A telling new paper from Frontier Economics suggests that the right kind of carbon policy can help solve the UK’s productivity puzzle, essentially by driving companies to innovate.
The report highlights two key findings: carbon policy need not harm productivity; it may produce a productivity boost.
Low carbon policy perfection
The paper argues that if national governments pursue policies that recognise the link between carbon policy and productivity growth, the two can work hand in hand. Accurate carbon measurement, key to reporting schemes such as SECR and ESOS, could also provide better signals to boost productivity.
“It has long been known that better environmental regulations can help raise productivity by encouraging businesses to innovate. There is still, however, relatively little recognition of the impact of effective pricing and regulation of greenhouse gases on innovation and productivity,” said Matthew Bell OBE, director at Frontier Economics and former chief executive at the Committee on Climate Change.
“Reducing emissions is, in many cases, simply more efficient for many organisations. Lower heating or cooling costs, reducing waste in production processes and the wider supply chain; these actions are good for business, not just the environment.”
He argues that as we accelerate towards a low carbon economy, we must ensure policy is informed by the most complete measurement of productivity possible.
The carbon shock of the 21st century
Bell is bullish surrounding the power of low carbon policy to truly galvanise UK business. “We know that carbon policies, whether taxes, regulation or public sector spending are likely to increase innovation, and in turn productivity, as firms seek new lower carbon production methods or products.
“Just as the oil shock of the 1970s led the auto sector to develop more efficient cars, the carbon shock of the 21st century can help to galvanise innovation across the economy.”
In terms of actual actions, the report offers three principal conclusions for government policy moving forward, chiefly that it needs to be more informed by a more complete measurement of productivity, including the creation of new formulae which take into account the positive value of output produced with lower emissions.
It also calls for a closer link between carbon pricing and environmental standards to help drive innovation, and more adaptable carbon policies linked to specific context to boost aggregate productivity.
What does the news mean for business?
Coming as it does from the former chief executive at the Committee on Climate Change, this news is a big deal. It provides further unequivocal evidence that low carbon policy needs to remain at the heart of UK efforts to tackle climate change.
Many UK firms are gaining a more accurate picture of their carbon footprint through mandatory reporting schemes such as ESOS and SECR. These policies can be a stimulus for the installation of lower carbon, energy efficient commercial operations.
It may be that the report eventually catalyses further policy change to help the UK down the low carbon path. But for now, the message for business is to embrace the low carbon efforts they are already making: doing so is likely to drive innovation and in turn, boost productivity.
"It has long been known that better environmental regulations can help raise productivity by encouraging businesses to innovate. There is still, however, relatively little recognition of the impact of"
Matthew Bell OBE director at Frontier Economics
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