Labour’s green industrial policy will not cure Britain’s economic ills

Fighting climate change has not held Britain back but it has not unleashed its economy either. Keir Starmer and the Labour Party hope to change this (Photo: AFP)
Fighting climate change has not held Britain back but it has not unleashed its economy either. Keir Starmer and the Labour Party hope to change this (Photo: AFP)


  • Trying to fight climate change and raise growth risks doing neither well

Britain is going green. The country tends to be found towards the top of international league tables for emissions reductions, even after accounting for imports, thanks to copious offshore wind and a swift transition from coal to natural-gas power plants. Such success has not, however, translated into obvious economic rewards: productivity has been near-stagnant for 15 years and wages have failed to keep up with inflation. Fighting climate change has not held Britain back but it has not unleashed its economy either.

The Labour Party hopes to change this. If it wins the next election it has pledged to invest £28bn ($35bn; 1.3% of GDP) of public money a year into the green transition, if the fiscal rules allow it. Rachel Reeves, the shadow chancellor of the exchequer, has outlined a long spending list, covering everything from gigafactories and wind turbines to tree-planting schemes and home insulation. A new state-owned energy company, meanwhile, would help a Labour government to achieve one of the five missions it has set for itself: for the entire power sector to be zero-carbon by 2030.

Politically, green industrial policy is in a sweet spot for the party. It unites disparate parts of its electoral coalition—from those who are energised by environmental causes to those who emphasise the need to boost growth, from those who think it will boost manufacturing in the north of England to those who like the idea of the state once again owning companies directly. But there is no automatic connection between the two central goals of Labour’s plan. Green policy aims to lower emissions; industrial policy seeks to raise growth. Trying to do both risks doing neither well.

On its own, spending more will not improve Britain’s economic performance. With high inflation and near-full employment, the country does not need additional government stimulus. The Bank of England would raise rates to offset the inflationary pressures of a green splurge. Instead the policy will stand or fall depending on whether the spending can be targeted to improve the productive capacity of the economy. Advocates argue that the right investments by the state will allow Britain to create new industrial clusters and to stake out a position in frontier industries such as green hydrogen and carbon capture and storage.

Industrial policy of this kind has a deservedly poor reputation in Britain. Sir Keir Starmer, the Labour leader, says that he will not be in the business of picking winners. But £28bn a year is more than twice current spending on environmental protection. Any future Labour government must ensure that the money is not wasted on no-hopers or pork-barrel politics. “The worst thing is industrial strategy done badly," says Giles Wilkes of the Institute for Government, a think-tank. Brexit means there are fewer institutional constraints on distortionary state aid, he points out.

Ominously, Ed Miliband, the shadow environment secretary, casts the spending as Britain’s answer to the Inflation Reduction Act in America, President Joe Biden’s signature package of spending that aims to reduce emissions and build domestic manufacturing capacity in green industries. The goal in Britain, too, is to attract investment and green jobs. “We are not neutral about where things are built," said Mr Miliband in March. “Joe Biden wants the future ‘Made in America’. We want the future ‘Made in Britain’."

Britain will struggle to compete with America directly to attract investment. It has neither the existing manufacturing base nor the ability to offer larger subsidies, points out Andrew Sissons of Nesta, another think-tank. Engaging in “beauty contests" of subsidies and tax breaks to attract industry to locate in Britain instead of the larger markets of the EU and America risks spending a lot of government money for very little payback. A pound spent encouraging a battery maker to plump for Northumbria over North Carolina is one less pound spent on investing in infrastructure for charging electric vehicles instead. Manufacturing jobs are an expensive use of green funds.

Labour’s moon-shot mission to decarbonise the energy grid by 2030 is more promising. It would accelerate current government aims by five years. That is ambitious but doable. Analysis by Ember, a campaign group, suggests that if all currently mooted wind and solar projects receive government approval and are constructed there would be sufficient renewable energy by 2030. The challenge would be the last sliver of power generation—ensuring that there is sufficient flexibility and storage so that the lights remain on when the wind does not blow and the sun does not shine. Some spending would be needed to help scale up new technologies; so too would reform of the planning system, the electricity market and the process of hooking up new capacity to the grid.

Reducing the need for expensive natural gas would help the British economy. It would also create opportunities to find productive uses for energy during periods of overabundant wind and sunshine. The best green industrial policy may be a well-designed energy policy.

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