedbeforetheeconomyrecovers);

� temporary (isthereanexitstrategyonspending,bearinginmindthelonger-termpressureforfiscalconsolidationandthedesirenotto‘crowdout’alternativeproductiveinvestmentwhentheeconomyisoperatingclosetocapacity);145

� targetedatareaswheretheinvestmentwillhavemaximumbenefits;

� measuredintermsofitsmultipliereffectasameasureofeconomicstimulus,itsabilitytoleverageprivateinvestment,andtheextenttowhichiteffectivelycomplementsthebroadergreenpolicyframeworkandgeneralsocialbenefitsgenerated;

� Cost-effective and resource efficient, givenpoliticalpressuretomaximiseproductivityofpublicspendingwillbehigh.

During the 2008/09 GFC, governments embarked onrecovery packagesthat were not well aligned with a low-carbon transition, were not always cost-effective, and took too long to implement. 146Themainproblemwasalackof‘shovel-ready’climate-relatedinvestments.Low-carbonprojectshadtofirstbefound,newgreensupplychainscreated,andbythetimetheprojectswereimplemented,themultiplierhaddecreased.Otherwell-intentionedgreenpolicieswerenotwelldesigned,somewererushedwithoutproperplanning,andassuchtheyhadmixedcost-effectiveness,e.g.cashforclunkersandsomehomeinsulationschemes.147Tohavemaximumeffect,fiscalmeasuresneedtobetimely and targeted,148but also cost-effective.Thiswillonlybepossiblewithproactiveplanning,clearpoliciesandstronginstitutions.

144 GranthamResearchInstituteonClimateChangeandtheEnvironment(February2009)An outline of the case for a ‘green’ stimulus145 Policymakerswould,infact,wanttoactivelycrowdoutsomenon-greeninvestment,eveninthelongrun.146 HSBCGlobalResearch(February2009)A Climate for recovery: The Colour of Stimulus Goes Green147 Agrawalaetal(May2020),What policies for greening the crisis response and economic recovery?: Lessons learned from past green stimulus measures and implications for the COVID-19 crisis

148 CenteronBudgetandPolicyPriorities(January2008)Principles for Fiscal Stimulus Economic Policy in a Weakening Economy; MercatusResearch(January2015)Timely, Targeted, and Temporary?” An Analysis of Government Expansions over the Past Century

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A forthcoming study of international COVID-19 crisis support schemes shows that only a fraction of the economic stimuli currently proposed would be more than sufficient to stimulate both global economic recovery and a Paris-compatible low carbon transformation. 149Theyshowthattheaverageannualcostofalow-carbonenergyandefficiencyinvestmentpathwaytomeettheParisagreementis estimatedatabout$1.3 trillion per yearoverthenextfiveyears.150Thisamountstoabout15%ofthetotalpledgedpost-COVID-19stimulustodate.

This time around, the UK government can be more ambitious as available green options are cheaper and some projects are ‘shovel ready’. In2008therewassparecapacityforyearsfollowingthecrisisastimewaswastedfrettingabout“shovelready”.Thegovernmentneedstoacturgently,sothebesttimetostartisnowandrecognisethedifferentgreeninvestmentoptionsacrossarangeofassetsthatareavailableoverdifferenttimehorizons.Itcanquicklyrestartprojectsthatwerealreadyunderwaypriortothecrisisandbringothersforward.Smallerscaleregionalprojects,forexampleenergyefficiency,reskilling,rooftopsolar,naturerestoration,localparkandotherenvironmentalupgrades,canbeputinplacerapidlyanduseexistingknowledgeandinnovations.Planningformedium-tolong-termhighproductivityassetsthatwilldelivercapitalstockandalabourforcesuitedtofuturechallenges,willalsoneedtostartnow.

The government’s net zero target, consistent with meeting the UK’s carbon budgets, offers several investment-focused options. Thegovernmentcanacttobringtheseforward,oftenwithoutdirectpublicfunding,aspartofatargetedandtimelypackage.Anumberofmeasureswerereiteratedinarecentletter to the Prime MinisterfromthechairoftheCommitteeonClimateChange,whichincludedamongotherthingsinvestmentinlow-carbonandclimate-resilientinfrastructure,andthereskilling,trainingandresearchforanet-zeroeconomy.151

149 Andrijevicetal.Forthcoming.Post-COVID-19recoverystimulusdwarfsnear-termclimatechangeinvestmentneeds.Science.150 D.L.McCollum,W.Zhou,C.Bertram,H.-S.deBoer,V.Bosetti,S.Busch,J.Després,L.Drouet,J.Emmerling,M.Fay,O.Fricko,S.Fujimori,M.Gidden,M.Harmsen, D.Huppmann,G.Iyer,V.Krey,E.Kriegler,C.Nicolas,S.Pachauri,S.Parkinson,M.Poblete-Cazenave,P.Rafaj,N.Rao,J.Rozenberg,A.Schmitz,W.Schoepp,D.van Vuuren,K.Riahi,EnergyinvestmentneedsforfulfillingtheParisAgreementandachievingtheSustainableDevelopmentGoals.NatureEnergy.3,589–599(2018) andJ.Rogelj,D.Shindell,K.Jiang,S.Fifita,P.Forster,V.Ginzburg,C.Handa,H.Kheshgi,S.Kobayashi,E.Kriegler,L.Mundaca,R.Séférian,M.V.Vilariño,inGlobal Warmingof1.5°C:anIPCCspecialreportontheimpactsofglobalwarmingof1.5°Cabovepreindustriallevelsandrelatedglobalgreenhousegasemissionpathways, inthecontextofstrengtheningtheglobalresponsetothethreatofclimatechange,sustainabledevelopment,andeffortstoeradicatepoverty,G.Flato,J.Fuglestvedt, R.Mrabet,R.Schaeffer,Eds.(IPCC/WMO,Geneva,Switzerland,2018;http://www.ipcc.ch/report/sr15/),pp.93–174.

151 CommitteeonClimateChange(May2020)Letter: Building a resilient recovery from the COVID-19 crisis to Prime Minister Boris Johnson

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An example of such investment priorities can be found in public transport, where investment has helped reduce emissions and bring prosperity to the regions. A10%increaseinaccessibility152ofaregioncouldleadtoa3% increaseinemployment.153Recentresearch 154foundthattransport appraisal methodology in the UK 155favourshighproductivityregionsandthislockslowproductivityregionsintopovertytraps.Investmentinrailinfrastructure,waterandwastehavepotentiallyhighmultipliersandclimateandresource-friendlyimpacts.

National Grid estimate that investment in a clean energy transition can create 400,000 jobs across the country, with a significant portion in the North of England and the Midlands. Inordertomeetthegovernmentsnetzerotarget,National Grid estimatesthatlowcarbonelectricitygenerationhastoincreasebyaround50%with2.8millionhomesneedinglowcarbonheatingretrofitsandanadditional60,000chargingpointstopoweraround11millionelectricvehicles.156

Arecent survey of leading economists and policymakers identified policies perceived to perform well on their timeliness, multipliers and climate impact. 157Respondentsincluded231centralbankofficials,financeministryofficials,andothereconomicexpertsfromG20countries,andthesurveycomparedtherelativeperformanceof25majorfiscalrecoveryarchetypesacrossfourdimensions:speedofimplementation,economicmultiplier,climateimpactpotential,andoveralldesirability.

Ultimatelyitfoundthatclimate-positivepolicieswereperceivedbyrespondentstohavehighoveralldesirabilitywhilemostclimate-negativepolicieshadrelativelylowdesirability.Thiswastrueevenforclimate-positivepoliciesthattookmoretimetoimplement.Long-runmultipliersofclimate-positivepolicieswerefoundtobehigh,reflectingstrongreturnsoninvestmentforgovernmentspendinginpromotinginnovationandexpandingcapacity(seeFigure6).

152 TheUKRIaccessibilityindexcapturestheamountofemploymentthatcanbereachedfromagivenlocation,perunitoftraveltimealongtheroadnetwork.153 UKRI(December2013)Road networks and local employment154 DianeCoyleandMarianneSensier(2020)The imperial treasury: appraisal methodology and regional economic performance in the UK155 HMTreasury(April2020)The Green Book: appraisal and evaluation in central government156 NationalGrid(January2020)Building the net zero energy workforce157 CameronHepburnetal.(May2020)Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?

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Investment and policy priorities stemming from this survey include: 158

1. Investment in sustainable smart infrastructure, includingEVinfrastructure;renewableelectricitygeneration;storage;gridmodernisationtoexpandelectrificationofroadandrailcombinedwithdigitisationtobettersmoothsupplyanddemand;urbanplanningandsmartcities;broadbandconnectivity;natureandland;wasteandrecycling.

2. Building efficiency spending for renovations and retrofits, includingimprovedinsulation,heating,anddomesticenergystoragesystems.Thiswilllowerhouseholdbills,helptacklefuelpoverty,andprovidelocaljobsthatcannotbeoffshored.Efficiency programmes159couldsupportover 150,000 jobsacrossallregionsoftheUK.160Thegovernmentcanalsosupportthemarketforheatpumpsbybringingforwardthetwo-year£100millionCleanHeatGrantschemecurrentlybeingconsultedontostartonMarch2021,ayearaheadofplan.

3. Investment in human capital, education, training and skills; toaddressimmediateunemploymentfromCOVID-19andstructuralshiftsfromdecarbonisation.

4. Natural capital investmentforecosystemresilienceandregeneration,includingrestorationofcarbon-richhabitatsandclimate-friendlyagriculture.

5. Developing and adopting climate-smart technologiesandcleanR&Dspending:suchasrenewables;resourceefficiency;batteriesandstorage(includinghydrogen);carboncaptureandstorage(CCS)technology;geoengineering;laboratoryproducedmeat.

6. Supporting adaptation and resilience: includingwatermanagement;floodprotection;heatandthepreservationofnon-renewablenaturalcapital.

7. Bailouts conditional onimprovementsagainstclimate-positivecriteria(seeSection6.12).

158 RecentAldersgate Group researchexaminesarrangeoflow-carbonandenvironmentalprojectsthatcouldaddresssomeofthekeyeconomicandsocialchallenges facingtheUKfollowingtheCOVID-19crisis.Atagloballevel,theIEAhassetout30immediateenergypolicymeasuresandinvestmentsthatcanboosteconomic growth,createjobsandbuildmoreresilientandcleanerenergysystems.

159 GreenFinanceInstitute2020.Financing energy efficient buildings – the path to retrofit at scale.Thisoutlinestheurgentneedtoincreasethepaceand scaleofinvestmentintoUKresidentialbuildings’energyefficiencyandresilience,settingoutarangeofpolicyoptionstoboostasustainableandinclusive economicrecovery.

160 EnergyEfficiencyInfrastructureGroup(June2020)Energy efficiency’s offer for a net zero compatible stimulus and recover

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Recentmodellingevidencesuggeststhatinvestingjust£11billioninapackageofthesetypesofgreenmeasures,includinginvestmentsinbuildingenergyefficiencyandsubsidiesfornewwindandsolarpowerinstallations,combinedwithareductioninVATfrom20%to15%,couldleadtoGDP growth of 0.8% by as early as next year.161

BOX 6: ENERGY EFFICIENCY AT THE END OF A SHOVELBuildingsaccountforalmost40%ofglobalenergy-relatedgreenhousegasemissionsandareasourceofenergywasteexacerbating fuel poverty.TheEnergy Efficiency Infrastructure Group(EEIG)estimatethatinvestmentinhomerenovationfornetzerocansupportover150,000skilledandsemi-skilledjobsto2030.Thiswillhelpto‘levelup’infrastructure,spreadopportunitiesacrosstheUK,reducehouseholdenergybillsby£7.5billionperyearattoday’sprices,andbenefitregionsmostaffectedbyunemployment,under-investmentandfuelpoverty.

Thegovernmentcanstarttodeliverthesebenefitsnowthrougha£2.8billiontwo-yearstimuluspackagethatbuildsonschemesalreadyrunning–theEnergyCompanyObligationanddevolvednationprogrammes.Thestimulusprogrammewouldgenerateover40,000full-timeequivalentjobsacrossthesupplychainoverthetwoyearperiod,leverageafurther£3.4billionfromhouseholds,socialhousingprovidersandthepublicsectorestate,anddeliverenergycostsavingtoonemillionhouseholdsacrossthecountry.

Aleaked document on the EU’splanned1trillion-eurostimuluspackageincludes€91billiontofundbuildingretrofits,intendingtotriggeratotalof€350billionincludingprivatefinanceoverthenextseven-yearbudgetcycle2021to2027.

Digitisationandelectrificationalsoincreasethescopeforefficiencyimprovementsthroughrealtimemonitoringodsmartconnectedsystems.TechgiantslikeIBM,CiscoandHuaweihavebeenpushingnewsystemsfordecades,butdigitalinnovationbycompanieslikeSmartwires,Octopus,OhmeandBNEFPioneersEnbalaandLimejumpenablesmart management of existing electrical infrastructure.

161 CambridgeEconometrics(May2020)Green stimulus package together with a VAT rate cut could lead the UK out of recession in 2021

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These fiscal policies can drive investments not only to improve productivity in a narrow sense, but also improve health and wellbeing, including strengthening social cohesion. Considerationofthislong-runoutlook,combinedwiththepropervaluationofdifferentformsofcapital–particularlyhuman,socialandnatural–caninformpoliciestocrowdininvestmentsininnovation,infrastructureandskills,garneringpopularsupportatthenationalandlocallevels.

A note of caution on overusing the term ‘shovel ready’. Therearearangeofinvestmentsthataretimely,labourintensive,andboostproductivityandgreeninthelongtermacrossphysicalbutalsonatural,social,knowledge,andothercapitals.Notalloftheseinvolveashovel,andoftenwhenashovelisphysicallyinvolved,theytakealongtimetopreparegivenbarriersandmarketfailuresthatslowdowninfrastructureinvestments.Forexample,theMersey Gateway Bridgewasproposedin1994andopenedinOctober2017;London’sCrossrailwasproposedin1974andwillpossiblyopenin2021.Projectswithoutashovelcanbequick,labourintensive,andnotinvolveconstructionofanything.

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INSTITUTIONS AND POLICIES FOR BUILDING TO LAST AFTER COVID-196.

6.1 KEY CONSIDERATIONS: CLEAR AND CREDIBLE POLICY SIGNALS AND INSTITUTIONS

The UK government will need to act now toimplementstrongandsupportivepolicies,backedbyenabledandwell-fundedinstitutions.Thiswilldeliveragreenrecoverypackagethatmaximisesmultipliersandtheothershortandlongrunbenefitsofgreeninvestments.Itisessentialthatthesepolicyandinstitutionalframeworksalignexpectations,buildconfidenceandhelptoovercomethechallengesofpreparingandfinancinginvestments.

Effective action requires strong institutions and the use of an array of policy tools and instruments, each designed to tackle particular market failures, whicharelistedbelow.Tacklinghardtocracksectorssuchasaviation,shipping,heavyindustryandagriculturerequiresaclearsenseofthedirectionoflong-termpolicy.Oneinfluential study 162makesapowerfulcasethatpolicytosupportcleaninnovationneedstobestrongbuttemporary.Oncethe“cleaninnovationmachine”hasbeen“switchedonandisrunning,”itcanbemoreinnovativeandproductivethantheconventionalalternative,withapositiveimpactonGDPlevelsandgrowth.Oncelowcarbonisthenorm,policypressurecanbeeased.

Confidence and expectations are key and this means policy signals must be clear, credible and durable. CredibilityisessentialiftheUKistoguideexpectationsandbuildastrong,inclusive,sustainableandresilientrecoveryfromtheCOVID-19crisis.Inparticular,thecredibilityofmarketsdrivenorheavilyregulatedbythepublicsector,suchasthoserelatingtoenergyinfrastructure,transport,buildingsandtheenvironment,ispredominatelywithinpolicymakers’control.Consequently,mixedormuddledsignalsonpolicyintentandthedesignofpolicyframeworkswilldeterinvestmentandraiseriskpremiacharged.

The challenge is to develop credible, long run policy commitment, in which public institutions take on some of the policy risk which investors cannot control. Doingthatislikelytoincreasetheeffectivenessandlowerthecostofanysingleprivateinvestmentproject.Thusacoherentpolicy-setenhancestheeffectivenessofallrelatedinfrastructuralinvestment:thesumofacredible and stable long term policy frameworkwillbegreaterthantheparts.163Toquotealeadingeconomic historian: 164

“Whatmattersisthestate[’s…]abilitytoandwillingnesstopursuepoliciesofstructuralchange.Andhence,whatmattersiswhetherornotthestateisinpossessionofsufficientpoliticalconsensusandsocialcohesionforpoliticalelitestobeabletogoagainstpowerfulvestedinterestsresistingchange.”

162 DaronAcemogluetal.(February2012)The environment and directed technical change163 GranthamResearchInstituteonClimateChangeandtheEnvironmentandCentreforClimateChangeEconomicsandPolicy(June2011) The Basic Economics of Low-Carbon Growth in the UK

164 EspenMoe(2007)Governance, Growth and Global Leadership: The Role of the State in Technological Progress

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Any policy intervention needs to be carefully designed in order to avoid replacing market failure with policy failure. 165Greatercoordinationandpublicsectorbailoutsmeanmoregovernment,butmoregovernmentdoesnotalwaysmeanbettergovernment.Lessons on policyfailureafterthe2008–09GFCcanhelpgovernmentsdobetterthistimeongreenstimulus.Whereexplicitchoicesarerequired,theyshouldbelimitedtosectorsandtechnologies,notfirms.Policyshouldotherwiseaimtobenon-discriminatory,competitiveandguardagainstrent-seekingbypowerfulvestedinterests.Policymustbesufficientlystringenttochangebehaviour,predictableinordertocontainpolicyrisk,yetsimple and flexibleinevolvingtochangingcircumstanceswhilelimitingcompliancecosts.166Theincentive and opportunity for vested intereststoseekfavoursfromthepoliticalsystemaregreaterthanusualinaneconomicrecession,anditwillbeimportanttotakeintoaccountcompetition-distortingeffectsofstateaid.167

The EU has a strong institutional framework and the European Commission and individual EU countries, e.g. Germany, have already announced their recovery plans. TheEU,forexample,hastheEuropeanInvestmentBank(EIB)andseveralnationaldevelopmentbanksandagenciesincludingKfWinGermany.AllplayauniqueroleinfinancingEUgreeninvestmentsofdifferenttypesandscales.TheUKhasnosuchequivalent,theclosestbeingtheCommonwealthDevelopmentCorporation,butthisdoesnotinvestintheUK.TheUKcouldmaintaintieswiththeEIBafteritleavestheEUandcollaborateonestablishinganewUKinvestmentbankinginstitution(seebelow).TheUKandEUcouldalsocooperateondesignandimplementationofrecoverypackagestoensurebestpractice,cost-effectiveness,andtakeadvantageofgainsfromcooperation,e.g.reducecostsbylinkingthenewUK-ETSwiththeEU-ETS,andboostmultipliersbycoordinatingstimulusinvestments.

165 CameronHepburn(2010)Environmental policy, government, and the market166 DieterHelm(July2010)Government failure, rent-seeking, and capture: the design of climate change policy167 JohnVickers(December2008)The Financial Crisis and Competition Policy: Some Economics

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6.2 KEY CONSIDERATIONS: BUILDING CAPACITY AND MANAGING LONG RUN RISK

Recoverypackageswillrightlyfocusontheimmediatetaskofrestoringdemandandsupply,boostingjobs,andpreventingeconomicandsocialdamage.Butatthesametimethesepackagesarealsoaboutinvestingnowtoreducefuturerisks.Inthisway,allpoliciesneedtoconsiderthelongtermandsendclearlongrunsignals.

Theshiftingbalanceofriskanduncertaintymeansthatindustrialsectorsandhouseholdsareconfrontedwithagrowingarrayofclimaterelatedrisks.Thesemanifestinatleastthreeways: 168

1. Physical risk, whichincludespreventingandaddressingpotentialdistresssuchasfloods,droughts,naturaldisastersaswellasecosystemcollapseandthecostsofrestoringdepletednaturalcapital.

2. Litigation liability risks, wherebypeopletaketothecourtstoseekrecompenseandjusticeagainstprivateandpublicorganisationswhoknowinglyundertookactivitieswhichhaveunderminedtheirlivelihoods.

3. Transition risk, whichfocussesondisruptionandvaluationlossesacrosstheeconomyresultingfromattemptstoreduceemissionsatanacceleratedpace.

Physical risk :Recent weather eventshavebeenlinkedtohuman-drivenclimatechangeincludingextremerainfallandfloodinghereintheUK.169Climatechangewillcontinuetomakeextremeweathereventssuchasfloodsanddroughtmorelikelyinfutureyears,witharound5millionUKpropertiesatrisk of flooding.170These‘physicalrisks’impactsocietyandtheeconomy.Failuretomanageclimatechangeopensupsignificantrisksofvastnumbersofpeoplehavingtomove,whichwouldlikelycreatea“climaterefuge”crisisintheUK.Recentresearch,assumingascenarioofunmanagedclimatechange,findsmeantemperatureriseexperiencedbyhumanpopulationsby2070couldbeashighas7.5°Ccomparedtothepre-industrial,about2.3timesthemeanglobaltemperaturerisebythistime.Upto3 billion people(roughly30%oftheprojectedglobalpopulation)wouldhavetomove.171

Litigation liability risk: Atthesametime,peopleareturningtothecourtstoensuregovernmentsfulfiltheirclimatecommitments.Therecentappealcourtdecisionto rule a third runway atHeathrow illegalbecauseitdidnotmatchthegovernment’scommitmentstotackletheclimatecrisis,orthepreviouslitigationagainsttheNetherlandsforcingacceleratedemissionscuts,markthestartofagrowingtrend.172Companiesandgovernmentsfoundtohaveknowinglysupportedactivitieswhichunderminelivelihoodswillbeheldtoaccount.Therearecurrently25 climate-related lawsuitsbroughtagainstgovernmentsortheirrepresentatives.173

168 Thisisconsistentwithearlyslowprogressindeploymentofdecarbonisationtechnologies.169 BankofEngland(2020)Climatechange:whataretheriskstofinancialstability?170 NationalInfrastructureCommission(June2018)Building resilience in the face of the effects of climate change171 ChiXuetal.(May2020)Future of the human climate niche172 CourtsandTribunalsJudiciary(February2020)R (Friends of the Earth) v Secretary of State for Transport and Others173 GranthamResearchInstituteonClimateChangeandtheEnvironmentandtheCentreforClimateChangeEconomicsandPolicy(July2019)Global trends in climate change litigation: 2019 snapshot

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Businessesarebeingsuedtoo.InOctober2019,MassachusettsjoinedNewYorkinsuingExxonMobileforallegedlyhidingitsknowledgeofclimatechangeandmisleadinginvestorsonitsfinancialimpact.CitiesandcountiesinNewYork,California,Colorado,WashingtonandMainehavefiledcivillawsuitsagainstoilandgascompanies.TherecentcasesofPG&E 174andBayer/Monsanto175provideearlyexamplesofthepoweroflitigationtoundermineequityvaluations.Finally,thethreat of litigationwillincreasinglyunderminethefutureviabilityofcompaniesandtheirshareholdervalue.176

Transition risk: Climatedamageswilleventuallytransfiguremarkets,butthemoreimmediatethreatforUKmanufacturingcomesfromliabilityandtransitionrisks.Thatis,therisksassociatedwithkeepingupwithrapidlychangingtechnologies,markets,policiesandsocialnorms.Theseriskscanrenderphysical,humanandintangibleassetsdevaluedorstranded,andthiscanhappenrapidly.

Inadditiontothesethreerisks,itisimportanttoalsonotethat technology risk is already high. Newtechnologiesandprocessesarelikelytoundercutoldonesandrenderthemredundant.Thishasthepotentialtotransformthecompetitivenessofgoodsandservicemarkets,especiallyassignificantR&Danddeploymentshiftstolow-carbonsectors.Atthesametime,increasinglyambitiouspolicyaction(includingregulationandmorestringentcarbonpricing)increasesthecostsofhigh-carbonactivities.

The perception of risk is also changing. Whereoncegreentechnologieswereseenasexoticandrisky,investorsincreasinglyworryabouttheriskofholdingassetswhichmaybecomedevaluedorredundantonaccountofhostilepolicies,costcompetitivealternativesandriskoflitigation(whattheFSBandTFCDcalltransitionrisk).Reflectingdiminishingprospects,stockpricesinfossilfuelshavebeenunderperforming for a decade,withtheoilandgassectordroppingfrom15%oftheUSstockmarkettounder5%whilecoalcompanieshavesoughtbankruptcy.177Thissuggeststherearebenefitsofinvestinginflexibleanddiversifiedassetstoboostinnovationandpreventlockintohighcarboninfrastructure,behaviourandinstitutions.

Markets increasingly recognise the strong economic and commercial case for early mitigation action by divesting from risky, high-carbon sectors.178Thereisagrowingriskthatfailing to keepup with changing technologies and policieswillrenderassetsill-suitedtotheeconomyofthe21stcentury.Theriskthattheylosefuturevalueorperhapsbecomingstrandedisreflectedinsharepricesforrenewablegoodsandservicesoutperformingthoseofcarbon-intensivesectors.179RoyalDutchShellandBPrecentlycutthevalueoftheirassetsby$22billionand$17.5billionrespectively.Bothcitedcoronavirusasasourceoflowerfuturedemandforenergyproducts,however,awarenessoflikelypolicyandregulatorychangesandcompetitionfromnew

174 Barron’s(October2019)A California Wildfire Has Thrown a Wrench Into PG&E’s Bankruptcy Process175 SpiegelInternational(January2019)Monsanto Merger Migraine: Safe Or Not, Roundup Is Toxic for Bayer176 GranthamResearchInstituteonClimateChangeandtheEnvironmentandtheCentreforClimateChangeEconomicsandPolicy(July2019) Global trends in climate change litigation: 2019 snapshot

177 CarbonTracker(April2020)COVID-19 and the energy transition: crisis as midwife to the new178 FinancialTimes(January2018)Insurers go cold on coal industry179 BNPParibas(August2019)Wells, Wires, and Wheels – EROCI and the Tough Road Ahead for Oil

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technologieslikelyplayedakeyroleinthatassessment.BigoilandgasplayersareincreasinglyrecognisingthatthattensofbillionsofdollarsworthofinvestmentarelikelytoberenderedunviableastheworlddecarbonisestomeettheParisclimategoals.180/181

The UK is well placed not only to adjust to, but also to benefit from, a low-carbon transition. Torealisethebenefits,however,itwillbeessentialthatrecoveryplansandpoliciesclearlyandconsistentlysupportappropriateinnovationandinvestment.TheevidenceforthisissetoutintheReport of the Advisory Group on Costs and Benefits of Net ZerofortheCommitteeonClimateChange(CCC).182ThereportconcludedthatthecostsoftransitioningtheUKeconomytolow-carbonformsofproductionareafunctionofthedecisionstakenbypolicymakersandinvestorstoday.ThemorecoordinatedtheUK’sresponsetomanagingalow-carbontransition,themorecost-effectiveitwillbe.183TheCOVID-19recoverypackagepresentsanopportunitytoputinplaceacoordinatedandstrongresponsethatacceleratesthelow-carbontransitionandmaximisesthenetbenefits.Thekeyinstitutionsandpolicyelementsofsuchapackageareexaminedinthefollowingsections.

6.3 INSTITUTIONS: A NEW NATIONAL INVESTMENT BANK

The LSE Growth Commission has long argued that a new institutional architecture is needed to drive infrastructure investment across the UK. Soundinstitutionscanboostconfidenceandreducethecostofcapital,bysharing and reducing risk.184TheUKshouldlooktorecognisedinstitutionalsuccessstories–suchastheClimate Change Act 185andthe Committee on ClimateChange 186independentlyholdingUKgovernmenttoaccount–andreplicatetheminareasinneedofbetterdata,measurementandevaluation.

A strong institutional architecture is even more important today inordertobringmajorsustainableinfrastructureprojectstomarket.Reformconsistsofthreepillars:anewdevelopmentbank,aninfrastructurecommission,whichthegovernmenthasalreadycreated,andgovernmentreform.Thissectiondiscussesthebenefitsofanew development bank and accompanyinggovernment reforms.187Thepaceofchangeandtheneedforextensivepublicinterventiontorecoverfromthepandemicandpromotethelowcarbontransitionunderlinestheimportanceoftransparentregulatoryinstitutionstolimitrent-seeking,protectconsumersandpromotecompetition.

180 ChristopheMcGladeandPaulEkins(January2015)The geographical distribution of fossil fuels unused when limiting global warming to 2 °C181 AlexanderPfeifferetal.(May2018)Committed emissions from existing and planned power plants and asset stranding required to meet the Paris Agreement182 CommitteeonClimateChange(2019)Report to the Committee on Climate Change of the Advisory Group on Costs and Benefits of Net Zero183 Forexample,policycangeneratecostreductionsandneweconomicbenefitsbyavoidinglockingintohigh-carboninfrastructure,behavioursandinstitutionswhich willbeexpensivetosubsequentlyretrofitorscrap,whileatthesametime,inducingresource-efficientinnovation.

184 ScottBakeretal.(October2015)Measuring Economic Policy Uncertainty185 HMGovernment(2008)Climate Change Act 2008186 GranthamResearchInstituteonClimateChangeandtheEnvironmentandtheCentreforClimateChangeEconomicsandPolicy(April2018) 10 years of the UK Climate Change Act

187 LSEGrowthCommission(2013)Investing in Prosperity: Skills, Infrastructure and Innovation

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The right institutional framework recognises the centrality of political risk, cancreatelongtermcommitmentsacrosselectoralcycles,andcanbringfinancingcostsdown.Thesethreefactorsarecrucialwhenconsideringinvestmentinacontextoflong-termstrategyaroundinclusive,sustainableandresilientgrowth,whichisalignedwiththenetzerotargetandtechnologicalchange.Theyalsocombinetocreateandclarifyrevenuestreams,whichcansupport investmentbycapturing(inpart)spilloversandexternalities(publicco-benefits)flowingfrominfrastructure,includingforthelongterm.188

Publicly funded institutions can also overcome market failures around investment. Theycanpromoterisksharingandriskreductionthroughguarantees,publiclybackedequitystakes,feedintariffsandcarbonpricefloors.189Theycanalsorunpilotprojectswhereknowledgeislowandbarrierstoentry,regulationsornetworkeffectsarehigh.Publicsectorinvestmentor“skininthegame”canbecrucialasitreducesprivateperceptionofpolicyrisk,loweringthecostofcapital.Legislatedframeworkssuchasthe UK Climate Change Actcanenshrineaprocessforemissionsreductionsintolawtothesameeffect.190

However, there remains alack of confidence in the duration and credibility of public institutionsto support decarbonisation investments. 191ThepreviousGreenInvestmentBank(GIB)wasinapositiontoactasa‘first mover’ in the UK market,butithassincebeenprivatisedastheGreenInvestmentGroupandsomaylackthemandatetosupportUK-onlyinvestments.192Otherexistinginstitutionsmaynothavethecapacityortheexpertisetoraisethesignificantamountoffinancialresourcesrequiredforfuturezero-carboninfrastructureintheUK.

A new institution in the form of a UK National Investment Bank (NIB) can help the government to deliver a strong, sustainable, inclusive, and resilient recovery and beyond to net zero in 2050. ANIBcandothisby:

� Leveragingbothdomesticandinternationalsourcesofprivatefinance,providingliquidityfortherecovery;

� Reducingandmanagingriskthroughinnovation,andhelpingtoovercomeotherfinancebarriersforinvestmentsincomprehensiveassets(physical,human,intangibleandnatural)consistentwithatransformationtomoreresilient,inclusiveandsustainableformofgrowth;

� Helpingtobringforwardandpreparesound projects at scale,fromlargecomplexprojectstoaggregationmodels;193

� Creatingplatformsforgoingtoscaleinnewgreentechnologiessuchashydrogen–theNIBwouldsetnewexamplesofscalinginvestmentandotherscanthenduplicatetheirefforts.

188 RoyalEconomicSociety(May2020)Finance for a strong and sustainable recovery189 InstituteofEnergyandSustainableDevelopment(October2009)Energy Services and ESCos – their benefits and implications for regulation and the consumer190 CommitteeonClimateChange(May2018)The CCC’s new Chief Executive relishes the challenges ahead191 FEU-US(November2019)The Truth Behind the Climate Pledges192 GranthamResearchInstituteonClimateChangeandtheEnvironment(September2019)Decarbonisation of the UK economy and green finance193 NationalInfrastructureCommission(May2019)Letter: Sir John Armitt to Chancellor of the Exchequer

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ANIBcanalsobuildpartnershipstoovercomecapitalmarketfailures,particularlyforearlystageriskwheretheycanprovidemoreriskycapitalatthestartofmajorprojectsusingarangeofinstruments.Capitalmarketsareoftenweakinmanaginglargeandcomplexprojects/programmes,withlargeperceivedrisks,longtermhorizons,andgovernmentinducedpolicyriskandotherpoliticalrisks.ByovercomingmanyofthesemarketfailuresaNIBcanmakeamajordifferenceinunleashingprivatefinance.TherearemanyexamplesfromaroundtheworldincludingtheEBRD,IFC,EIB,andmanynationalinvestmentbankslikeKfWinGermany.AlistoftheirstrengthsandbenefitsisprovidedinBox7.

Asanexampleofthetypeofscaleitcouldgenerate,with£20billionpaidincapitaland£80billioncallable;totalcapitalisationcouldbe£100billiontotal.Paidincapitalcouldbe,forexample,paidinover5yearsat£4bnp.a.Witha1.5–1gearingratioandturnoverofportfolioonaverage5years,itcouldlendaround£30billionperyear.

Utilising these strengths, the mandate of the NIB would be to foster sustainable investment and take it to scale. Initially,thereshouldbeatargetedfocusonmanagingandreducingriskinfast,labourintensive,andhighmultiplierprojectsthatcancontributedirectlytoastrong,sustainable,inclusiveandresilientrecovery.Thusitcouldplayacentralpartinthenecessaryfinancingandliquiditywhichwillbecrucialtorecovery.However,theBank’smandatecouldbecarefullybroadenedovertime.Projectoriginationandappraisalprocessesshouldberootedinregionaldevelopmentplansandinfrastructureneeds.Itcouldlendtotheprivatesector,nationalgovernmentandlocalgovernmentsastheytakeagreaterroleinrecoveryandlevellingupinvestments.TheBankshoulduseitsstrengthtoinnovateandhelppushthefrontiersofinvestmentasmanyofitscounterpartsinothercountriesalreadydo;sharingandtakinganinterestinwhatothersaredoinggloballywillbekey.

The effectives of a new NIB in delivering on the governments objectives will need complementary government reformsthatensureasystem-widefinancialresponsefromnationaltolocallevel.Thereisaclearneedfor:

� A strong governance structure for infrastructure that joins up and empowers local authorities, enablingcoordinationofinfrastructureinvestmentsacrossregionsandcities,inparticularacrosshousingandrelatedinfrastructureinvestments.Thiswillinvolvestrengtheningthecapacityoflocal,regionalanddevolvedgovernmentstoattractanddeploycapital;thereisrealconcernaroundlocalgovernmentdebtmanagementgivenhighriskcommercial and other property investments.194Muchoftheemerging,sustainableeconomyisinherentlydecentralised(transport,renewables,landuse)andrequiresgranular,ground-upsolutions,particularlyforSMEs.

194 NationalAuditOffice(February2020)Local authority investment in commercial property;FinancialTimes(February2020) Audit office warns over councils� £6.6bn commercial property spree

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� Stronggovernanceandhightransparencyofpublicinvestmentsandfinancingfacilitiesbybeingapublicentity.

� AboardestablishedbygovernmentandaccountabletoParliament.

� Decisionsinvolvingfinanceandinvestmentaretakenoutoftheinnardsofministriesandthisreducespoliticalinterference.

� Canincludeaprivatesectorshareholding.

� Potentialtobeprofitablewithoutsubsidyifsetinthecontextofgoodpolicy.

Investment strengths

� Abletoinvestacrossarangeofassetswithhighpublicreturns,e.g.energysystems,transport,digitalcommunicationinfrastructure.

� Canshiftinvestmentstrategydependingontheeconomiccycle.

� Atrustedconvenerandsyndicator;anditcanbuildsectorandotherskills.

� Itcanrunpilotprojects.

� AsustainabilitymandateenablesafocusonachievingUKlongtermclimateobjectives,aswellaslevellingup.

� Canworkcloselywithprivateretailbankstoscaleupprivateinvestmentinareaswithmarketfailuresandbarriers,e.g.massreplacementofgasboilers,buildingretrofits,wetlandregeneration,andsoon.

� CanworkalongsidetheBritishBusinessBank,whichisorientedtowardsSMEs,butwouldalsoneedasustainabilitymandatetoleveragecomplementarities.

� Buildssustainableinvestmentandfinanceskills.

Policy strengths and risk instruments

� Lookslongtermandreducespolicyrisk(oftenjustbyitspresence).

� Hasarangeofinstrumentstomanagerisk(suchasequity,longtermloans,mezzanines,andpoliticalriskguarantees).

� Reinforcesthepolicyregimebyworkingcloselywithgovernmentonsupportivepoliciesandregulationsandovercomingbarrierstoinvestments.

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� Priorities for investment in regionswhereproductivityandwellbeingwouldbemostresponsivetohighercapitalintensity,andwherenetworkandagglomerationeffectscanbeexploitedtosupportlow-carboninnovationhubs.Thisshouldconnectlocalprioritieswithnationalobjectivesincludingnetzero-alignedinvestment,levellingup,buildingskillsandensuringajusttransition.

� Delivering greater policy and fiscal autonomy to cities and regions, buildingontheCitiesandLocalGovernmentDevolutionAct2016,andotherrecentmovestoempowercities,withparticularfocusonclimate-smart cities.195Strengtheninggovernancestructuresatthelocalandcitylevelwillbecrucialtoavoidpoorfinancialmanagementand/orcorruption.

6.4 INSTITUTIONS: A REVISED INDUSTRIAL STRATEGY

The impact of COVID-19 has increased the role of the UK government in the economy through the process of rescue with loans to or shares in many companies. Thatputsitinapositiontobeactiveonindustrialpolicy.Astherescue-loansareunwound,extendedorconvertedtoequity,inwhichcasethestatebecomesasignificantshareholder,thestatecouldtiltitsinfluenceinthesefirmstowardsasustainable,resilientandinclusiverecovery,utilisingsupportivepublicpolicies.SeealsoSection6.12onbailouts,wherethegovernmentintervenestoprovideliquiditytostrategicallyimportantfirmsandindustries.

The UK has lacked scale, consistency and longevity in its industrial strategy, caused by a lack of institutional underpinning. Astheroleofpolicyistosetexpectationsonthefuturepathandbreakusoutofanegativefeedbackloop,andthegovernmentisinauniquepositiongiventheimpactofthecrisis,thereisastrongcaseforaradicalrethinkoftheUK’sindustrialstrategy.Thechallengesofimplementinganeffectiveindustrialstrategyareconsiderable.TheUKshouldlearnfrompastexperiencetoreducetheriskofpolicyfailure.TheLSE Growth Commission (2017)andMazzucato (2017)discussprinciplesofindustrialstrategy,lessonsfrompastsuccessesandfailures,andthecurrentUKIndustrialStrategy.196

CrucialforamoreeffectiveIndustrialStrategyisgreatercoherencewiththeCleanGrowthStrategyandstrongerambitionifeconomicgrowthistobesustainableoverthelongterm.Itisnotsensibletofocusthe Clean Growth Strategyonpromotinganarrowlydefined‘low-carbonsector’thatcontributesaround1percenttoUKGDP,whiletherestoftheeconomygetsonwithabusiness-as-usualhigh-carbonpath.197Totargetlonger-termgreeninvestment,thegovernmentwillneedtobringtogethertheexistingIndustrialStrategyandCleanGrowthStrategytocreateasingleforward-lookingandcoherentplanforstrengtheningtheUK’shumancapitalfortherecoveryandthelow-carbontransition.Aspartofthis,italsoneedstoreassessandbetterintegrateadaptation.

195 LSEGrowthCommission(2018)Sustainable growth in the UK. Seizing opportunities from technological change and the transition to a low-carbon economy 196 LSEGrowthCommission(2017)UK Growth A New Chapter, A Blueprint for Growth in 2017 and Beyond;MarianaMazzucato(2017)Response to the Green Paper “Building our Industrial Strategy”

197 LSEGrowthCommission(2018)Sustainable growth in the UK. Seizing opportunities from technological change and the transition to a low-carbon economy

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Sucharevisedstrategyneedstosetaclearlong-termcommitmenttonetzeroandadaptationandwillneedtomapouthowitplanstogetthere.NetzeroandadaptationmustbepositionedattheheartofthisnewstrategyandshouldlinktolocalindustrialstrategiessettingoutplanstohelpbusinessesrecoverfromCOVID-19byaligningwiththeprovisionofzerocarbongoodsandservices.Itwillalsoneedtoinvolveaplanforadaptationandthenaturalenvironment.ThiswillneedtobeaccompaniedbyeffortstofinalisetheambitiousEnvironmentBillandAgricultureBill–bysubsidingprojectsthatdeliverenvironmentalimprovements,puttinginplaceacomprehensivesetofimprovementtargetsundertheEnvironmentBill,anddevelopingatradepolicyandfuturetradeagreementsthatsupportthedeliveryoftheUK’sclimateandenvironmentalgoals(seeBox10).

Technical advances and policy innovations are opening up opportunities for improvements to labour and resource productivity, and sustainable growth, everywhere across the economy. ArevisedIndustrialStrategyisnotonlyaboutdevelopingbreakthroughinnovation,asimportantasthiswillbelongerterm.Itisalsoaboutrecognisingthewidearrayofexistingcost-efficientlow-carbontechnologiesthatcanbeadoptedacrossdifferentsectorsandtheintrinsicallylow-carbonactivitiesthatcompaniescanexpandwiththerightincentives.Forexample,thereisvastpotentialintheUKforimplementingexistinginnovationsinaviation,includingmoreefficientflightpathsandotheraircraftoperations.Thereisalsopotentialforgreengrowthviasupportingandexpandingintrinsicallylow-carbonindustriesacrosstheregions,suchasineducationandfinancialservices,areaswheretheUKalreadyhasacomparativeadvantage.Itisnotjustaboutexpandingthenarrowlydefinedenvironmentalgoodsandservicessectorinisolation,whichisimportantbutarelativelytinypartoftheeconomy.Theindustrial strategy, with a commitment tonot only net zero, but also levelling up,shouldalsofocusonresilienceandthecrucialroleofthesocialthirdsector.198Theideaofresearchmissions,asdiscussedaboveintheinnovationsection,canbringthestrategytogether.

A particular mission may be around zero emissions vehicles. Recentresearchidentifiesasignificant manufacturing and employment opportunityinthissector.Nearly80,000jobscouldbecreatedby2030intheproductionofelectricvehiclepowertraincomponents,chargepoints,fuelcellpowertraincomponentsandautonomousvehiclehardwareandsoftware.ThisrequiresincentivestosupportproductioninregionsacrosstheUK,policiestoboostdemandforzeroemissionvehiclesandregulationsthatarecloselyalignedwiththeEuropeanSingleMarketandEUemissionsregulations.199Aparticular strengthfortheUKisautomationandcontrolsystems.200Developingfurtherincentivestoencouragethetake-upandUKproductionofelectricvehiclescouldcreateanadditional 150,000 jobsby2040.

198 RoyalEconomicSociety(May2020)Policy for a strong and sustainable recovery199 LSEGrowthCommission(February2020)Seizing sustainable growth opportunities from zero emission passenger vehicles in the UK200 LSEGrowthCommission(February2020)Seizing sustainable growth opportunities from zero emission passenger vehicles in the UK

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Failure to get the institutional and policy structures right, including Industrial Strategy, risks continued under-investment across national assetsandlossofinternationalcompetitiveness.ThiswillweakentheUK’sfoundationsforasustainablerecoveryandmoreinclusivegrowth.ItwouldleavetheUKwithongoingstructuralweaknesses,muddledexpectationsonthedirectionofchange,includingpolicyuncertainty,andlessflexibilitytoadapttofutureexternalshocks.TheUKwouldbelesswellpreparedforthechallengingtransitionahead–diffusionofnewproductivity-enhancingtechnologieswouldbeslow,andgrowth,livingstandardsandthelevellingupagendawouldsuffer.

Sound institutions, including the NIB and a net-zero aligned industrial policy, will need to be supported by strong policies for key market failuresandguardagainstthenegativeimpactsofCOVID-19,byhavingastrongcompetitionpolicyintimesofhighfirmbankruptcyandliquidityconstraints,andbailoutconditionality.

6.5 POLICIES FOR CARBON PRICING

Carbon pricing is a foundation for recovery policy that will help drive innovation and investment.201Withoutit,overconsumptionandoverproductionofdamagingactivitiesisallbutguaranteed.ItwillalsobeveryhardtoachievetheUK’sclimatecommitments,includingtonet-zeroemissions,withoutastrongandeffectivecarbonprice.

Greenhouse gas emissions are often describedby economistsas an externality of market transactions 202oramarketfailure.Asgreenhousegasemissionsrise,warminggeneratesdamagesmeasuredusingthe‘social cost of carbon’.203Astandardeconomicapproachistointernalisethiscostbypricing carbontooffsetthemarketfailure.204Thistakestheformofamarket-basedpolicyinstrumentsuchascarbontaxorestablishingemissionstradingschemes.

Prices send a transparent and non-discriminatory signal to all consumers and producers to guide the most efficient short-term emissions reductions. Becausethemarketdrivesinvestment,pricingreducesthescopeforrent-seekingbypowerfullobbiestosecurelucrativepubliccontracts.Pricingisalsonecessarytoreducethe‘rebound effect’wherebythesavingsgeneratedthroughmoreefficientuseofresourceareploughedbackintoevengreaterconsumptionofthoseresources(forexampleheating,flightsorcarjourneys).205Pricinghelpssteerthosesavingstowardslessdamagingconsumption.Globalpoliciesmustbeexpectedtotightenfurtherinanticipationofthiseffect.

201 CentreforClimateChangeEconomicsandPolicyandGranthamResearchInstituteinClimateChangeandtheEnvironment(December2011) The case for carbon pricing

202 EconomicsOnline203 CarbonBrief(February2017)Q&A: The social cost of carbon204 GranthamResearchInstituteonClimateChangeandtheEnvironmentandCentreforClimateChangeEconomicsandPolicy(May2019) How to price carbon to reach net-zero emissions in the UK

205 UKRI(2020)The rebound effect

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The UK already has a comprehensive carbon pricing regime in place. Ithasseveraldifferentcarbonpricesacrosstheeconomyduetooverlappingpoliciesandimplicitandexplicitpricesignals.Therehavebeencallsforitsreformovermanyyears.Twotypesofreformsareoftenadvocated:bringitmoreinlinewitheconomictheorybyhavingoneuniformpriceacrosstheeconomy,andensurepricelevelsareinlinewiththeUK’sclimatecommitments,includingnetzero. 206

New research suggests the current regime may not necessarily be a problem if the price levels are designed correctly, withtheappropriate complementary policies.207Theresearchfocussesonpricelevelsthatcandeliveradditionalrevenuetogovernmentintheshorttermandareconsistentwiththenet-zerocommitmentinthelong-term,includingcomplementarypoliciesthatwillbeneededgivennon-pricesensitivesectors.Itdiscussesasectorapproachtosettingpricelevels.Reformofcarbonpricelevelswillneedtoconsiderimportantfactorssuchasdistributionalincidence,competitivenessconcerns,designofrevenuerecycling,anddeadweightlossesandgains.TheLSEGrowthCommissionreports,andothers,examinethesefactors. 208

Now is a good opportunity to adjust carbon price levels. WiththeUKplanninganew UK ETSasitleavestheEU-ETS,andgiventhedisruptionfromthecrisis,thereisanopportunity,temporarily,toadoptastrong carbon priceacrosstheeconomythatcanguiderecoverydecisionsandredirecteconomicsystemsinazero-carbondirection.209TheUKwouldnotbealoneintakingadvantageofthisopportunity;Switzerlandforexamplerecentlyreformeditscarbonprices.Moreoptimalcarbonpricesacrosspoliciescanalsoimprovetheefficiencyofthetaxsystemoverall,withouthurtingnetjobs,andraisenewsourcesofrevenueforgovernment,whichcanhelptocreatefiscalspaceforjobenhancingrecoveryinvestments,whichwill,inturn,generatehighertaxrevenuesthatcanhelpbringdownthebudgetdeficitinthelongterm.

UK carbon prices, including shadow prices, have been too low to date,stallingthedevelopmentoflow-carbonsolutions,particularlyinsectorsthataremoredifficulttodecarbonise.IntermsofinvestmentprogrammesandprojectsintheUKrecoverypackage,thegovernmentwillneedtoensuretheshadowpriceofcarbon–thepriceitusesinternallytoguidepublic-sectordecisions–isconsistentwithnet-zero.Suchapricecouldstart at £50 (with a rangeof £40–100) per tonne of carbon dioxide (tCO2) in 2020, reaching £75 (£60–140) in 2030 and £160(£125–300) per tCO2 in 2050,whichreflectsthelikelycostofnegativeemissionstechnology.210

206 LSEGrowthCommission(December2018)Sustainable growth in the UK. Seizing opportunities from technological change and the transition to a low-carbon economy;DieterHelm(October2017)Cost of Energy Review;GranthamResearchInstituteonClimateChangeandtheEnvironmentandCentreforClimateChange EconomicsandPolicy(May2019)How to price carbon to reach net-zero emissions in the UK; OECD (August 2011) Climate-Change policy in the United Kingdom

207 GranthamResearchInstituteonClimateChangeandtheEnvironmentandCentreforClimateChangeEconomicsandPolicyandVividEconomics(March2020) Distributional impacts of a carbon tax in the UK: Report 2 – Analysis by income decile

208 GranthamResearchInstituteonClimateChangeandtheEnvironmentandCentreforClimateChangeEconomicsandPolicyandVividEconomics(March2020) Distributional impacts of a carbon tax in the UK: Report 2 – Analysis by income decile

209 GranthamResearchInstituteonClimateChangeandtheEnvironmentandCentreforClimateChangeEconomicsandPolicy(May2020)Pricing carbon during the economic recovery from the COVID-19 pandemic

210 GranthamResearchInstituteonClimateChangeandtheEnvironmentandCentreforClimateChangeEconomicsandPolicy(May2019)How to price carbon to reach net-zero emissions in the UK

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To be politically feasible and allow for the politically sensitive management of distributional consequences, the carbon price imposed on emitters may have to be lower than the shadow price and must be responsive to the sector context.211Revisedcarbonpricescanbedifferentiatedbysector;anapproachthatcouldhavealower impact on household billscomparedtootheroptions.212Apoliticallyfeasiblecarbonpricecouldstartataround£40pertCO2in2020acrossmostsectors,exceptforaviationandshippingandenergyintensiveindustrieswhereitwouldbe£50,risingto£100pertCO2,ormore,in2050(seeFigure7).Thegovernment’splantoestablishaUKETSalsoprovidesasensibleopportunitytoreformthecarbonpricingpolicypatchworkinthisway;reformscanraiseandequalisecarbonpricesacrosspolicies,andextendtheUKETStomoresectors,includingwaste.Equalisingpricesacrosspoliciescanrealiselargeefficiencygains.Complementarypolicieswillalsobeneededtoensurefulldecarbonisationinlinewithnet-zero,includingregulations(alsoseenextsection),technologysupportandincentivesfornegativeemissionstoremoveanyremainingemissionsfromtheatmosphere.213

If these sector-based carbon prices were imposed through an explicit carbon tax or the auctioning of emissions allowances, theproposedpricelevelswouldraisepublicrevenueofaround£15–20billionayearuntiltheearly2030s,beforefallinggraduallyasemissionsreducetonet-zero.This is equivalent to about two-thirds of the total revenue raised through fuel duty. Carbonpricingcanthereforeplayapartinwiderfiscalreformthatmaybeneededinrecovery,reducinganyriseisdistortionarytaxes,suchasincometaxesorwealthtaxes.

211 GranthamResearchInstituteonClimateChangeandtheEnvironmentandCentreforClimateChangeEconomicsandPolicy(May2019)How to price carbon to reach net-zero emissions in the UK.Thenumberspresentedthataresourcedfromthisreportareastaticrepresentationofcostandmustberevisedovertime,allowingfor behaviourchangeandtechnologicalandprocessinnovation.

212 GranthamResearchInstituteonClimateChangeandtheEnvironmentandCentreforClimateChangeEconomicsandPolicyandVividEconomics(March2020) Distributional impacts of a carbon tax in the UK: Report 2 – Analysis by income decile

213 Acomplementarypricemechanismcouldalsobesetuptoencouragethedevelopmentanduseofnegativeemissionstechnology.Thiscouldtaketheform ofapublicprocurementscheme,throughwhichtheGovernmentwouldpurchasenegativeemissionsinproportiontotheresidualcarbonoutputthatits policieshavenotsucceededinavoiding.Asecondpossiblemechanismisaprivatebutregulatedoffsetmarket,inwhichmarketparticipantswouldbuynegative emissionsinplaceofpayingthecarbonprice.See:GranthamResearchInstituteonClimateChangeandtheEnvironmentandCentreforClimateChange EconomicsandPolicy(May2019)How to price carbon to reach net-zero emissions in the UK

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6.6 STANDARDS, REGULATIONS, AND PUBLIC PROCUREMENT

The damages caused by carbon are not the only market failure that needs to be overcomeandthepricingofgreenhousegasemissionsisanecessary,butnotasufficientrequirementforefficientdecarbonisation.Standardsandregulationsareneededtotacklearangeofadditionalmarketfailuresandhaveakeyroletoplayasacomplementtocarbonpricing,helpingtodrivetheinvestmentsthatareurgentlyrequired.Duringacrisis,regulationscanbehelpfulpolicytoolsinthreeways.

First, existingregulationscanensurethattheUKdoesnotgobackwards.Forexample,ifstandardsaresuspendedorweakened,firmsmaybetemptedtorelaxpollutioncontrolsorworkerprotectiontosavecostsintheshortrun.Suchtemporarygainswouldimposemuchhigherlong-termcosts,e.g.higherlifetimecapitalcostsforthoseinvestinginlong-termassets.ExamplesincludeeffortsinEUtoweakenautomotivefuelefficiencystandardseventhougheconomicanalysisshowsnegativeimpactsonjobs,innovation,airpollution,healthoutcomesandcarbonemissions.Nottomentionthateffortstorelaxregulationsareoftenineffectiveandbackfire,reducinginnovationandcompetitivenessinglobalmarkets(see6.11below).

� Regulations can promote competition and tackle concentration to support structural change. Withthestatetakingonabiggerroleintheprivatesector,regulationscanpromotecompetitiontoprotecttheconsumer,limitdiscriminatorypoliciesandavoidrentseeking.Thereisalsoabigriskthatfirmfailuresenhanceconcentration.Largefirmswithaccesstoliquiditycansnapupstart-ups,buildingdominantmarketsharesandlimitingcompetition.Thisisespeciallyprevalentinthetechsectorwhereitunderminesstructuraladjustmentanddiminishesinnovation.Thegovernmentcanassessits£500millionFutureFundwiththisinmind.

Second, usingregulationsandnewstandardsascomplementstocarbonpricingcanhelptoaccelerateinnovationingrowthsectors,createefficientmarketsandinducenewtechnologies,therebyloweringthelevelofpublicstimulusexpendituresrequiredtobringaneconomybacktofullactivity.Consistentwiththeanalysisoncarbonpricingintheprevioussection,itisoftenmoreeffectivetoblendpricesignalswithregulations,suchasforenergyefficiencyorpollutioncontrol,thantorelyonpricesignalsalone.

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� Progressiveregulationsandstandardscanprovidesignalsandpolicycertainty(andtheyalignexpectations)fortheprivatesectorthatguideinvestmentsoverthemediumterm,e.g.astheyhavedoneforrenewableenergy.Standardslikeefficiencystandardsonbuildings,carsanddomesticappliances,canalsoprovideclearsignalsandpolicycertainty,andhavebeenshowntocutcostsanddriveinnovation.Recent researchexaminesseveralcasestudiesacrosswaste,buildingsandtransportandfindsthatwell-designedenvironmentalregulationscanincreasebusinessinvestmentininnovationandskills,betterqualityproductsandinfrastructure,andcanleadtogreaterbusinesscompetitivenessandjobcreation.214

� Pre-announcedregulationinkeydecarbonisationareasprovidecleardirectionfromgovernment(e.g.banningsalesofinternalcombustionenginesafteracertaindate)todirectinnovationandinvestment.

� Regulationscanbemorepoliticallyacceptablethancarbonprices(seeBox8).ToughEUfuelefficiencyandfleetaverageemissionstargetsforpassengercarsinducedaseriesoftechnologicalimprovementswhichhelpedmakeEuropeancarsgloballycompetitive.TheycaninfluencethedesignofnewproductsandR&Dstrategies,asseeninthecarindustry.Theyhavealsobeenfoundtopositivelyaffectconsumerpreferencesandsocialnorms.

� Regulationscouldbeintroducedtoaccompanynationallevelfinancingoflocalgovernmentinvestments,asoccursunderthePublic Works Loan Board.215Forexample,HMTreasurycouldapplyregulationstomaximisetheimpactofthesefiscaloutlaysforrecoveryandlong-termtransformation.

214 AldersgateGroup,BurohappoldEngineering(2017)Help or Hindrance? Environmental regulations and competitiveness.215 UKDebtManagementOffice(2020)PWLB lending facility

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INSTITUTIONS AND POLICIES FOR BUILDING TO LAST AFTER COVID-196. BOX 8: STANDARD ISSUE: THE POLITICAL ACCEPTABILITY OF STANDARDS216

Performancestandardsmayhavegreaterpoliticalacceptabilitycomparedwithpoliciessuchascarbonpricingforavarietyofreasons,andcanbeusedastocomplementcarbonprices:

1. Inmostsectors,standardsdonotimmediatelyaffectexistingindustriesandequipment,onlynewinvestments–soincumbentsarelesslikelytoobjecttotheirintroduction.

2. TheUKalreadyhasperformancestandardsinseveralsectors,andthesemayonlyneedstrengtheningandbetterenforcementtoreduceemissionsfurther.Thusthegovernmentcanavoidthetroubleofcreatingentirelynewpolicytools.

3. Performancestandardsachievemeasurableresultsmorerapidlythancarbonprices,andtheirbenefitscanthusbeobservedovershortertimescales.

4. Performancestandardsconveyapositivemessageandfocusonachievementsandprogress.Forexample,itcancontributetoregionaldevelopmentgoalssuchasmovingdomesticmanufacturingtowardhighervalue-addedproducts,ratherthanfocusonlimitsandconstraints.

Manyexamplesexistthatconfirmthesereasons.TheEU’s eco-design regulationshaveresultedinenergyrelatedproductscoveredbytheregulationsconsuming18%lessenergyby2020thanwouldotherwisehavebeenthecase.217TheregulationshavebeensosuccessfulthattheEUinitslatestCircular Economy Action Planhasnowcommittedtobroadentheirscopetomoreproductsandtocoverresourceefficiencycriteria.Thisreceivedstrong business support.

216 NewClimateEconomy(2014)Better Growth, Better Climate217 TheEconomist(October2016)The EU is Reviewing the Policy that makes its appliances so Efficient.

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� Afurthersetofmarketfailuresdefinesnon-pricesensitivesectorspronetowasteandinefficiency.Insomecases,lackofinformationcanbeovercomebycreatingawarenessofthedifferentcarboncontentsofenergysources,andtheoptionsavailableforemissionreductions,forexampleenergyratingsondomesticappliances.Inothercases,incentivestoinvestinefficiencyimprovementsareabsent.Forexample,tenantsinleakybuildingswillnotwanttopayforinvestmentinbuildingstheydonotown,butneitherwilllandlordsastheydonotshoulderthehigherbillswhicharepaidbythetenant.Suchcasesmaybenefitfromthecreationoforarange of instruments218suchasenergy service companies (ESCOs).219Thesecompaniessellenergyservicestoconsumers,whichincludeimplementingenergy-efficiencyprojectsandrefurbishingbuildingstogeneratesavingswhicharethensharedwithconsumersintheformoflowerbills.

Third, public consumption accounts for a quarter of UK spending. The government can use public procurement to create incentives at scale for products and technologies that meet both financial and environmental needs.220Implementinggreenpublicpurchasingapproaches–whetherforlow-emittinglightbulbs,sustainableenergyorbuildingmaterials–canhelpshiftmarketsandbringdowncostsofcleanalternativesthrougheconomiesofscaleinawaythatcanbecomepermanentafterthecrisis.For example,theDutchministryofinfrastructureandtheenvironment,partneredwiththecouncilsofRotterdam,AmsterdamandUtrechttoruntwopilotsinvestigatingwaysprocurementprocessescouldsupportmoreefficientuseofrawmaterials.Theministry’s“multi-waterworksproject”requiredthereplacementof50locksanddams,needinglargeamountofconcrete,andtheyidentifiednewprocessestoembedinprocurementincludingassessmentcriteria,evaluatingbids,proofandmonitoring.Thepotentialsavingsfromasinglelockcouldbe36%ofCO2and21%ofmaterials.Meanwhilethecitycouncilsheldaworkshoptoencouragetheconcreteindustrytoconsidertheirtotalenvironmentalimpact,fromextractiontoproduction,transport,useandendoflifedisposal.Rotterdamcouncil’ssubsequenttenderforconcretetilesdeliveredtilesthathadhalvedtheirenvironmentalcost.221

6.7 POLICIES TO INDUCE INNOVATION

A crucial market failure outlined in Section 4.4 is associated with the need to innovate to drive decarbonisation. Supporting innovationcantaketheformofgrantsandtaxbreaksforresearch,developmentanddeployment(R,D&D)aswellassubsidies,obligationsandothermechanisms(suchasfeed-intariffsforcleanenergygeneration)tosupportdeployment.222Strongandconsistentpoliciesarerequiredtotipenergyandindustrialsystemstowardsnewer,cleaner,andultimatelycheapermodesofproductionthatbecomeimpossibletooutcompete.Early policy intervention can direct technical change.223Governmentfinanceforearlystage

218 GreenFinanceInstitute2020.Financing energy efficient buildings – the path to retrofit at scale.219 InstituteofEnergyandSustainableDevelopment(October2009)Energy Services and ESCos – their benefits and implications for regulation and the consumer220 AmarBhattacharyaetal.(May2020)Better Recovery, Better World: Resetting climate action in the aftermath of the COVID-19 pandemic. Forthcoming. Theauthorshavedrawnonmaterialinthispaperinwritingthissectionofthereport.

221 AldersgateGroup(January2019).Beyond the 2019 Elections, Maintaining Momentum on resource Efficiency.222 CommitteeonClimateChange(2019)Report to the Committee on Climate Change of the Advisory Group on Costs and Benefits of Net Zero223 DaronAcemogluetal.(2012)The Environment and Directed Technical Change

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R&Dhasbeenthesourceofmanysignificant post-war innovations.224ThetechnologiesthathavegoneintotheiPhoneareprobablythemosthighprofileexample.Touchscreendisplay,GPSandvoice-activationwereallinitiallygovernment-funded.Someofthesesuccessesareby-productsofawiderresearch‘mission’,whichfocusesonsolvingspecificsocietalchallengesthroughtheinteractionofmanydifferentsectorsandgovernment.AkeyexampleistheInternet,theoriginsofwhichtracebacktotheUSgovernment’seffortstobuildmorereliablecommunicationnetworksinthe1960s.Theconceptofresearch missionsisgaininginpopularityacrosstheworldasabasisforindustrialstrategiesthattrytoachieveimportanteconomicandsocialobjectives,suchaslow-carboninnovationacrossallsectors.225ThishighlightstheimportanceofnotjustpromotingdeploymentorfacilitatingprivatesectorR&Dspending,asimportantasthisis,butalsodirect public investment in early stage riskier technologies.226

Where innovation policies have been tried in green technologies, the world is already witnessingthe power of this early intervention effect.227Examplesincludethe100billiondollarGermanEnergiwender,whichdrovethegame-changingsolarphotovoltaicrevolution,andtheUK’ssupportforoffshorewindfarms,whichinamatterofyearsdroveinnovationsthatpushedcontractpricesdowntothelevelofwholesaleelectricity.TargetedinnovationanddeploymentpolicieshavehelpedmaketheUKaworldleaderinoffshorewind.ThesectorisaUKsuccessstory,generatingalmostatenthoftheUK’selectricityinjustadecade,andfallingcosts.Thesectoremploys 7,200,228andthesectorexpectstogrowitsskilledworkforceto27,000 by 2030ascapacityincreases.229TheIEAforecastsglobaloffshorewindcapacitytoincreasefifteen-foldto2040,becominga$1trillionindustryoverthenexttwodecades.

Whether or not one cares about carbon, past policy mechanisms such as subsidies for renewables and support for R,D&D on batteries are delivering cheaper electricity and better cars than fossil fuel based alternatives.230Themarketalonewouldnothaveprovideditandeconomistscouldneverhavepredictedit.Mostimportantly,oncegiventhepush,innovationisdrivenbythedesiretoprofit from growing new markets.231

Some industrial sectors areinnately carbon- and energy-intensivebut even they have scope to dematerialise and reduce emissions.232Theseincludeaviation,haulage,shipping,metals,ceramics,chemicalscement,plasticsandagriculture.Demandforthesesectorsisunlikelytoshifttoreadysubstitutesinthenearterm(theworldwillcontinuetoneedsteel,cementandplastics)butproductionprocess,technologiesandtheefficientuseandre-useofmaterialswillallowsomefirmstooutcompetelessefficientrivals.Policymustfocusonacceleratinginnovationtocutemissionsinsuchhard to crack sectorsbysupportingR&Danddemonstrationofcriticaltechnologiesandnewbusinessmodels(forexampleinfuelcells,hydrogenandammonia

224 Philippe Aghionetal.(July2019)Path dependence, innovation and the economics of climate change 225 LSEGrowthCommission(December2018)Sustainable growth in the UK: Seizing opportunities from technological change and the transition to a low-carbon economy

226 MarianaMazzucato(June2011)The Entrepreneurial State227 BloombergNEF(December2019)Liebreich: Peak Emissions Are Closer Than You Think – and Here’s Why228 DepartmentforBusiness,EnergyandIndustrialStrategy(March2020)Offshore wind Sector Deal 229 DepartmentforBusiness,EnergyandIndustrialStrategy(March2019)Offshore Wind Sector Deal: Written statement – HCWS1382230 LombardOdier(April2019)What happens when complacent economists meet a dynamic planet?231 DimitriZenghelis(July2016)10. Decarbonisation: Innovation and the Economics of Climate Change232 TheEnergyTransitionsCommission(November2018)Reaching net zero emissions: mission possible

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technologies,carboncaptureandstorageandbiomass).Thepublicsectormustinvestinriskyinnovationnotingthattheappropriateallocationofriskcapitalmeansthatnotallnewinnovationwillbescalableorprofitable.PlansforasuitablyfundedandautonomousUK ARPAarewelcomeinthisregarded.233

Innovation funding could be framed as a mission around low-carbon technologies and embedded in a revised industrial strategy (seebelow).Themissionscouldincludeinternationalcollaboration,university-industryinteraction,andaregionalhubfocusbuildingontheUniversityof Sheffield Advanced Manufacturing Research Centre – AMRCsuccess.234Anditcouldbesupportedbystrongcarbonprices.Thegovernment’s£500millionFutureFund,whichprovideshelpfulsupportforstart-upsandinnovativenewfirms,andthenewClean Growth Fund,partoftheGreenGrowthStrategy,isastepintherightdirection,butshouldbecoordinatedwiththemissiontoensurethatpolicyensuresacultureofcreatingwinnersisestablished.235

Targeted deployment support is also required in a portfolio of innovation policies. Renewableenergypolicyneedstobedynamic,sincethetechnologiesarenew,andthecostsarelikelytocomedownthroughtimeasafunctionofdeployment.TheexampleofUSinvestmentinthefailedSolyndraprojecthighlightsthedangersofseekingtofavouraparticularbusiness.

A recovery package aligned with the net zero emissions target could provide a significant industrial opportunity for UK businesses as long as it is accompanied by a bold innovation policy. Thesepoliciesshouldseektoacceleratetheinnovationatscaleofcriticaltechnologiessuchashydrogen,andrapidlygrowthedemandforultra-lowcarboninfrastructure,productsandservices,includingbatterystorageandsyntheticfuels.Thishighlightstheimportanceoflarge-scale trials of new technologiesinplaceofUKinnovationpolicywhichhasinthepastbeentoofragmented,toosmallscaleandoftensubjecttochange.Thishasbeenduetopolicymakers’fearoffailure.236

Policy needs to go beyond carbon pricing and support for R&D to deliver efficient decarbonisation. IntheearlystagesofR&D,itisfairtosupportawiderangeoftechnologiesthroughauniformandslowlyrisingcarbonprice,designedtopickoffthemostcost-effectiveemissionsreductionsatthemargin.However,formanynetworkinvestments,therecomesatimewhenchoices need to be madeaboutrollingoutandscalingtechnologyinfrastructure237(forexample,dogovernmentssupportEVorhydrogenvehiclenetworks?Shoulddecarbonisingdomesticheatingfocusonfuelpumpsandelectricitygridupgradesorhydrogenusingupgradesoftheexistinggasnetwork?Investinginbothinonelocationwouldbewastefullyduplicative).

233 PolicyExchange(2020)Visions of ARPA234 AMRC(March2019)AMRC is an ‘enormous success’ but more to be done235 DepartmentforBusiness,EnergyandIndustrialStrategy(March2020)Clean growth fund236 Accelerating innovation towards net zero,fromVividEconomicsandtheUKEnergyResearchCentre(UKERC)commissionedbytheAldersgateGroup,and Zeroing in: capturing the opportunities from a UK net zero emission target,fromtheAldersgateGroup

237 Gross, R., Stern, J., Charles, C., Nicholls, J., Candelise, C., Heptonstall, P. and Greenacre, P. 2012 On picking winners: The need for targeted support for renewable energy, Imperial College London

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Where network choices must be made, picking winners still beats picking losers. Themantraonnotpickingwinnersdelayedpolicymakersinacknowledgingtheevidencethatrenewabletechnologieswerethemostcompetitive.PoliciessuchastherenewablesobligationandContractsforDifference(CfDs)intheUK,aswellasthefeed-intariffsinGermany,requirechoicesbeingmadeondeploymenteligibility.

Strong early intervention is key to drive innovation. The‘slow carbon price ramp’ 238approachhassincebeenchallenged by economists239whoarguethatcarbonabatementcostsareshapedbyinnovation,sothatonceatechnologybecomessufficientlycompetitive,itstartstochangetheentire environment in which it operates.240Formanyadvancedtechnologies,itmakesbettersensetostart with the most expensive optionstobringtheircostsdown.241Early policy intervention242candirect technical change.243Inplaceofaslowpriceramp,theseauthorsargueforaclearandcredibleearlypolicyshock,includingahighcarbonprice,tokick start the green innovationmachineanddefinitivelyshiftinvestment.244

6.8 POLICIES TO RE-SKILL AND LEVEL-UP

A key role for government in the recovery package is to create astrong institutionalframework and sound policiesfor flexible labour markets enabling workers to thrive in the new economy.245Ifthepolicyissociallydisruptive,itcouldmeetresistancewhichsetsbackpolicyprogress(asrecenteventsinFrance246andelsewhere247testify).Aroundone-fifthofjobsintheUKtodayuseskillsthatarelikelytobeaffectedbythegreentransition.Approximatelyhalfoftheseinvolveskillsthatarelikelytobeneededinthelowcarboneconomy.Forexample,overone-thirdofmarineengineersformerlyemployedintheoilandgassectornowworkintheoffshorerenewablessector.Yet,aroundonein10useskillsthatarelikely to be less in demand.248

The risks of resistance to new policy today could be higher given the impact of the COVID-19 shock on society and the economy. Understandingwherethepolicyimpactwillbefeltisbecomingacentralpillarofanyclimatestrategy.249Itexplainswhymuchoftherecentfocushasbeenona‘just transition’.250Ensuring a ‘just transition’ means enabling and insuring

238 Nordhaus, W. 2007 The Challenge of Global Warming: Economic Models and Environmental Policy, Yale University239 Grubb, M. and Wieners, C. 2020 Modeling Myths: On the Need for Dynamic Realism in DICE and other Equilibrium Models of Global Climate Mitigation INET Working Paper No. 112 January

240 Zenghelis, D., 2019. What happens when complacent economists meet a dynamic planet? Lombard Odier.241 Vogt-Schilb, Adrien & Meunier, Guy & Hallegatte, Stéphane, 2018. “When starting with the most expensive option makes sense: Optimal timing, cost and sectoral allocation of abatement investment,” Journal of Environmental Economics and Management, Elsevier, vol. 88(C), pages 210–233.

242 Chapter 4: Aghion, P., Hepburn, C., Teytelboym, A., and Zenghelis, D. 2019 Path dependence, innovation and the economics of climate change in Handbook on Green Growth, Fouquet, R. (Ed).

243 Daron Acemoglu et al. (2012) The Environment and Directed Technical Change244 PhilippeAghionetal.(November2009)Cold Start for the Green Innovation Machine245 LSEGrowthCommission(December2018)Sustainable growth in the UK: Seizing opportunities from technological change and the transition to a low-carbon economy

246 TheGuardian(December2018)Who are the gilets jaunes and what do they want?247 BBCNews(September2000)Countdown to crisis: Eight days that shook Britain248 GranthamResearchInstituteonClimateChangeandtheEnvironment(October2019)Financing inclusive climate action in the UK – An investor roadmap for the just transition

249 LSEBusinessReview(January2019)The discredited economic vision at the root of France’s ‘gilets jaunes’ problem250 GranthamResearchInstituteonClimateChangeandtheEnvironment(December2018)Climate change and the just transition: A guide for investor action

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potential losers through institutions that reskill and retool workers, offer clean substitutes, and provide social insurance. This is not just politically expedient; it is practically necessary if climate policies are to be enacted at sufficient scale and speed. Todeliverthis,some haveproposedamulti-stakeholderNetZeroandJustTransitionDeliveryBodythatwoulddevelopanddeliveraplanforajusttransitiontonetzero.251TheOECDbroadenstheconceptofjusttransitionandconsidersclimatepolicythroughawellbeing lens,aperspectivewhichanalysessynergiesandtrade-offsbetweenclimatechangemitigationandbroadergoalssuchashealth,education,jobs,aswellaswiderenvironmentalqualityandtheresourcesneededtosustainourlivelihoodsthroughtime.252Awell-beingandjusttransitionlensshouldbeappliedacrossallaspectsoftherecoveryplanandthetransitiontonetzero.

Accounting for political realities is distinct from succumbing to lobbying from powerful industrial sectors liable to lose from change. Awarenessofdistributionalimpactsrecognisesthatthebiggestbarrierstoadjustmentarenoteconomicortechnologicalbutpolitical,institutionalandcultural.However,structuralandregionalreformrequiretransparentandefficientinstitutionswhichpromotecompetitionandinnovationwhilelimitingrent-seekingfromvestedinterestsandpowerfullobbies.

Rapid transformative change needs to be managed carefully, whether it is from a crisis like COVID-19, decarbonisation, artificial intelligence, automation, or digitisation. Thegainsmustbe,andbeseentobe,equitablydistributed,andtheloserssupported.Thisrequires:

� ‘Enabling institutions’toreskill,retool,andcompensateaffectedworkers;253

� Policiesdesignedtocompensatethosewholoseout;254and

� Targeted‘place-based’ employment transition policiesinareasathighriskofdisruption.255

Equipping people with the right skills and resilience so they are flexible in the face of changing labour marketscanlimittheharmtopeople’slivesandlivelihoodsfrompotentialandactualjobdisplacement.Economic history shows that economies that embrace change are better able tomanage structural adjustment,as they do not inhibit the flow of resources from declining, low-productivity sectors to new, more productive sectors.256

251 IPPREnvironmentalJusticeCommission(May2020)Faster, Further, Fairer: Putting People at the Heart of Tackling the Climate and Nature Emergency252 OECD(September2019)Accelerating Climate Action: Refocusing Policies through a Well-being Lens253 BankofEngland(May2018)Ideas and Institutions – A Growth Story254 ExamplesincludeproposalsfortheUSDemocraticGreenNewDealtoreturncarbontaxrevenuestohouseholds,orformerLondonMayorKenLivingstone’s popularuseofcongestionchargerevenuestofundextracapacityonLondon’sbusnetworks.

255 BenjaminAustinetal.(April2018)Jobs for the Heartland: Place-Based Policies in 21st Century America256 DimitriZenghelisetal.(2018)Stranded assets: then and now;LlewellynConsulting(October2014)Tough Love

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The UK should put in place a national low carbon skill strategy to support the existing andfuture workforcein the long-term with the provision of necessary skills as the economy decarbonises. Thiscouldincludeembeddingsustainabilityacrosstheeducationalcurriculum,includingareviewofapprenticeshipstandardsandT-levels,andthesettingupofsustainabilitystandards,metricsandlabelsfortertiaryleveleducationcourses.Centralandlocalgovernmentcanworkcollaborativelywithbusinessesandeducationalinstitutionstodirectinvestmenttopartsofthecountryinneedofeconomicregeneration.ThiswasdonesuccessfullywiththeSiemens/Ørsted/ABPinvestmentsnearHullandtheMHIVestasontheIsleofWhite,whereBEIS,LocalEnterprisePartnerships,manufacturers,projectdevelopersandhighereducationinstitutionsallworkedtogether.

Ørsted and Siemens Gamesa have been pivotal in growing the Humber offshore wind cluster. Thisincludeseducationandtrainingfacilitiesandeasytransferbetweenroles,forexamplethroughdevelopingthe‘OffshoreEnergyPassport’thatenablesoffshoreworkerstotransferbetweentherenewableandextractionindustries.257Likewise,Teessidehosts58%oftheUK’schemicalsindustryandisresponsiblefor20,000jobsand£4bnofexportsperyear.ThereisaclusterofleadingenergyintensiveindustriesinTeessideworkingtogethertocreatethe‘Teessidelowemissionsindustrialzone’,throughthedevelopmentofsharedemissionreductioninfrastructure.Bysharinginfrastructure,logistics,energyandutilities,andbyexchangingrawmaterials,productsandresidualandwastematerials,companiesintheclustercanoperatemoreefficiently,enablingthemtoreducetheircostsandboosttheircompetitiveness.

The government should consider adopting a standardised grading or standard mark system for tertiary training and education coursestomarkcompatibilitywithalowcarboneconomy(basedonthesameprinciplesasTCFDdisclosure).Itwoulddemonstratetheresilienceofskillstoclimaterisk,litigationriskandtransitionrisk,whichencompassestheriskofpolicieshostiletoemissionsandnewtechnologiesthatundercutconventionfossil-fuelbasedsystems.

It is unknown exactly how long social distancing measures will be in place, how consumers will behave out of the crisis and what the structural change might look like in the long term. Largenumbersofworkershavebeendisplacedandmayhavenojobtogobacktoafterlockdownsarelifted,athugesocialandpersonalcost,anditisthemoredeprivedareasandgroupsthatwillsuffermost.PoliciesneedtobecarefullythoughtthroughtoensureCOVID-19doesnotleadtopermanentincreaseininequalityandsetbackthelevellingupagenda.AnumberofmeasuresareneededintheUK’srecoverypackage,including:

� Jobguarantees,whicharelesscostlythanlong-rununemployment,butshouldallowsufficientflexibilitytoallowworkersandemployerstorespondtoachangingjobsmarket.

� Retrainingandreskillingforthefuture,whichhasahugereturnbutneedsmuchbettercoordinatedgovernmentsupport.

257 Aldersgategroup(April,2019).Zeroingin:capturingtheopportunitiesfromaUKnetzeroemissiontarget

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� Policyshouldsupportfirmstoovercomebarrierstoin-housetrainingthroughhumancapitaltaxcreditsandpartnerships with education providers258

� ActiveLabourMarketPolicies(ALMPs)thathelppeoplewhohavebecomerecentlyunemployedtofindalternativeemploymentorremainintheactiveworkforce.

These policies can be targeted to protect the livelihoods of people in areas highly disrupted by COVID-19 and the forces of change, suchasNortheastEnglandandSouthWales.Theycanalsobecoordinatedwithplace-basedstimulusinvestmentsthatcreateshorttermdemandforlabourandsupportlocalSMEs.

Employment policies in recovery will also need to create new job opportunities for youth, women, disadvantaged students, apprenticesandthosewhohavebeenoutofthelabourmarketforsometime.Itwillbeimportantforpolicytogobeyondprotectingexistingjobs,importantasthathasbeeninthecrisis.A crucial part of this will be ensuring that education institutions are responsive to the changing labour market and are flexible as the green recovery accelerates the low-carbon transition and the demand for skills shifts. Universities,colleges,schoolsandemployersallhavekeyrolestoplayinequippingworkerstodealwithandembracethechangesfromCOVID-19andthosethatwillemergeintheyearstocome.Toachievethis,educationinstitutionsneedtoworkcloselywithothereconomic,environmental,technologicalandsocialinstitutions.Fortunately,manyareasinthemid-andnorthofEnglandhavestrongeducationinstitutions,establishedduringtheheydayoftheenlightenmentandindustrialrevolution.Theseinstitutionsremainstrongbutgoingforwardtheywillneedadequatefundingtoensuretheycanplaytheircrucialroleinskillingandreskillingaspartofacoherentlevellingupandnet-zeroagenda.New technologiescanalsohelpdisadvantagesstudentsaccessuniversity.259

Policies also need to protect viable firms in the regions that will offer the new jobs of the future. Multinationalcorporations,withhighproductivityandgreaterresilience,willprobablyneedlesssupportbutmayneedincentivestoremainorlocateintheregions.Small,start-up,innovativefirmswillneedsupport(asalreadyannouncedbythegovernment)asthesefirmswillbeasourceofnewmoreresilientjobsinthefuture;thissupportcanbetargetedtosmall,innovateregionalfirms.SMEs,whoemploymostoftheUK’sworkersacrosstheregions,willneedstrongsupporttoadoptnewtechnologies,newmanagementtechniquesandtoaccessnewmarketstogrowandexpandhighproductivityemploymentopportunities.SMEsaccountformostofthe“longtail”ofUKcompanieswhohavefailedtoinvestsufficientlyinprocesses,productsanddigitalinfrastructure,andwhichhavedraggedproductivity.Thegovernmentneedstofindawayofraisingproductivityinthosetailfirms.LocalMayors,whohavelocalknowledgeandaremoreintouchwithlocaleconomicandsocialconditionsandsentiment,canjointhecentralgovernmentindesigninganystimulusandsupportmeasuresfortheregions.The38Local Enterprise Partnerships(LEP)acrossEnglandcanalsohelpdeterminelocaleconomicprioritiesandundertakeactivitiestodriveeconomicgrowthandjobcreation,improveinfrastructure,andraise

258 LSEGrowthCommission(December2018)Sustainable growth in the UK: Seizing opportunities from technological change and the transition to a low-carbon economy

259 TheTimes(May2020)App gives poor pupils a mentor to guide them into top universities

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workforceskillswithintheirlocalarea.Regional leadersarealreadymovingforwardwiththeirowngreenrecoveryplansandtheseneedtobewell-coordinatedwithplansatthenationallevel.

The private sector can also take a leading role in the regions. Fundmanagers,localauthoritypensionfundsandfoundationsarestartingtointegratejusttransitionprinciplesintotheirclimateplans.BanksalsohavearoletoplayasajusttransitionoffersthemawayofbridgingtheirclimateresponsewiththeirprimarypurposeofservingtherealeconomyacrosstheUK.AJust TransitionInvestment Fundcouldbedesignedtochannelinstitutionalcapitalandprivatesavingsintogreeninvestmentswithpositivesocialimpactinleftbehindregions.260

6.9 POLICIES TO PROTECT NATURE AND BIODIVERSITY

Climate action and investing in the quality and resilience of nature can reduce the risks of pandemics and boost jobs in the short run. Theunderlyingcauseofdiseaseemergenceisthehugenegativeimpacthuman activitiesarehavingonecosystemsandtheirabilitytofunction.261TheworldandtheUKneedstoreconcile human development within the biophysicalenvironment.262Investinginnatureandbiodiversityshouldplayacentralroleintherecoverypackage.Environmental policiesthatpromotesustainableland-useplanning,reducedlandclearinganddeforestation,biodiversityprotectionandbiosecurity,provideancillarybenefitsandreducediseaseemergence.263IntheUK,thereareongoingissuesthatmainlycomefrombiosecurityissuesinthefarmingsector,suchasTBinbadgers.

The UK has one of the most depleted natural environments in the world. Thispartlyreflectsthefactthatthecountrywasthefirstintheworldtoindustrialise,butthetrendisongoing.Akeyindexof species’ indicator,basedonspeciesabundance,hasfallenby16%since1970;between2002and2013,theindexfellby3%.264

UK natural capital investments that boost ecosystem resilience and regeneration can deliver large economic multipliers quickly. Investmentsinrestorationofcarbon-richhabitatsandclimate-friendlyagriculture–suchasafforestation,expandingparkland,andenhancingruralecosystems–requiretolowworkertrainingrequirementsandminimalplanningandprocurementrequirements.265Theseinvestmentsshouldperformwellagainstcriteriaofshortrunmultipliers.Thingsliketreeplanting,restoringwetlands,greeningUKcities,andimprovingbiodiversity,oughttobelabour-intensivewithlimitedimportingoroff-shoring.Inthenearterm,itmightbegoodtomatchopportunitieswiththosewhomayhavelosttheirjobsintheretailandentertainmentsector(whotendtobeyoung,flexible,energetic,andgeographicallymobile).

260 GranthamResearchInstituteonClimateChangeandtheEnvironment(December2019)Uniting the nation through climate action: Why the just transition could be the next big thing for Britain

261 JohannaLindahlandDeliaGrace(November2015)The consequences of human actions on risks for infectious diseases: a review262 UNEP(2016)UNEP Frontiers 2016 Report: Emerging Issues of Environmental Concern263 IPBES(April2020)COVID-19 Stimulus Measures Must Save Lives, Protect Livelihoods, and Safeguard Nature to Reduce the Risk of Future Pandemics;TophAllenetal. (October2017)Global hotspots and correlates of emerging zoonotic diseases;KateJonesetal.(February2008)Global trends in emerging infectious diseases

264 RSPB(2016)State of Nature 2016265 CameronHepburn,etal.(2020),Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?OxfordReviewofEconomic Policy36(S1),forthcoming.

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Natural capital can combine with adaptation measures to generate multiple co-benefits. Forexample,improvingandextendinggreenspacestoabsorbcarbonandparticulates,retainwater,andaddressheatislandeffectsbenefithumanphysicalandmentalhealth.Theyalsorestorebiodiversityandstrengthenecosystems.Tomaximiseonthesebenefits,itrequirestheextensionofthenaturalcapitalaccountstocoverallinterrelatedsectors.London’sgroundbreakingnaturalcapitalaccountsshowedhowlearningandrelaxingalongsidenaturepromote children’s healthydevelopmentandnurturepositiveenvironmentalattitudesandvalues.266Disadvantagedareashavetheleastaccesstogreenlandscapes.Bettergreenspaces,startingwithsocialhousingestates,wouldhaveapositiveimpactonhealthandwell-beingaswellassocial inclusion andeconomic opportunity.267

BOX 9: NATURAL CHOICE: NATURE PROJECTS AND JOBSAgroupofnatureCEO’shavepresentedproposalsforinvestmentinnaturethatweredelayedbythepandemicorcouldbestartedrapidly.Foraninvestmentofaround£300million,theselarge-scalehabitatinvestmentprogrammescoulddeliverskilledandlow-skilledjobsacrossurbanandruralareas–5,000skilledand5,000low-skilledjobsinconstruction,agricultureanddelivery–and200,000ofthe500,000hectarepriorityhabitatcommitmentsetoutinthe25YearPlan.Theprojectsalsohaveseveralattractiveco-benefits.Theycanbuildresilienceagainstclimateimpacts,reversedeclinesinbiodiversity,provideslocalandregionaleconomicbenefitsthatcanhelptolevelupandprovidebetteraccesstonature.Thegovernmentshouldprioritiseinvestmentsincriticalassetsthatarenotfungiblewithotherhabitatsorformsofcapital,forexamplewetlandrestoration.

Project types, examples and delivery organisations include:

� Habitat conservation and management.Forexample,restartseagrassrestoration(WWF,ProjectSeagrass,SkyOceanRescue)andprojectstohaltdeteriorationofrarewildflowermeadows(WildlifeTrusts).

� Endangered species and rare breeds.Forexample,reintroductionprogrammesandpopulationmonitoringofendangeredspecies(WildlifeTrusts,Buglife).

� Habitat creation and restoration.Forexample,resumepeatlandrestorationinScotland(Buglife)andrestartmarinehabitatrestorationprojects(MarineConservationSociety).

266 GLA2017NaturalCapital;AccountsforPublicGreenSspaceinLondon.267 CampaignforBetterTransport,CPRE,FriendsoftheEarth,GreenAlliance,Greenpeace,LondonWildlifeTrust,NationalTrust,RSPB,WWF.,2106GreenerLondon: whatthenextmayorcandotoimproveourcapital

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� Water quality and flooding. Forexample,restartprojectstoprotecthabitats,improvewaterqualityandquantity,andreducefloodrisk(RiversTrust,WestcountryRiversTrust)

TheRSPBEngland’sstrategicpipelineofprojectsalsoprovidesimmediateinvestmentopportunitieswhicharecost-effective,createnewjobsandgeneratesignificantco-benefits.Theyidentifyfivepriorityprojectsrequiringaround£80millionininvestment:theHaweswaterChangeProject,theCompletingtheOuseWashesHabitatCreationProject;theOxford-Cambridge(OxCam)ArcProgramme;theEastCoastWetlandsProgramme;andtheCurlewProject.

Combineddeliveryoftheseprojectswouldpotentiallymeetthegreenspacestandardandprovidevisitsforover1millionpeopleeachyear,store200,000tonnesofadditionalcarbon,withaneconomicvalueof£70million,protectover50homesinEastAngliaandtheNorth-Westfromflooding,safeguardatleast50priorityspecies,includingnationallysignificantpopulationsofendangeredcurlewandgodwit,restore5,700hectaresofpriorityhabitat,supportawiderangeofbusinessesincludingengineers,developersandfarmingbusinesses,createover3,000daysofvolunteerefforteachyearand45directconservationjobs,andguaranteethewaterqualityatHaweswaterReservoir,whichprovides25%oftheentiresupplyfortheNorth-WestofEngland.

Source:RSPBEngland

The Treasury should continue to bring forward its plans to support natural capital in the UK and implement the recommendations of the forthcomingDasgupta Reviewon the Economics of Biodiversity. Forexample,theMarch2020Budgetannouncedthecreationofaforest“thesizeofBirmingham”acrossEnglandoverthenextfiveyears,contributingtothewiderUKtargettoplant30,000newhectareseveryyear,asadvisedbytheCCC.Someofthe£640millionfortheNatureforClimatescheme,alsoannouncedinthe2020Budget,couldbeusedtoleverageprivateinvestment,enablingthegovernmenttoreachitstreeplantingtargetsfaster,orevenexceedthem.Bringingforwardtheseinvestments,aswellasinvestmentsinpeatlandrestoration,willrequirethecreationofnewinvestmentmodelsfornaturalcapital,forexample,multi-investorfundswithmatchedfundingfromgovernment.Theinvestorsmightbecarboninvestorsseekingofftakeofcarboncreditstoinsurancecompaniesinterestedinfloodprevention.268

268 CommitteeonClimateChange,CostandBenefitAdvisoryGroupforthcoming.

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It is important that climate change and biodiversity are addressed together as they interact closely.269Forexample,protecting intact forest landscapescanbenefitbiodiversityconservationandglobalcarbonstorage,whileatthesametimepreventingtheriskofdiseasetransmissiontohumans.270Intactecosystemsmayplayanimportantdisease regulation rolebymaintainingnaturaldiseasedynamicsinwildlifecommunitiesandreducingtheprobabilityofcontactandpathogentransmissionamonghumans,livestock,andwildlife.271/272

The UK has vast potential to plant trees, restore degraded lands and wetlands. Plansarewellspecifiedinthe25-Year Environment Plan.273Theseprojectswouldbeparticularlybeneficialinrecoveryastheyhavehighshortrunmultipliers–theyarelabourintensivebutcannotbeoffshored.Suchcapitalspendingwouldbefast-actingbecauseworkertrainingrequirementsarelow,manyprojectshaveminimalplanningandprocurementrequirements,andmostfacetsoftheworkmeetsocialdistancingnorms.Theyalsohavethepotentialtogeneratehighreturnsinthelongrun.SuchinvestmentscouldstrengthensolidarityandengagementbetweencommunitiesaroundtheUK.

BOX 10: UK REGULATION FOR NATURAL CAPITAL INVESTMENTStrongregulationcanalignexpectationsaroundthegovernment’snaturestrategyandprovidethecertaintybusinessesneedtoinvestinnaturalcapital,helpingtodeliverjobsandotherco-benefits.Thegovernmentshouldprioritiseitsexistingambitiousprogrammeofregulatorychange.Regulatoryuncertaintyorroll-backwouldbeamistake,transferringcostsfromthelossofnaturalcapitalandbiodiversitytothepublicandhurtingbusinessresiliencelongterm.Onerecentexampleisevidencethatairpollutionexacerbatesthepandemic;countriesthathavecutairqualityregulationshavebeenhitharder.ThreeBillsshouldbereformed,strengthenedand/oradoptedwithurgency.

The Agriculture Bill –TheAgricultureBillsetsupanessentialframeworkforinvestmentinpublicgoodsandfuture-proofingthefarmingsectorbyinvestinginthenaturalresourceswhichunderpinit.PolicydevelopmentandconsultationonanEnvironmentalLandManagementschemeshouldnotbedelayed,norshould

269 RobertWatsonontheBBCRadio4TodayProgramme17/04/2020270 JamesWatsonetal.(February2018)The exceptional value of intact forest ecosystems271 FeliciaKeesingetal.(December2010)Impacts of biodiversity on the emergence and transmission of infectious diseases272 TheauthorsthankCharlotteTaylorforthiscontribution.273 HMGovernment(2018)A Green Future: Our 25 Year Plan to Improve the Environment

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INSTITUTIONS AND POLICIES FOR BUILDING TO LAST AFTER COVID-196. developmentofparallelschemestoenhanceanimalwelfareandfarmproductivity.Aone-offschemeofgrantsshouldalsobeconsidered,supportingtransitionoffarmstobeabletomeetthehigherenvironmentalstandardsrequiredundertheUK’sfutureagricultureregime.Thispackageofreformwillimprovecost-effectivenessofpublicinvestmentsandformpartofagreenrecovery.GapsintheBillneedtobeaddressedaroundlong-termfundingandbudget-settingprocesses,regulatorystandardsandenforcement,andlegislativeassurancesthatdomesticstandardswillnotbeundercutbyfutureFreeTradeAgreements.

The Fisheries Bill–Fishstocksareatextbookexampleoftheinterdependenceofecologyandtheeconomy.Fisherieshaveatheoreticallyinfiniteeconomicvalueasalow-carbon,renewableresource,butavaluethatcouldfalltozerothroughover-exploitation.Aspartofawiderprogrammeofoceanrecovery,theFisheriesBillshouldbestrengthenedtoensurethatfisheriesareclimate-smartandthatcatchlimitsaresetatsustainablelevels,witheffectivemonitoringandenforcement.

The Environment Bill –TheEnvironmentBillcanplayakeyroleinbusinessandpublicconfidenceintheGovernment’splanstorestorenatureandmakeouruseofnaturalresourcesmoresustainable.ThetargetsintheBillcanhelpdriveimprovementsinthelongtermandprovidebusinesseswithcertainty.ThetimetablefortheBillanditsimportantprovisionsshouldthereforenotbedelayedfurther.Resumingtheworkcandemonstratedomesticleadershipastheworldseekstoagreeanewglobaldealfornatureatnextyear’sConventiononBiologicalDiversityconference.TheBillshouldbestrengthenedintwowaysinlightofthecoronaviruscrisis.First,thegovernmentshouldsetclearlong-termtargetsandcredibleinterimtargetstodrivepublicandprivatesectoraction.Secondly,theBillshouldincludeinterdependenttargetsthatreflectthecomplexityoftheissuesathand.Forexample,itshouldincludetargetstoreversespecieslossandimprovetheextentandconditionofhabitats,withlong-termgoalsfortherecoveryofnature;andagoaltoreducetheUK’sglobalenvironmentalfootprintshouldbeapriority.Thisshouldstandalongsideregulatoryrequirementsforreportingandduediligenceinsupplychainsforcommoditiesthatriskcausingdeforestationandconversion,asproposedbytheGlobalResourceInitiative.

Source:Wildlife and Countryside LINKandAldersgateGroup

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6.10 POLICIES FOR SCALING UP PRIVATE FINANCE

Significant challenges around finance must be overcome. TheUKgovernmentwillneedpoliciestounlockallpoolsoffinanceandutilisethemmoreeffectivelytosupportrecoverypackagesandbeyond.Thefocushereisonscalingupprivatesourcesoffinancetohelpfundtheinvestmentsneededforrecoveryandlong-termtransformation.

Asset managers and investment banks are increasingly interested in sustainable investments,recognisingthegrowingrisksassociatedwithstrandedordevaluedhighcarbonassets.Thisissupportedbyinvestorrequests,theneedforportfoliodiversificationandpipelineorigination,socialresponsibilityandinsomecountries’regulatoryrequirements.Fortunately,thefinancialsectorcommitmenttonetzerohasdeepenedthroughthecrisisasESG funds have outperformedinthecrisisinwaysfewexpected;274andrisk adjusted returns from investment in green assetsarenowdemonstrablyhigherthancarbonintensivealternatives.Theyhavealsofaredbetterthroughthecrisiswithgrowingopportunities,giventhelargefallsingreentechnologypricesinrecentyears.275

Despite this interest, in 2016, only 1.2% of the £8 trillion in assets under management(AUM) in the UK were invested in ESG funds.276Attheendoftherescuephase,despiteampleprivatesavingsandgrowinginterestingreeninvestments,mobilisingmoreofthesesourcesofprivatefinancemaybeimpededbyhighriskpremiaandotherlong-standingmarketfailuresandbarriers.Confidenceintheconsistencyandcredibilityofadurableandsupportivepolicyenvironmentisessentialtocreatedemandforapipelineofprojects,whilesimultaneouslyloweringinvestors’perceptionofpolicyrisks.Thisisvitalinsectorssuchasenergy,transportandbuildingswhichareheavilyregulatedandpolicydriven.Forexample,abigpartofthecostreductionsofthelast10yearshavebeenduetoareductioninthecostoffinancebroughtaboutbyimplicitriskguaranteesassociatedwiththeContractforDifference(CfD)model.Arecent studyfoundthatevery1%reductioninthecostoffinance,thelevelisedcostofenergy(whichcapturescapitalandoperatingcostsoverthelifetimeoftheinvestment)ofoffshorewindprojectsgoesdownby6%.277

New institutional structures will be crucial to tackle these market failures and barriers and bring the cost of capital down. Reformstocreatethenecessaryinstitutionalstructureswereexaminedinsection6.3.Hereweexaminesomeofthekeymarketfailuresandbarriers,andwaystotacklethese,thatareneededtoalignallfinancialflowsandstocks(portfolios)withnetzeroandshiftthefinancialsystem.Thegovernmentneedstopreparenowforwaystounlockprivatefinance.

274 BloombergGreen(May2020)Blackrock Joins Allianz, Invesco Saying ESG Funds Outperformed 275 FinancialTimes(April2018)Green investing generates returns, not just a warm glow276 DepartmentforInternationalTrade(May2018)The UK – a natural home for green asset management277 EnergyUK,2018,OffshoreWindMarketDevelopmentandCostReductionBackground,February:

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MOBILISING PRIVATE FINANCE

The UK can build on its successinkeyareassuchasoffshorewindbyinnovatingnewfinancialapproachesforscalingupinvestment,including:exploringgreeningcentralbankassetpurchaseprogrammes;issuinggreensovereignandmunicipalbonds;harnessingpensionfundinterestinrealassetsandutilisingtheUK’sstrengthininvestmenttrusts;andimprovingprojectpipelinedevelopment.Therearealsoinnovationsinfintechthatcanhelptomobiliseretailinvestors.

Quantitative Easing (QE) programmes after the GFC did not consider climate change, and evidence suggests they leaned towards assets from carbon-intensive companies.278TheBankofEngland’sfirstclimate-related financial disclosureinJune2020showstheirsterlinginvestmentgradecorporatebondholdings,althoughonlyaround2%oftheirtotalAssetPurchaseFacilityinvestments,areconsistentwith3.5°Cofglobalwarming.Centralbanksnowhaveampletoolsto balance the multiple objectives of QE,includingensuringitsupportsstronggreenrecoverypackagesandismoreinlinewithnet zero.279Ataminimum,theBankofEngland’sQEprogrammescanmoreselectivelypurchasecorporatedebtfromcompaniesona“donoharm”basis,implyingcompaniesthataremisalignedwithnetzerogoalswouldnotbeabletoparticipate.Thesecompaniesarenotwellpositionedtodealwiththemajorseculartrendsandthelong-termnetzerotransformationandcouldinstead,wheretheyarelargeemployers,participateingovernmentbailoutswithsensiblegreenconditions.

Much of the funding for a sustainable recovery could come from increased government borrowing in the form of additional sovereign bonds, as well as other public issuance.280IntheGreenFinanceStrategy,theUKGovernmentindicatedthatitdoesnotplantoissueasovereigngreenbondatpresent.Theexperiencefromothercountriesindicatesthatsovereignbondscanhaveanimportantdemonstrationeffectbothacrossthefinancialsystemandwithingovernment,giventheneedtoidentifyqualifyingareasofpublicspending.Inaddition,sovereignbonds(alongwithissuancefromotherpublicbodies)canalsohelptochannelprivatesavingstoprioritiesthattendtobeundersuppliedbythemarket(suchasresearchanddevelopment,SMEfinanceaswellasthejusttransitionactivitiesattheregionallevel).

The Government and the new Green Finance Institute could work with others to develop a strong strategy for a green and sustainable bond market in the UK, at the national, corporate and local level. Thiscouldidentifythebarriersfacingthismarketandhighlightpracticaloptionstoscaleupissuanceofcommunity,corporateandpublicsectorbonds,whichaccelerateflowsofgreenandsustainablefinanceinacost-effectivemanner.Betterlocalfinancialsolutionscouldbeparticularlyusefulforfundingeffectivelocalinvestmentsintheregionsandinnovationsareemerging.Forexample,Box11examinestheemergenceofcommunitybondsforfundinglocalauthorityrenewableenergyinvestments.Inaddition,transitionfinanceinstrumentslikesustainability-linkedloansandtransitionbondscanprovidesolutionsforhigh-carbonsectors

278 CentreforClimateChangeEconomicsandPolicyandGranthamResearchInstituteonClimateChangeandtheEnvironment(May2017) The climate impact of quantitative easing

279 INSPIRE(June2020).A Toolbox for Sustainable Crisis Response Measures for Central Banks and Supervisors.280 NickRobinsetal.(October2019)Financing inclusive climate action in the UK: An investor roadmap for the just transition

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wherethereisaneedtoundertakecomplexlow-carbontransformationsandwhichareoftenineligibleforsustainablefinanceproductswithstrictuse-of-proceedsrules,generallyforgreenprojects.

BOX 11: WISDOM OF CROWDFUNDING: MUNICIPAL BONDS FOR THE TRANSITIONTheUKlacksthethrivingmunicipal‘greenbond’marketthatcanbefoundinotherEuropeancountries,suchasSweden.281Crowdfundingmodelscouldofferinvestorsaninterestratewithhigherrewardsthanholdingcash,butlowenoughtoprovidefinancethatissufficientlycheapforcouncilstomeetinstitutionalrequirements.LocalUKauthoritiesmust,forexample,seekthecheapestsourceoffinancepossible,andthePublicWorksLoanBoardcurrentlyoffersfundsatconcessionarypublicsectorinterestrates.

Thefirst‘CommunityMunicipalBond’modelwasissuedbyAbundanceandSwindonCouncilin2016,raising£1.8millionat6percentover20yearsthroughlocalandnationalinvestors.ThismodelisnowbeingtrialledforrenewableenergybytheUniversityofLeedsandLeedsCityCouncil.Thepilotisaimingtoinstallsolararraysoncouncilbuildings,fundedbyacrowdfundedmunicipalbondthroughtheAbundanceplatform,andhasbeensupportedbytheDepartmentforDigital,Culture,MediaandSport,andLocalPartnerships.TheprojectwilllaunchbondsopentocitizeninvestorsinLeeds.

To harness pension fund interest in real assets, a range of challenges will need to be overcome to mobilise private capital. ThesearemanyofthechallengesthattheNIBcantackle,asdescribedabove, including:projectpipelinedevelopment,reducingtransactioncosts(suchasaroundprojectoriginationandpreparation),andreducingtheperceivedhighrisksofgreeninvestmentsthroughde-riskinginstruments,suchasguarantees.

281 NickRobinsetal.(October2019)Financing inclusive climate action in the UK: An investor roadmap for the just transition

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A crucial task for the new NIB will be to work with the National Infrastructure Commission to step up project pipeline development that is net zero aligned.282Acommoncomplaintamonginvestorsisthatthereisnoshortageofmoneylookingforreturns,butthereisalackofscaledupopportunity.Thegovernment,throughtheNIB,canprovidewhatisnecessary.Itcanprovide:leadership,throughchampioningthedevelopmentofarobustprojectpipeline;transparency,bydevelopingnetzerosectoralinvestmentplansthattakeaccountofthefactorsdiscussedaboveonlocalUKconsiderations,bysourcingprojectsandusingdataeffectively;priorities,throughexpeditingstrategicallyvaluableprojects;project support,includingthroughtheinvestment-enablingenvironmentsthataffecttherisk-returnprofilesofprojectssuchaspolicyincentives,thesupplyofpublicfundsandinstitutionalsupport;andprovideeligibility criteriatoalignprojectswithlong-termclimateobjectives–combinedwithdynamicadaptabilitytokeepprojectpipelinesalignedwithpolicyobjectivesovertime.ThiswouldpreventthecurrentsituationwheretheNationalInfrastructureandConstructionProcurementPipelinefor2020–21,publishedJune2020,showsover£8billionworthofplannedspendingonhighcarbontransport.

Figure8showsthecompositionofthemajorpipelinecategoriesintermsoffundingsourcefollowingthe2008financialcrash.Thethreeclassificationsare:public,private,oramixtureofboth(thatis,private-publicpartnerships).Acrossallcategories,72percentor£207billionofthetotalexpenditurefrom2011/12to2019/20wasplannedfromprivatesources(withenergyaccountingforthebulkofthis).Public/privatepartnershipsaccountedfor20percentor£56billionandpublicspendingfor9percentor£25billion.

282 OECD(November2018)Developing Robust Project Pipelines for Low-Carbon Infrastructure: Policy Highlights

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INSTITUTIONS AND POLICIES FOR BUILDING TO LAST AFTER COVID-196. BOX 12: UNLOCKING PRIVATE DEBT FINANCE FOR NEW ENERGY INFRASTRUCTURE: ZENOBĒ ENERGYZenobēEnergyisanindependentUKoperatorofbatterystorageassets.Arecent£25millionindebtfundingfromSantanderwillsupportitsambitiousUKgrowthplans.Thedebtwillfinancearangeofinvestments,including:theconstructionandpurchaseofadditionalbatterystorageprojects;‘behindthemeter’servicestoimprovepowersupplyresilienceandreduceenergycostsforcommercialandindustrialcustomers;andprovideservicestothefleetvehiclesectorincludingthedesign,operationandfinancingofbatteriesandassociatedcharginginfrastructure.GaryRoscoe,partneratTLT,thelegaladvisorforSantanderontheproject,commentedthat“energystorageisbecominganincreasinglyattractivepropositionforequityinvestorsanddebtfundersalike,givenitssignificantroleintheenergysystem.Santanderhavetakenaninnovativeapproachtothetraditionalprojectfinancestructuretoofferdebtfundingforthisproject,andweexpecttoseeincreasinginterestininvestmentopportunitiesofthiskindoverthecomingyear.”TLTalsocommentedmorebroadlyondebtfundingforrenewableenergyandcomplementaryinvestmentssuchasbatterytechnology.“Traditionalrenewablegenerationassetswithsubsidysupportareaproven,securepropositionforprojectfinance.However,withthecurtailmentofsubsidiesandtheemergenceofnewtechnologiesandopportunities(suchasenergystorage),fundershaveneededtorevisittheestablishedapproachtodebtstructuring.Thereisnoone-size-fits-allapproachfornewrenewablegenerationprojectsanddevelopinganunderstandingofthewiderlifecycleandassociatedrevenuestreams–particularlyinthecontextofmulti-technologyprojects–willbekeytoopeningupthefundingmarket.Insomecases,acreditdecisioninformedbymoretraditionalleverageddebtconsiderations(asopposedtostrictprojectfinancecriteria)hasenabledaviabledebtsolutiontobeconfigured.But,asthemarketdevelops,we’dexpecttoseeanincreasingnumberofmoretailored,flexibledebtdealscometomarket.”

Source:TLT

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Innovations in fintech can also leverage retail investor capital. Forexample,digitalcrowdfundingplatformscanbringinretailinvestorsdirectlytolabourintensivecleantechnologyinvestments,includingenergyefficiency.Itcanhelptotacklemarketfailuresandscaleupfinance,whichisespeciallyusefulatatimewhensourcesoffinancearestressed.Thisisinanearlystagebuthashugepotential.Fintech,e.g.blockchain,candrivedowntransactioncostsandmakeriskevaluationeasier.Thereisnonethelessaneedforregulatory,governanceandpolicyclarity,aswellaseducationandawarenessaroundthedigitaltools/platformsthatareavailable.

ALIGNING FINANCIAL FLOWS AND TRANSFORMING THE FINANCIAL SYSTEM

All finance needs to be aligned with the Paris Agreement goals. It will be crucial to reduce information asymmetry, which involves improving and possibly standardising metrics for the classification of assets as ‘green’, ‘brown’ or in transition to green, toprovideinvestorsandmarketswithaclearerindicationofwhichactivitiesareconsideredsustainableandtomitigate‘greenwashing’.TheEU Taxonomyprovidessuchatool.Itcanhelpinvestorsunderstandwhetheraneconomicactivityisenvironmentallysustainable,andtomanagethetransitiontoanetzero.Whileagoodfirststep,theEUTaxonomywillneedtoovercomelimitationsinitsmethodology.Forexample,thetaxonomyspecifiesstaticmetricsandthresholdsagainstwhichaprojectisassessedascompliantornot(greenorbrown).Thisdoesnotrecognisethe“50shadesofgreen”onthetransitiontogreen.ThetaxonomyisalsolimitedtosectorsthatarecoveredbyNACEcodesanditartificiallyseparatesmitigationandadaptationprojectswhentheyareofteninterwoven(e.g.alow-carbon,climateresilientproject).TheUKhasproposeddevelopingitsowntaxonomy.

While metrics are important, they are part of a much wider programme of action to transform the financial system and ensure all financial decisions take climate change into account. Tomitigatetherisksoffinancialinstabilityduetoclimatechange,governments,centralbanks,regulatorsandthefinancialindustryneedto:improvetheinformationanddisclosureofclimaterisk(reporting);transformriskmanagement(risk);andenableinvestorstomakeinformeddecisionsontheclimatereadinessoftheirportfolios(returns).MarkCarney,inhisroleasthePrimeMinister’sfinanceadvisorforCOP26,istakingforwardworktoalignandtransformthefinancialsystemthroughthisthree‘R’framework:reporting,riskmanagementandreturns.283

283 MostrecentlyinhisremarksatthePetersbergClimateDialogue,April29,2020.Toinformclimateriskmanagementoffinancialregulatorsandindustrypractitioners (includinginvestorsandinsurers),theOECDislaunchingaseriesofworkshopsin2020–22onClimateScience,Policy,RegulationandPractice.

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� Refine reporting methods and develop pathways to make them mandatory : Whatismeasuredgetsmanaged.284Policymakersincreasingly recognisethatinvestmentsmustberesilienttoaresourceconstrainedlow-carbonworld,preventinglockingintoarangeofassets(physical,butalsohuman,intangibleandnatural)thatmayberendereddevaluedorstranded.285TheTaskForceonClimate-relatedFinancialDisclosures(TCFD)goesbeyondbackward-lookingemissionsdisclosuretoencouragecompaniestoreporttheirstrategic forward look,orriskmanagementandhedgingstrategy,todecarboniseactivitiesandsupplychainstosafeguardshareholdervalueagainsttransitionrisks.286Therehasalreadybeenhugeprogressonthelargelyvoluntary,privatesectorled,TCFDwitharound$120trillionofbalancesheetcapitalbehindit.ThereisnowaneedtorefinetheTCFDstandards,includingimprovingmetricsandtaxonomies,anddeveloppathwaystomakethemmandatoryintheUKandacrosstheglobe. Canadahaspushedtheenvelopeandintroducedmandatory reporting for employers accessing liquidity assistanceduringthecrisis.287TheUKcouldconsiderTCFDasabailoutcondition.RevisedTCFDstandardsshouldbecomemandatoryforalllargeUKbusinesses,includingalllistedcompaniesontheLondonStockExchange,byCOP26inNovember2021.

� Rapidly accelerate the development of better data and analytic tools to improve climate risk management: Astepchangeinriskmanagementisneededtoensurefirmsandinvestorscanmanageandmeasuretherisksinthetransitiontoanet-zeroworld.Thepurposeistostretchhorizonssothatfirmscanmanagetherisksbetterandtakedifferentdecisionstodayinthelightofotherwiseopaquefuturefinancialrisks.Akeypartofthisisbettersupervisionandclimatestresstestingandscenarioanalysis.TheNetworkofCentralBanksandSupervisorsforGreeningtheFinancialSystem(NGFS)willsoonpublishguidanceonclimate-relatedscenarioanalysisandacollectionofreferencescenariosforusebyallinterestedcentralbanksandfinancialregulators.TheIMFisalsosteppingupitsworkonclimate stress testinginthecontextoftheFinancialSectorAssessmentProgram( jointwiththeWorldBank).288TheBankofEnglandshouldsetatimelinetoresumeitsstresstestingwork,suspendedinthecrisis,andworkwiththeNGFStobuildacoalitionofcentralbanksandsupervisorsthatcommittoclimatestresstesting.

� Ensure all financial firms and companies are focused on the opportunities and returns from the transition to net zero: around120countriessofarhavecommittedtoreducingemissionstonetzero.TheUnitedNations-convenedNet-ZeroOwnerAlliancerepresentsagroupofinstitutionalinvestorswithover$4.6trillioninassetsundermanagementwhichhaveunitedtoalign their portfolios with a 1.5oC scenario.289EverycompanyineveryUKsector–insurer,pensionfundandsoforth–shouldcommittodevelopanddiscloseanet-zeroplan,includingtheopportunitiesandreturnstheyexpect,byCOP26.Againstasimilartimeline,allUKprovidersofcapital,banks,investors’pensionsfundsandinsurersshouldcommittodisclosewheretheyareonthepathtonetzero,includingwhattheiroverallportfoliolookslikecomparedtoParisobjectives.

284 AldersgateGroup(October2019)Using TCFDs to manage climate risk: next steps for UK government, investors and businesses285 TheTaskForceonClimate-relatedFinancialDisclosures(June2019)TCFD: 2019 Status Report286 CentreforClimateChangeEconomicsandPolicyandGranthamResearchInstituteonClimateChangeandtheEnvironment(July2016) The importance of looking forward to manage risks: submission to the Task Force on Climate-Related Financial Disclosures

287 CanadianGovernmentLarge Employer Emergency Financing Facility Factsheet288 IMFBlog(February2020)Assessing Climate-Change Risk by Stress Testing for Financial Resilience 289 ResponsibleInvestor(April2020)Post-Covid recovery packages must quicken the pace to net-zero carbon emissions

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These steps will lay the basis for a more sustainable financial system that helps drive and smooth the transition to a zero-carbon and climate-resilient economy. Financialinstrumentstoachievethesegoals–includinggreenbondsdiscussedabove–needtobedevelopedandsupportedfurther.Thiswillrequirenationallyagreedtaxonomiesandstandardsthatutiliseimprovedclassificationmetrics.Forexample,theproposedEUGreenBondStandardwillbebasedontheEUTaxonomyandsowillinherititslimitations.Therelativeperformanceoftheseinstrumentsthoughtheeconomicdownturnshouldbemonitoredtodeterminetheirresiliencetoshocks.Asstated,initialevidencesuggeststhatESG-based instruments have fared better,althoughheightenedriskaversionhasaffectedallnewissuance,includingforgreenbonds.290

6.11 UK COMPETITIVENESS

As business spending and confidence has taken a hit from COVID-19, it may be tempting to argue that climate policies at this time would also create an unwanted hit to competitiveness. Evenintimesofastrongeconomy,incumbentsoftenclaimthatambitiousclimatepolicywillputUKfirmsatacompetitivedisadvantage,orevencausethemtorelocateelsewhereoutsourcingemissionstolessstronglyregulatedeconomies.Withveryfewexceptions,theevidencedoesnotsupportthesefears:

� RecentstudiesofEuropeanclimatepolicy,particularlyoftheEUemissionstradingsystem,suggestthattheimpacts have thus far been small,whetherintermsofcarbonoffshoring,economicgrowth,employmentorconsumerprices.Onlyafewenergy-intensivesectors(suchassteelandcement)areatriskofsignificantadverseeffectsifpolicyisstrengthened.291

� Eventhosewhoperceivethemselvesaslosersmayinfactbeactingagainsttheirowninterestsbydelayingtransition.Policiesandregulationswhichfirmscomplainwilldamagethemcanturnouttoincentivise innovationonceimplementedandboostproductivityandcompetitiveness.292Forexample,in2009theEUintroducedafleetaverageefficiencytargetof130g/kmby2015.Thiswaswidelyopposedbythemotorindustry,butitwasmettwoyearsearly.IntheUS,bycontrast,consumerandindustrycarlobbieskeptgasolinetaxationlowandimprovementsinfuelefficiencywereslower.Asaconsequence,theUScarindustrywasmuchlesspreparedforhigheroilpricesandtheglobalfinancialcrisis,animportantfactorinthebankruptcies of Chrysler and GeneralMotors in 2009.293

290 theInternationalNetworkofFinancialCentresforSustainability(FC4S)291 CentreforClimateChangeEconomicsandPolicyandGranthamResearchInstituteonClimateChangeandtheEnvironment(July2014) Burden or opportunity? How UK emissions reductions policies affect the competitiveness of businesses

292 LlewellynConsulting(October2014)Tough Love293 CentreforClimateChangeEconomicsandPolicyandGranthamResearchInstituteonClimateChangeandtheEnvironment(July2014) Burden or opportunity? How UK emissions reductions policies affect the competitiveness of businesses

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Newtechnologiesandprocessesarelikelytoundercuttheoldandrenderthemredundant.Thishasthepotentialtotransform the competitivenessofgoodsandservicemarkets.294Indeed,itunderliesoneofthekeyelementsoftransitionrisk.Sectors,companiesandcountriesthatareslowtoadapttotheneweconomyarelikelytolose(seeSection4.4).Theywillmissoutongrowingopportunitiesassociatedwithnewmarketsandriskbeingsaddledwithunproductiveassetsincludingworkers,managementandideas.AtatimeoflargedislocationandchangelikeCOVID-19,itismoreimportantthanevertoputinplaceincentivesforfirmstoresettheirbusinessmodelsandadoptandembracebothexistingtechnologies(movetothetechnologyfrontier)andalsoinnovate(movethefrontierout)sotheycancompeteintherecoveryandthenewsustainableeconomywebuild(seeBox8forexamplesofhowregulationscanachievethiswithhighlevelsofbusinesssupport).

6.12 BAILOUT CONDITIONALITIES

Recovery policies can be designed to have positive climate outcomes by attaching appropriate conditions for government support on hard hit firms and sectors. PollutingfirmsandsectorsarebeinghardhitbytheCOVID-19pandemicandtheyemploythousandsacrosstheUK,withmanyfossil-fuelextractionandusagesectorsarealreadyaskingforgovernmentbailouts.Governments can protect jobs and prevent locking in emissions by attaching conditions; there does not have to be a trade-off between climate and jobs. Propping up these companies will help to not only save jobs but also maintain a stronger foundation for economic recovery. Todothisgovernmentscouldofferloans,guarantees,capitalinjections,andwagesubsidies.Withtime,burdensomedebtcanbetradedforpublicequitystakesprovidedconditionsaremet.

Conditions can include requirements to embrace newer (yet proven) standards and business models and commit to climate targets, makingthemmuchmorelikelytosurviveandcompeteinatransformationtolow-carbonmarkets.Experienceshowsthatattachingefficiencyandemissionstargetstofinancialsupportcangivecorporationsanedgetocompeteinachangingmarketplace.OneexampleisthesuccessofthefuelefficiencystandardsattachedtoUS car industry bailoutsintheAmericanRecoveryandReinvestmentActof2009.Thissuccessfullyfosteredarangeofnewtechnologies.Therefore,itcanbeextremelybeneficialtoincludemorestringentemissionstargetstoguidethebailoutofairlines,hotels,carmakers,andmanyotherindustriesthatcaninvestinnewbusinessmodels,energyefficiencyand/orrelymoreonrenewableenergysources.Mostoftheknowledgeandtechnologiesarealreadyavailableandcost-effective;thisisnotaboutimposingrapidstructuralchangesonindustries.Forexample,conditionalbailouts for airlinescouldrequireachievementofnet-zeroemissionsby2050withintermediatetargetssetat5-or10-yearintervals,startingnowwiththeadoptionofarangeofexistingcost-effectivetechnologies.295Ifairlinesareunabletomeetthesetargets,bailoutfundingwouldbeconvertedtoequityattoday’sverylowstockmarketspotprices.296Accompanyinga

294 AldersgateGroup(May2020)COP26 delay must be used to maximise summit success295 TheConversation(May2020)Why airline bailouts are so unpopular with economists.SeealsotheworkoftheSolar Impulse Foundation.296 O’Callaghan,B.,andC.Hepburn(2020),‘Howtomakeairlinebailoutsgreen’,TheConversation.

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shorttermfocusonimplementingexistingtechnologies,airlinesshouldalsoworkwiththeUKsuniversities,aviation,avionicsandaeroenginemanufacturingexpertisetodevelopsustainableaviationfuelsindustry.Thisisapriorityareaforhelpingtotacklethissector’semissionsandstrengthenUKcapabilitiesandcompetitivenessinnewtechnologies.Inthiscontext,itiswelcomethattheDepartmentforTransportrecentlyannouncedthe‘Jet Zero Council’todecarboniseaviation.297

This is starting to happen in other countries. Forexample,conditions were attachedtotherecentAirFrance-KLMGroupandAustralianAirlinesbailouts,includingemissionsreductionstargets,sustainablefuelusetargets,andcutsindomesticflightswhererailalternativeslessthan2.5hoursintraveltimeexist.298

6.13 COMPETITION POLICY

As large liquid firms snap up small start-ups suffering financial diff iculty under lockdown, carefulpolicywillberequiredtopreventexcessivemarketconcentrationwhichcanunderminecompetitionandinnovation.299Itisalsoimportanttoconsiderperverseeffectsofsupportforhighemissionsfirms,andexplorethepotentialforattachingconditionality related to loweringemissionsor,beyondthecrisis,offeringextendedsupportforbusinessestransitioningtheirproductiontonetzero.300Flexibilityinstateaidrulesarerequiredduringthecrisis(asreflectedbythe EU’s temporary framework).301

Transactions are justified on the grounds that bankruptcy would be more damaging to competition than acquisition. WhiletheCompetitionandMarketsAuthority(CMA)hasindicatedthatitwill not relax the standardsbywhichitjudgesthesetypesoftransactionsasaresultofCOVID-19,substantialuncertaintiesastothestateoffuturemarketsmakeinformedjudgementschallengingfortheCMA.302Thiscouldhavealongtermimpactuponcompetitionbyenablingfirmswithsufficientaccesstofinancingtoannexfirmsfacingbankruptcy;asevidencedbyAmazon successfully making a minority investment in Deliverooviathefailingfirmdefence.303

297 Edie,2020 – Jet Zero Council: Government unveils new collaborative initiative to decarbonise aviation298 WorldofAviation(May2020)Air France Bailout Tied to Green Conditions 299 GCR(April2020)CMA will not relax failing-firm analysis during covid-19 pandemic300 TheGuardian(March2020)The Covid-19 crisis is a chance to do capitalism differently301 EuropeanCommission(March2020)State aid: Commission adopts Temporary Framework to enable Member States to further support the economy in the COVID-19 outbreak

302 HMGovernment(April2020)Summary of CMA’s position on mergers involving ‘failing firms’303 Linkedin(April2020)The ‘failing firm’ defence in merger control and the impact of Covid-19

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6.14 POLICIES TO LOCK IN BEHAVIOURAL CHANGE

The reaction to the crisis has shown the possibility of rapid changes in ways of doing things. Itoffersanopportunitytoembed climate- and productivity positive behaviours.304Thisincludeschangestotravelroutines,virtuallearningandhealthcare,theuseofurbanspaceandinvestmentinthecircular economytoreducerelianceonfragilesupplylines,notingthatindependencedoesnotequatetosecurity.Foressentialssuchasmedicalsuppliesorfoodorenergy,globalconnectivity and collaboration enhances resilience.305

However, some post-COVID-19 behavioural change may be incompatible with emissions reductions. ThereisanecdotalevidencefromChina,forexample,ofpeopleshiftingfrompublictransporttocars.Thistestifiestotheneedtoinvestinpublictransportcapacity,evenasrevenuesfall,toofferanattractivesubstitutetothecarandavoidsprawlandthehollowingoutofcities.

Behavioural innovation can also accelerate the pace of transition. Asbetterwaysofconsuming,producing,andlivingarefound,complementary changes in behaviour, institutions, and socialnormswillevolve.306Thepresenceoflow-costalternativestoemittinggreenhousegaseshasenabledanti-fossil-fuelcampaignstopointtosuperior energy alternatives.307

Anti-fossil-fuel norms are already concentrating moral pressure on the largest culprits of climate change.308Aspate of lawsuitshavebeenfiledagainstfossilfuelcompaniesandgovernmentsfordeceivingshareholdersandcitizensbyknowinglyundertakingorsupportingunsustainableanddamagingactivities.309Thesefactorsaredrivingglobalclimatepoliciesatanacceleratingpace:morethan1,500climatelawsandpoliciesworldwide;and106sincetheParisAgreementwasreached.Atthesametime,newbusinesslobbiesinfast-growingsectorsarestartingtochallenge the influence of incumbentsonpolicymakers.310Inmovingtowardsalowcarboneconomy,policyislikelytobothrespondtoandaccelerateinevitablechangesinsocialnorms.

Social feedbacks help make norms self-reinforcing and therefore stable. Formalinstitutionsstruggletoenforcecollectivelydesirableoutcomeswithoutpopularsupport.Acceptablestandards of behaviour and social normsarethesourcesoflawandultimatedriversoflegislativechange.311Socialnormsarethesourcesoflawandrecognisingtheappropriatenessorimmoralityofbehaviourisadriveroflegislativechange.

304 BCGHendersonInstitute(April2020)Sensing and Shaping the Post-COVID Era305 IPCC(2014)International Cooperation: Agreements & Instruments306 CentreforClimateChangeEconomicsandPolicyandGranthamResearchInstituteonClimateChangeandtheEnvironment(August2015) The road to Paris and beyond

307 ElizabethBradshaw(August2015)Blockadia Rising: Rowdy Greens, Direct Action and the Keystone XL Pipeline;CentreforClimateChangeEconomics andPolicyandGranthamResearchInstituteonClimateChangeandtheEnvironment(May2014)Closing coal: economic and moral incentives

308 FergusGreen(February2018)Anti-Fossil Fuel Norms309 CitiesandcountiesinCalifornia,NewYork,Colorado,WashingtonandMainehavefiledcivillawsuitsagainstoilandgascompanies.TheGranthamResearchInstitute onClimateChangeandtheEnvironment(May2018)Global trends in climate change legislation and litigationsurveyidentifies25climate-relatedlawsuitsbrought againstgovernmentsortheirrepresentatives.

310 MatthewLockwood(October2013)The political sustainability of climate policy: the case of the UK Climate Change Act311 EricPosner(1997)Standards, Rules, and Social Norms

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However, social norms are also prone to tipping points. Studiesshowthatwhenacommittedminorityofindividualsreachacriticalmassofaslittleas25% of the total,theywereconsistentlyabletooverturntheestablishedbehaviourandinitiatesocialchange.312Policycanmodifyprevalentself-reinforcingfeedbacksbygivingpeoplereasonstochangetheirexpectations.Socialpsychologistshavelongunderstoodthatsolvingcoordinationproblemsrequiresbuildingexpectationsintomodels.Tippingdynamicscanapplytosocialnormsopiniondynamicsandcascades of belief updating.3132019sawtheexamplesofGretaThunbergandExtinctionRebelliononclimateandSirDavidAttenboroughonplasticpollution.Socialfeedbacksthenhelpreinforcepolicieswhichhelpinducenewtechnologiesandgrownewindustriallobbies,self-reinforcingandacceleratingbroaderstructuralchange.

6.15 GLOBAL BRITAIN IN A POST-PANDEMIC WORLD

UK action matters. WhiletheUKisonlydirectlyresponsibleforonly1%ofglobalemissionsofgreenhousegasesbyproduction–andonly2%evenaccountingforindirecteffects(arisingfromnetimportsofgreenhouse-gas-intensivegoodstomeetUKconsumption)–therearemanyreasonswhytheUKshouldtakeagloballeadershiprole.

A Global Britain can help ensure a more coordinated international response to avoid a global depression and build a better future. Isolationism,intermsoflimitingtradeandinvestmentflows,cuttingtechnologicalcooperation(includinginternationalcollaborationtofindavaccine)andstarvingglobalinstitutionsofsupport,willmaketheUKandtheworldlessresilient.

A strong, inclusive, sustainable and resilient UK recovery package will provide an important foundation for international engagement and resetting Britain’s role in the world. ItcouldhelpstrengthentheUK’sNationallyDeterminedContribution(NDC)thatitwilltaketoCOP26inNovember2021,buildsolidaritywiththeEUthroughsharingandcollaboratingaroundtheproposed€750billionrecoveryplan,whichwillbealignedwiththeEUGreenDealandtheEUTaxonomy–collaborationcouldincreaseinvestmentmultipliersacrosstheUKandEUcountries–anditcouldprovideafocusfortheUK’sG7Presidencyin2021.Ouractionsnowcouldhelpshapetheworld.Thatis“GlobalBritain”.

The postponement of the COP26 climate change negotiations until November 2021 offers an opportunity for the UK COP26 Presidency to sharpen its strategy, particularlyaroundfinance.TheUKCOP26PresidencystrategywillneedtocarefullyassessthestressorsthatCOVID-19placesontheinternationalfinancialsystem,whichcouldhinderitscapacitytomeetinternationalclimatefinancecommitmentsandinmobilisingprivatesourcesoffinance,particularlyinemerginganddevelopingcountries.ItwillneedtoreviseitsstrategyoverthecomingyearandshowstrongleadershiptomakeprogressonitsCOP26objectives.

312 DamonCentolaetal.(June2018)Experimental evidence for tipping points in social convention313 CassSunsteinwritesabouthowopinioncascadesarecausedwhenprivatebeliefswhicharenotexpressedareauthenticatedwhensomeonesignificantexpresses theminpubliccausingacascadeof‘beliefupdating’.SeeTimurKuranandCassSunstein(January2007)Availability Cascades and Risk Regulation.

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Concessional finance will be particularly important in the current context. OnecrucialconsiderationfortheUKCOP26Presidencyisaroundthedevelopedcountrycommitmenttothe$100billionclimatefinancetargetfor2020andhowitwillseektogetcountriestomaintaincommitmentaheadofCOP26,includingsettinganew2025target.Progresswillbeaslow,delicateanditerativeprocess,towhichtheUK’ssoftinfluencingskillsareparticularlysuited.TheUKcanalsodirectlysupporttheMDBstohelpthembuildcapacityaroundagreenrecovery.Internationalinstitutionscanonlybesuccessfuliftheyreceivethesupportofmembercountries/shareholders,andtheUKcouldplayanenhancedroleinthefaceofthecurrentUSgovernment’sweaksupportofmultilateralism.

The UK can also play a stronger role in international collaborations, including the Coalition of Finance Ministers for Climate Action. Itcanleadbyexamplethroughagreenrecoverypackageandshareknowledgeandbestpracticethroughtheseexistingplatforms.Financeministriesarecatchingupwithotherministriesonclimatechangeandneedtotakeacentralcoordinatingandleadershiproleacrossgovernments.TheauthorshaveprovidedanalyticalworkandguidancetotheCoalition,detailingkeyaspectsofgreenrecoverypackagedesignwithafocusonstrategy,investments,policiesandfinance.Thisisbeingsharedacrosscountriesandcomplementsthisreport.

The merger of DFID and the FCO is another opportunity to ensure all of the UK’s international work is better coordinated, including ensuring the quality, effectiveness, Paris alignment, and non-politicisation of ODA is strengthened. TheUKcanmaintainaGlobalBritainfocusbynotonlyraisingthequalityofODA,butalsobymaintainingitshighlevelsintimeswhereitwillbeneededmostbypoorcountries.TheamountofUKaidisbasedbylawon0.7%ofGNI,whichhasbeenachieved.AsCOVID-19willcutthedenominatorinthisratio,thisshouldnotbeallowedtoflowthroughtolowerabsoluteODAlevels–meaningtheratiomayincreaseabove0.7%temporarily.TheUKcanalsoencourageEUcountriestomaintaintheirODA.TheUKneedsaclearstrategythatpreventsbackpeddling.

A future focus for direct UK ODA could be protecting nature given high pandemic emergence risk in developing countries. TheUKcanalsohelptofosterglobal collaborationtostrengthenthemandateandfinancingofglobaldecision-makingbodies,whichwillbeessentialtoensureaneffectiveresponsetothepandemicandfacilitateinternationalcollaborationonnatureandclimateaction.314

The UK’s trade policy post-Brexit must ensure future trade agreements are consistent with the delivery of its environmental and climate goalsaswellasincreasingthecompetitivenessofitsbusinessesinthelow-carbontransition.Insodoing,theUKcansetapositiveexampletoothercountriesandreinforceitsglobalstandingasaleader.

314 Steele,W.,T.Alizadeh,L.Eslami-Andargoli,andS.Serrao-Neumann(2014),PlanningAcrossBordersinaClimateofChange,Routledge,London,UnitedKingdom.

INSTITUTIONS AND POLICIES FOR BUILDING TO LAST AFTER COVID-196.

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The recommendations in this report set out a sensible, clear, and evidence-based framework for Building to Last after COVID-19 on a path of strong, sustainable, resilient and inclusive growth. Theyarenotanexhaustivelist,butprioritiesthatwillensureastrongandgreenrecovery.Theywillalsoformthefoundationsforajusttransitiontonetzerooverthenextfewdecades.

7.1 RECOVERY STRATEGY

ThereiswidesupportforarecoverystrategythatlaysstrongfoundationsforadvancingbothshorttermrecoveryobjectivesandtheUK’sclimateandlong-termtransformationobjectives.Thegovernmentcantaketheseimmediatestepstolockinsucharecovery:Design a recovery package strategy that aims to both restore supply and demand in the short term and advance long-term objectives, such as: levelling up and tackling regional inequalities; investing in low-carbon, resilient infrastructure; improved productivity; a just transition to net-zero; and delivering the Global Britain agenda on the ground. The package should be assessed against these overarching criteria.

Concernsaroundfiscalspaceandtheaffordabilityofsuchapackageneedtobetackledheadon.Austerity-basedpolicieshavebeenshowntohamperlong-termgrowth.Stabilisingdebt/GDPrequiresgrowthtoboostthedenominatorandraisenetrevenuestoslowthegrowthofdebt,thenumerator.Onlybygeneratinggrowthdoespublicdebtbecomesustainableandeasilyrepayable.Thealternativeisdepressionandinstability.Arecoverybasedonfiscalausteritydrivenbyspendingcutsandweaklinkstosustainabilityandresiliencefailedafter2008andfurtherlockedintheunproductivefossilfueleconomy.

Use ambitious fiscal policy to deliver a strong, sustainable, resilient and inclusive recovery. Aiming to balance budgets in a recession to achieve debt sustainability, is self-defeating.

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The strategy must make clear, long-term commitments on the low-carbon transition and reversing environmental degradation. To do this it should:

� IncludeacredibleplantoputtheUKonthebeginningofapathwaytoreachitsnetzerotarget,

� CompletetheEnvironmentBillandtheAgricultureBill,withthelattermakingaclearcommitmenttodirectpublicmoneytowardspublicgoods,includingsubsidiestowardsfarmersthatdeliverhighlevelsofenvironmentalimprovements;

� PutinplaceasetofcomprehensiveimprovementtargetsundertheEnvironmentBill;

� EnsuretheUK’stradepolicyanditsfuturetradeagreementsareconsistentwiththedeliveryofitsenvironmentalandclimategoalsandincreasingthecompetitivenessofitsbusinessesinthelow-carbontransition.

7.2 TARGETED INVESTMENT

Targeteddirectinvestmentexpenditureswithshort-andlong-termgainswilldeliverontherecoverystrategy.Sustainable,resilientandinclusiveinvestmentshavesomeveryappealingshort-andlong-runcharacteristicsinarecession.Thisisbecausetheyboostdemandandcreatejobsintheshortrunandexpandcapacityinthelongrun.

Toensureinvestmentsdeliverandmaximisethemultiplebenefitsthisreportsetsout,recoveryinvestmentprogrammesandprojectswillneedtobeassessedalongthefollowingsetofdimensions:

Recovery investment programmes and projects can be assessed against a range of criteria with a focus on the strength of growth multipliers in the short- and long-run and the extent of co-benefits in contributing to climate/net-zero, resilience, and levelling-up across the country. Itwillbeespeciallyimportanttoconsiderspeedofimplementation,thelocationofinvestment,andlabourintensityintheshortrunsoastoabsorbunemployedlabourinthewakeofCOVID-19.InvestmentsalignedwiththeUK’sclimateandenvironmentaltargetscandelivermanyofthesocial,economicandco-benefitcriteriamentionedabove.

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7. RECOMMENDATIONS

Drawing on the latest evidence, the government should prioritise investment in:

� Broadband and smart connectivity toenablevirtualisationandfacilitatehomeworkingacrossallpartsofthecountry,aswellasexpandconnectedhealthcare,educationandsecurityplatforms.315

� EV charging networks toincreaseincentivestobuyingelectriccars.Thegovernment’svision foran EV rapid charge point networkforEnglandannouncedonMay14setsthedirection.316

� Upgrading and retrofitting homes and buildings throughbuildingefficiencyspendingforrenovationsincludingimprovedinsulation,heatingandcooling,anddomesticenergystoragesystems.Coupledwithsupportivefiscalandnon-fiscalpolicies suchasrebates,taxdeductionsandmechanismsshareefficiencygainsbetweenlandlordsandtenants).

� Energy and heat networks and the circular economy (reducingrecyclingandreusingmaterialinputs)tocreatenewskillsandnewjobs.

� Expanding rail and bus transport tobetterconnectlow-incomeregionswithmajorcentresprovidingbetteraccesstobetterjobs.

� Planting trees, restoring wetlands, greening cities and improving biodiversity. Investmentinnatureoughttoperformwellagainstcriteriaofshortrunmultipliers.Theyarelikelytobelabour-intensivewithlimitedimportingoroff-shoring.Inthenearterm,somemayprovidegoodmatchingopportunitiesfollowingthesharpriseinavailableyoung,flexibleandgeographicallymobileworkers,previouslyemployedintheretail,entertainment,foodandcateringsectors.

� Bring forward private sector investment in offshore wind whichhashighlongandshortrunmultipliers.317TheContracts-for-Difference(CfD)frameworkhasbeeneffectiveatreducingriskandleveraginginprivateinvestment.Itwillneedtobeamendedtomakeauctionsmoreregularandappropriatelysized,inordertofrontloadthe2019ConservativeManifestocommitmentfor40GWofnewoffshorewindby2030andputUKsupplychainsingoodsteadtocontinuetodeliverinthe2030sandbeyond.

� Supporting adaptation and resilience: includingwatermanagement;floodprotection;andthepreservationofnon-renewablenaturalcapital.Inmanyinstances,preservingnaturalcapitalgeneratesmultipleco-benefitsincludingdecarbonisationandadaptationtoamorevolatileclimate(seesection6.9).

·

315 BTDigitalimpact&sustainability.316 HMG 2020, Government vision for the rapid charge-point network in England. May317 Committee on Climate Change Cost and Benefit Advisory Group forthcoming.

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7.3 INSTITUTIONAL REFORM TO SUPPORT INVESTMENT

New and strengthened institutional structures will be crucialtotacklemarketfailuresandbarriersandbringthecostofcapitaldown.Thegovernmentshouldincreaseeffortstoachievecross-partyconsensusoninstitutionalandregulatoryframeworks,tolowerperceivedpoliticalriskandprovideclearsignalsforprivateinvestors.Consensusandreformareneededacrossthreepillars:

1. Establish a new National Investment Bank (NIB)with£20billionpaidincapitalthatcanhelpthegovernmenttodeliverastrong,sustainable,inclusiveandresilientrecoverytonet-zeroin2050. Prioritiseinvestmentinregionsthatneeditmost.Directpublicsupportfornewinfrastructuremustbematchedbyregulationtomaintaininvestmentandprotectconsumersfromrent-seeking.

2. Deliver greater policy and fiscal autonomy to cities and regions, buildingontheCitiesandLocalGovernmentDevolutionAct2016.Empoweringcitiescanenableamoreeffectiveidentificationofandfocusonlocalpriorities,whilestrengtheninggovernancestructuresatthelocalandcitylevelwillbecrucialtoavoidpoorfinancialmanagementandcorruption.InvolveMayorsinthedesignofrecoveryplans,whichcanhelpincreasetheeffectivenessofinvestmentsthatwillimpacttheirregion/cities.

3. Prioritise the recommendations of the National Infrastructure Commission, National infrastructure Assessment. WorkingwithanewNIB,andconsideringtheNationalInfrastructureandConstructionProcurementPipelinefor2020–21,empowertheNICtodevelopandpublishanupdatedpipelineofcleanandsustainableinfrastructureinvestmentsthatwillcontributetomeetingtheUK’s2050decarbonisationtargetsandreflecttheseintheNationalInfrastructureCommission’sNationalInfrastructureStrategy.

7.4 INDUSTRIAL STRATEGY REFORM TO SUPPORT INVESTMENT

Bring together the existing Industrial Strategy and Clean Growth Strategy tocreateasingleforward-lookingandcoherentplanforstrengtheningtheUK’shumancapitalfortherecoveryandthelow-carbontransition.

Develop research missions based on a range of metrics,includingpositivetechnologyspillovers,aspartofaforward-looking strategytoretaincomparativeadvantageinfuturemarkets.318Pushnewinnovationwhilesupportinglarge scale trialsofnewtechnologiesandbusinessmodels(seeSection6.7).

318 TherecommendationsoftheLSEGrowthCommissionReport(December2018)Sustainable growth in the UK: Seizing opportunities from technological change and the transition to a low-carbon economy

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7. RECOMMENDATIONS

Extend and integrate the focus of the UK Industrial Strategy on securing strong domestic supply chainstosupportthefullspectrumofdecarbonisationactivities.319Governmentshouldalsoextendandintegrateafocusonadaptation.

Aim to support intrinsically low-carbon industries across the regions,suchasineducation,financialservices,pharmaceuticalsandhealthcare.Itisimportantthatthesupportisnotjustforindustriesintheenvironmentalgoodsandservicessector,whichissignificantbutarelativelysmallpartoftheeconomy.Forexample,supportingzeroemissionvehiclemanufacturingandsupplychainsacrosstheregionstosecurecompetitiveadvantagecouldcreate80,000regionaljobsby2030.

7.5 POLICY REFORM TO SUPPORT INVESTMENT, BY POLICY AREA:

With the presence of numerous interrelated market failures, the policy response that underpins the UK’s recovery package, and is aligned with its long term objectives, is likely to cover a corresponding number of different policy instruments.320Thesearesetoutbelow.Relianceonanyoneofthesepolicymechanismswillnotdelivercost-effectiverecoveryandlong-termdecarbonisation,butthecollectioncanbemutuallyreinforcing,providingaclear and compelling signaltoentrepreneursandinvestorsalike.321

7.5.1 ENABLING, RESKILLING AND LEVELLING-UP

Adopt “ just transition” employment measures to avoid workers falling into long-run unemployment after the crisis, including:jobguarantees;retrainingandreskillingforthefuture;incentivesforemployersviahumancapitaltaxcredits;andboosttrainingforworkers,includingapprentices,innewandemergingsectors.

Where workers become unemployed, adopt Active Labour Market Policies (ALMP). TheUKshouldaimtomovetowardstheOECDaverageexpenditurelevelonActiveLabourMarketPolicies,especiallyfor16–24-yearoldsandlow-educated/low-skilledjobseekerswhereitcurrentlylagsbehind.

319 UKIndustrialStrategy320 CentreforClimateChangeEconomicsandPolicyandGranthamResearchInstituteonClimateChangeandtheEnvironment(June2011) The basic economics of low-carbon growth in the UK

321 BennettInstituteforPublicPolicy(2019)Mind over matter – how expectations generate wealth

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7. RECOMMENDATIONS

Initiate a Future Skills Programme to reskill and train workers for the low carbon economy. ThiscanbeappliedimmediatelywiththegoalofkeepingpeopleengagedinthelabourmarketoncethecurrentJobRetentionSchemelapses.Thiscouldincludeembeddingsustainabilityacrosstheeducationalcurriculum,includingareviewofapprenticeshipstandardsandT-levelsandthesettingupofsustainabilitystandards,metricsandlabelsfortertiaryleveleducationcourses.

Ensure adequate funding for education institutions (universities, colleges and schools) and skills/training, especially in the regions hard hit by COVID-19, toeffectivelyreskillandretoolworkersforthejobsofthefuture(alllow-carbonjobs,notjustgreenjobs).Aspartofthis,boostinvestmentinlifelonglearninginitiatives,especiallyforlow-skilledworkers.Reformtheapprenticeshipschemetoensureitisadequatelyfunded,transparent,andSMEswhodonotpaythelevyareabletoaccesstheschemeeffectively.Thiscouldincludeembeddingsustainabilityacrosstheeducationalcurriculum,includingareviewofapprenticeshipstandardsandT-levelsandthesettingupofsustainabilitystandards,metricsandlabelsfortertiaryleveleducationcourses.

Target ALMP policies in areas that need it most, i.e.whereemploymentisseverelydisruptedbyCOVID-19andtheforcesofchange,suchasNorthwestandNortheastEnglandandSouthWales.

Target these policies at vulnerable and disadvantaged groups, includingyouth,women,disadvantagedstudents,apprenticeshipsandthoseathighriskoflong-termunemployment.

Coordinate these policies with regionally targeted stimulus investmentstocreateshorttermdemandforlabourandsupportlocalSMEs.PrivatefinancecanalsobedirectlyinvolvedbyestablishingaJustTransitionInvestmentFundtochannelinstitutionalcapitalandprivatesavingsintogreeninvestmentswithpositivesocialimpactinleftbehindregions.

Integrate the issue of inequalities into decarbonisation policy and the provision of all government services, including urban planning and public procurement. Notonlyintermsofwealthinequality,butalsoaccesstokeypublicservicesliketransport,education,health,housing,andjustice.Consideradoptingawell-being/justtransitionlensacrossallclimatepolicy.

7.5.2 FISCAL POLICIES

Reinforce the UK’s carbon pricing regime to ensure prices are consistent with net zero. Thissuggestsapoliticallyfeasiblecarbonpricestartingataround£40pertCO2in2020andrisingto£100pertCO2,ormore,in2050.ThiswouldmeanarealignmentofUKcarbonprices.Somepricescouldfallwhileothersrise,withanetimpactlikelytoraiserevenues.ThenewUKETSwillalsoneedtobeintegratedintothesereformsandincludeapricefloor.Imposedthroughanexplicitcarbontaxortheauctioningofemissionsallowances,thereispotentialtoraisepublicrevenueofaround£15–20billionayearuntiltheearly2030s.AriseinthepriceofcarbonontheEUemissionstradingschemetoabout€30pertonne,ledtoa30 per centriseinapplicationsfornewlowcarbon

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7. RECOMMENDATIONS

innovationspatentswithoutcrowdingoutpatentingforothertechnologies.322Thegovernmentshouldalsoaimtoleveltheplayingfieldbyclosing the gap323intheimplicitcarbonpriceforelectricityuseandgaswhichactsasabarriertoheat pump deployment.324

Aim to broadly equalise the cost of carbon emissions, across sectors and policies including standards and regulations. WhiledifferentinstrumentsmaycontinuetoapplyacrossdifferentUKsectorsforsometime,Figure5–carbontaxes,ETS,regulations,etc.,broadlyequalisingcostsacrosstheseinstrumentsandsectorswilllowerthecostsofdecarbonisation.Itwillachievethisbyincentivisingemissionsreductionswheretheyarecheapest(alternativepolicies,e.g.R&Dandindustrialstrategy,canworktobringdownthecostofmoreexpensivefuturemitigationoptionsthatwillbeneededtoreachnetzero).

Retain all pre-existing incentives for low-emissions car purchases such as Plug-in Car and Van Grants to build consumer confidence and support sales of new EVs.

7.5.3 STANDARDS, REGULATIONS AND PUBLIC PROCUREMENT

Adopt standards and regulations where market failures reduce responsiveness to prices topromoteefficiencyanddriveinnovation.Forexample,pushingforwardwithsmartchargingequipmentstandardsundertheAutomatedandElectricVehiclesAct2018,bringingforwardthephase-outdateforpetrol,dieselandhybridvehiclesto2030orsoonthereafter,andintroducingminimumenergyefficiencystandardstobringnewandexistingbuildingstoEPCbandCby2035(2025forlow-incomehouseholds).

All public expenditure, including procurement, should be aligned with net zero, tocreateincentivesatscaleforproductsandtechnologiesthatmeetbothfinancialandenvironmentalneeds.HMTreasurycouldleadbyadoptinggreenbudgettaggingmethods(thiswillhelptheUKgovernmentevaluatetheenvironmentalimpactsofitsbudgetaryandfiscalrecoverypoliciesandtheiralignmentwithnetzero),withthesupportoftheOECD,theCoalitionofFinanceMinistersforClimateAction,andothers.

322 Calel, R. and Dechezleprêtre, S. 2016, Environmental Policy and Directed Technological Change: Evidence from the European Carbon Market. Review of Economics and Statistics. Volume 98; Issue 1; March p.173–191

323 Advanietal.,2013.EnergyusepoliciesandcarbonpricingintheUK,InstituteofFiscalStudiesandGranthamResearchInstituteonClimateandtheEnvironment,LSE.324 This is as advocated for in the government’s recent Future Homes Standard consultation, 2019.

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7. RECOMMENDATIONS

7.5.4 INNOVATION POLICIES

Scale up innovation policy, research, development and deployment to achieve the government target of 2.4% of GDP early, before 2027, and ensure a greater share for the regions. Publicsupportforresearch,development,anddeploymentofnewtechnologiesintheUKhasalreadydrivenremarkable,andoftenunexpectedlylarge,costreductionsinrenewableandotherenergytechnologies,butpublicinnovationspendinglagsprivatespendingintheregions.Thiswillrequireamixtureofincreasedfundingandfurtherincentivesforbusinessinnovation,includingenhancedincentivesforcleaninnovation.ItshouldalsostrengthentheUK’sresearchanddevelopmentcapabilitiesandcollaborationbetweenuniversities,industryandlocalpolicymakers.TheUK’sresearchisavitalelementinitscomparativeadvantageandfutureas‘GlobalBritain’.ItisessentialtoenhanceR&Dandtakemoreofitthroughtomarketdeployment.

Accelerate the establishment of a clean innovation mission through a revised Industrial Strategy and honour the election commitment for £800 million to fund an equivalent institution to the US Defense Advanced Research Projects Agency .325Thiswouldprovidegreatercoherenceacrossnewfundinginitiatives,includingtheFutureFundandtheCleanGrowthFund,andensureallaretargetedatcleaninnovation.

Be clear that innovation strategies will often eventually need to ‘pick winners’ in terms of choosing which technology and infrastructure network to roll out(andtheregulatoryregimetosupportit),whilemaintainingapolicysuitethatprovidesincentivestotacklemarketfailuresandbarriersthatletswinnersemerge.Thiscouldfocusonfundingearlystageinnovationsandcommercialisationofexistingtechnologiesandgettingpublicinnovationfundstotheregionsthatmayotherwisemissout.

Support innovation in hard to treat sectorssuchasaviation,haulage,steelandcementwhichcoulddeliversignificantjobbenefitsinthemediumandlong-term.326Thoughassociatedwithlowershortrunmultipliers,innovationinvestmentthesekeysectorsisrecommendedonthebasisofstronglypositivelongrungrowthandclimateimpact.

Explore establishing new high technology, collaborative research centresintheregionsonthebackofsuccessessuchastheAMRCinSheffieldandtheAPCinWarwick.Networksofuniversitiesontheirownwillnotbesufficient,thesecollaborativecentresleverageresearchers,theprivatesectorandothergovernmentbodiesandinstitutions.

Design and implement exemplary net zero cities toboostlocalinnovation.Theseestablishcompetitionsbetweencities/townswhoshowbyafixeddatethattheyareontrackfornetzero,andthenlinksadditionalfundingtothewinners.

325 DefenseAdvancedResearchProjectsAgency326 TheEnergyTransitionsCommission(November2018)Reaching net zero emissions: mission possible

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7.5.5 SCALING UP PRIVATE FINANCE

Align all private finance flows with the goals of the Paris Agreement. Thiswillrequireprivatefinancetoadoptstandardsortaxonomiestohelpthemassesstheirinvestmentsandportfoliosagainstthenetzerogoal.Severalstandards/taxonomiesareavailabletoachievethis,buttheyhavelimitationswhichtheUKwillneedtoovercomewhenconsideringregulationinthisarea.AUKtaxonomyandmetricscouldbedevelopedthatmovesawayfromthebinaryclassificationofgreenorbrown,andinsteaddevelopssectorpathwaysandmetricsthatcanmeasurethe“50shadesofgreen”,i.e.allowtransparentassessmentofwherecompaniesareonthepathwaytonetzero.

Accelerate the adoption of the three R’s: reporting, risk and returns. ReleasetherevisedTCFDguidelinesandmakethemmandatoryacrossalllargeUKcompaniesbyCOP26,includingallLondonStockExchangelistedfirms.ConsidertheTransition Pathway Toolasthebasisofdisclosurereporting.SupporttheNGFStoacceleratethedevelopmentofbetterdataandanalytictoolstoimproveclimateriskmanagement,andhelptobuildacoalitionofcentralbanksandsupervisorsthatcommittoclimatestresstestingstresstesting,withtheBankofEnglandleadingbysettingadateforresumingitsstresstestingwork.Makeitmandatoryforallfinancialsectoractorstodiscloseanetzeroplanandidentifytheopportunitiesandreturnsfromthetransition.

Achieve better coordination between monetary and fiscal policy, includingensuringthatcentralbankmeasures,e.g.QE,arealignedwithnetzeroandsupportgreenrecoverypackages.

7.5.6 CONDITIONAL BAILOUTS AND COMPETITION POLICY

Bailouts should be conditional on improvements against climate-positive criteria, includingrequirementstoembracenewer,yetprovenandcost-effective,standards,technologiesandbusinessmodels,commitmenttonetzeroandclimatetargets,commitmenttomandatoryclimateriskdisclosureunderTCFD,andcommitmenttocollaboratethroughglobalR&Dpartnerships,forexampleinaviationandshipping.TheseconditionsshouldbeconsideredunderProjectBirch,designedtorescuestrategicallyimportantUKcompanies.

One option worthy of further consideration is amending utility companies’ funding models to enable more long-term investments to be made. Forexample,watercompanieshaveinthepastnotedthatOfwatandthewaterregulatoryframeworkdisincentivisesnaturalcapitalinvestmentswithalong-termreturnbeyondthe5yearsofthepricecontrolperiod.

Strengthen the Competition and Markets Authority topreventconcentrationresultingwhenlargeliquidfirmsacquireviablesmallfirmsfacingfinancialdifficultyunderlockdown.

7. RECOMMENDATIONS

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7.5.7 BEHAVIOURAL CHANGE

Explore policies to embed climate- and productivity-positive behaviours that were brought on by the response to COVID-19,forexampleinvestinginchangestotravelroutines,virtuallearningandhealthcare,theuseofurbanspaceandinvestmentinthecirculareconomytoreducerelianceonfragilesupplychains.

Act to discourage negative behaviour changes from the response to COVID-19. Forexample,anincreaseinpeopleavoidingpublictransportinfavouroftravellingontheirownbycarthreatenstoincreasecongestionandpollution.Ratherthancuttingbackoninvestmentinurbanpublictransport,inresponsetofallingticketrevenues,investmentisneededexpandcapacityandincreasesservicestohelpworkerstravelsafelydistanced(togetherwith,forexample,investingintestingandcontacttracingcapabilitiesincaseoffutureoutbreaks).

7.6 GLOBAL BRITAIN

AGlobalBritaincanhelpensureamorecoordinatedinternationalresponsetoavoidaglobaldepressionandbuildabetterfuture.TherearemanyoptionsforanengagedglobalBritainpost-Brexit.

Empower and give credibility to the UK COP26 Presidency and the G7 Presidency through a strong green recovery programme at home. ArenewedandsharpenedfocustotheCOP26Presidencystrategycouldbearoundmaintainingthedevelopedcountry$100billionpublicfinancecommitmenttodevelopingcountries,strengtheningcountryNationallyDeterminedContributions(NDCs)thatareduebyCOP26,andstrengtheningandacceleratingmultilateraldevelopmentbankcommitmentstoagreenrecoveryandnetzerothroughcloserandmoreconstructiveengagementanddirectfunding.

Maintaining high levels of quality, Paris Aligned ODA. TheUKshouldfocusonraisingthequalityandeffectivenessofODA,ensureitisalignedwiththegoalsofParisAgreement,andmaintainitslevel,evenifthe0.7%ofGNIratiorisestemporarilyduringthecrisis.TheUKshouldpressforsimilaractionacrosscountries,includingintheEU.

Sharing information and coordinating recovery packages with the EU in priority areas of mutual interest enhances the benefits of stimulus investments in the short and long term. Globaltrademeansonecountry’sexportsrequireanothercountry’sspendingonimports.Thebenefitsoflowcarbonmarketstoanyonecountrydependonhowmanyothersadoptsimilarinvestments.SomeofthebenefitsofclosecooperationwiththeEUarehighlightedthroughoutthereport.WorkingwiththeEUcanpromotelearningandcoordinationandwillraisethebenefitsofstimulusinvestmentsintheshortandlongtermbyboostingshortandlongrunmultipliers.Forexample,Franceaimstobeagloballeaderonhydrogen.ThiswillbecrucialfortheUKeconomyanditshouldcollaborateratherthanduplicateorsimplyimportFrenchhydrogentechnology.

7. RECOMMENDATIONS

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7.7 NEXT STEPS FOR THE EUROPEAN UNION

The EU is designing large recovery packages that will need to follow many of the same principles set out in this report, particularly around levelling up, innovation, regulation, bailouts and competition. TheEUwasoneoftheearliestandhardesthitregionsaffectedbyCOVID-19and,similartotheUK,facessystemicissuesoflowproductivitygrowthandunevendistributionofincome.ForthesereasonswehighlightsomekeyasksfortheEU,inadditiontosharingwiththeUK,thatcanhelpincreasetheimpactofitsownrecoverypackages.

� AstheEuropeanCommissionandEUmembersdesignrecoverypackages,theymustensuretheyareconsistentwiththerecommendationsinthisreportaroundstrategy,fiscalexpansion,thecriteriasetoutforstimulusinvestments,institutionsandpolicies,withaspecialemphasisonlevellingup,skills,competition,innovation,regulationandbailouts.

� Eurozonemembersmustaddresstheunevenperceptionofsovereigndebtriskunderasinglecurrencylackingcross-borderfiscalflowsandpan-Europeanbankguarantees.Thesystemicrisktothosecountrieswithhighpublicdebt(whichinthecaseofItalyandSpainhavealsobeenhithardbyCOVID-19)highlightstheimportanceoftargetedpoliciestoboostgrowthandretainsolvency.Debt-to-GDPratiosinGreece,ItalyandPortugalare expected to hit 220%,180%and150%respectively.

� Yettheeurozoneremainsemblematicofthedegreetowhichexcessivefiscalconsolidationhasaggravatedpublicdebtburdensoverthepastdecade.Thisisbecausesuchpolicieshavereducedgrowth,boththroughunderminingdemandandconstraininginvestmentinexpandingsupply.Thismistakecannotberepeated.Thedrivetowardsfiscalconsolidationsincethefinancialcrashhasalsoshiftedtheentireeurozoneintoagloballydestabilisingcurrentaccountsurplus,exacerbatingtheimbalancescausedbyworldwideexcesssavings.

Despite all the challenges, European policymakers have made a strong start in delivering a strong and sustainable recovery. EUgovernments,theECBandtheEuropeanCommissionhaveputinplacemeasurestosustainincomeandemployment,easefinancialrisksandmaintaintheflowofcredit.TheEuropean Commission Recovery StrategyislikelytoinjectEUR2.4trillionovertheperiod2021–2027andprioritiselow carbon327anddigitalspending,wheremultipliereffectscanbeexpectedtobehighest.IntegratingtheEuropeanGreenDealandtheCOVID-19recoveryeffortiswelcome,buttheplansmustberobusttolobbyingbyvestedinterestsormemberstatesseekingtopush back on ambitionandpreservefossilassets.

327 EuropeanGreenDeal,2020.EuropeanCommission

7. RECOMMENDATIONS

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The Commission package is aimed disproportionately at lower income, higher debt southern European economies thereby promoting resilience and ‘levelling up’. TheJust Transition Mechanismwillhelpmobiliseatleast€100billionovertheperiod2021–2027targetedatthemostaffectedregions.Insupportofthesemeasures,theECBhasrecentlyexpandeditsassetpurchaseprogrammebyaround€1.4trillion.Individualmemberstates’fiscalstimulusplansrangefromaround3%ofGDPinRomania,toanotable50%ofGDPinGermany.

Future packages must be coordinated with the UK and other partner countries to maintain the EU’s global leadership role and share knowledgearoundinstitutionalandpoliticaleconomychallengesassociatedwithvariousrecoverypackages.

The EU must learn thekey lessonsand principles from EU climate policies of the last several decades and ensure they are front and centre when designing and implementing green recovery packages. Theseinclude:

� Recognisingtheimportanceoflearning-by-doingandfeedback(tomaximisebenefitsandavoidpolicyfailure);

� recognisethatthereisno“silverbullet”tobringtheeconomybacktohealthanddeliversustainability(itisthepackageofinvestments,institutionsandpoliciesthattogetherwillrestoresupplyanddemandandcreateastrongerEuropewitheachmemberstaterequiringspecificfocus);

� continuedcoordinationamongkeyeconomicactorsandsectors,integratingthecomplexnetworkofexistingpoliciesincludingtheEuropean Green Deal;

� drawingonthebesttechnicalandeconomicknowledgeandconsultingcloselywithstakeholderstoensuretransparency,stabilityandindustrybacking(thiswillinvolveallEuropeancountriesdrawingonthebestexpertisewhereveritislocated,includingintheUK).

7. RECOMMENDATIONS

THE ALDERSGATE GROUP IS AN ALLIANCE OF MAJOR BUSINESSES, ACADEMIC INSTITUTIONS, PROFESSIONAL INSTITUTES, AND CIVIL SOCIETY ORGANISATIONS DRIVING ACTION FOR A SUSTAINABLE AND COMPETITIVE ECONOMY. OUR CORPORATE MEMBERS, WHO HAVE A COLLECTIVE TURNOVER IN EXCESS OF £550BN, BELIEVE THAT AMBITIOUS AND STABLE LOW CARBON AND ENVIRONMENTAL POLICIES MAKE CLEAR ECONOMIC SENSE FOR THE UK.

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