The green paper is arranged around ten strategic pillars,
one of which is to ‘develop affordable energy and clean growth’. Within this,
the green paper reiterates the Government’s commitment to shift towards a lower
carbon economy, but stresses that his must be done in a way which ‘minimises
the cost to UK
businesses, taxpayers and consumers’. This echoes very similar statements in a
previous Policy Exchange report, The
Customer is Always Right, which argued that previous
Governments had paid insufficient attention to the rising cost of energy and
climate policies, and that going forward the Government should place consumers and affordability at the heart of its energy
strategy.
There is significant focus in
the green paper on how to manage or reduce the cost of energy through
improvements in network efficiency, and also in energy efficiency. In addition,
the document makes a passing reference to improving resource efficiency more
generally. It notes that ‘increasing the efficiency of material use across the
whole supply chain can deliver huge cost savings and improve the productivity
of UK
Following the publication of
the green paper, Policy Exchange hosted a roundtable last week, which
considered the opportunity to embed resource productivity thinking in the
Industrial Strategy. The roundtable was held jointly with SUEZ Recycling and
Recovery UK
Improving resource
productivity represents a significant economic opportunity for businesses.
Research by Accenture has
shown that there is potential to unlock $4.5 trillion of global growth through
improvements in resource productivity. They suggest that this can be achieved
by moving from traditional ‘linear’ business models, in which resources are extracted,
consumed, and disposed, to more ‘circular’ business models in which businesses
reduce their dependence on natural resources, and turn waste streams into new
sources of revenue. Accenture has also done sector-specific analysis, for
example showing that the automotive sector could
reduce its cost base by 14 percent through improvements in resource efficiency,
delivering $400-600 billion of additional profit globally by 2030.
Similar analysis by Oakdene Hollins for
Defra in 2011, suggested that UK
On face value, it appears
that improving resource efficiency could make an important contribution to
reducing the cost base and raising the productivity of UK
In addition to the economic
benefits, there are obviously significant environmental gains to be made by
improving resource and energy efficiency. The Defra study mentioned above
suggested that improvements in energy and resource efficiency could yield a
reduction in carbon emissions of 90 million tonnes of CO2 equivalent
per year (or 13 percent of the UK
The Industrial Strategy green
paper rightly recognises that improving energy and resource efficiency could
contribute not only to the Industrial Strategy and the UK’s productivity
problem, but also towards meeting our carbon targets under the Climate Change
Act, and making environmental improvements in line with Defra’s forthcoming 25
Year Plan for the Environment.
Why and how should Government intervene?
The question then is what
Government should do about it? If the economic opportunities to improve
resource productivity are so great, then it should be in the interest of
companies to realise these opportunities, and improve their competitiveness.
What is the rationale for Government intervention?
Participants at the Policy
Exchange roundtable indicated that whilst there are significant opportunities
to improve resource productivity, they are not always realised by businesses.
The main barriers can often be a shortage of internal capital, coupled with
risk aversion or short-termist attitudes towards investing to improve future
efficiency. Improvements in resource efficiency can yield long term savings,
but still often require significant up front capital investment. Business
investment horizons are often very short, with firms looking for a 2-3 year
payback. This severely limits the scope of possible improvements in resource
efficiency. Short investment horizons are compounded by the fact that resource
efficiency investments have to compete against other demands on capital
(potentially on a global basis if a multinational firm). It is often difficult
to make the case to invest in resource efficiency – even within a
resource-intensive business. Businesses could also look to external sources of
finance, such as banks. But informational failures may impede the use of
external finance, for example the cost of producing ‘investment grade’ analysis
of efficiency opportunities can be prohibitive.
There may be
a role for Government intervention to overcome these financing challenges and
unlock projects. However, interventions to promote energy and resource
efficiency need to be well thought through, and evidence led. There have been
some notable failures of policy in the past, due to a lack of understanding of
the underlying barriers to investment in efficiency – such as the Green Deal
energy efficiency scheme. Government must explore in detail the underlying
barriers to business investment in resource efficiency investment before it
proceeds further.
Because of the difficulties
in financing resource efficiency improvements, businesses rarely make
significant transformational changes in the way they use resources, and instead
tend to make relatively incremental improvements. There are of course
exceptions. For example, over the last few years Jaguar LandRover has
developed a completely new range of lightweight aluminium car bodies, driven by
a need to reduce the weight of its vehicles in order to meet fuel efficiency
and carbon standards. As part of this process, Jaguar LandRover made
fundamental changes to its manufacturing process, to reduce overall material
consumption, and increase the recycled content of the materials used. Central
to this change was the development of a new aluminium alloy which can tolerate
higher levels of impurities. This means that scrap castings and offcuts, which
were previously discarded, can now be recycled back into the production
process, thereby creating a closed-loop system. Overall, this has resulted in a
40 percent reduction in the weight of the cars, improvements in fuel
efficiency, a reduction in the amount of virgin materials consumed, and the
amount of waste generated.
This example highlights an
important way in which Government can encourage resource efficiency
improvements – through research funding and catalysing the rollout of new
innovations. The project was delivered through a public-partnership between
Jaguar LandRover and Novelis, facilitated by the University
of Cambridge , and part-funded by
Innovate UK
Whilst this is an excellent
example, in general the Government could do more to support research and
innovation into resource efficiency. In 2015/16, Innovate UK
Tackling these issues will
require some novel thinking from Government. Waste policy, resource efficiency,
and productivity have historically been led by quite separate parts of
Government (across Defra, what is now BEIS, and HM Treasury). There is a risk
that work continues in silos, but roundtable participants thought that the
process of developing a new Industrial Strategy could bring together these
various parts of Government, and create a more joined up approach
