This article is by Sam Alvis, head of economy at Green Alliance. It is part of our recently published essay collection ‘What does the US Inflation Reduction Act mean for the UK’s green economy?’
The US Inflation Reduction Act has the UK on the backfoot. The government’s immediate response was that the UK simply can’t compete with its fiscal firepower. And, while this unsurprising to those who have long observed the UK’s low rates of public and private investment, the government is right that there are more tools to hand than just subsidies.
But the UK needs to go beyond just opposing subsidies to think about how else it can create the markets that are now fleeing stateside. As Dustin Benton has described, the idea that markets make themselves is for the birds: industrial policy, and a green one at that, is back.
Whether you actually call it ‘industrial strategy’ or a ‘plan for growth’, it is best thought of as a framework rather than a checklist of interventions.
It has to start from the top
Any good industrial policy begins with a strategy, articulating what policy makers are hoping to achieve. This might be decarbonisation, as with the EU or US plans, regional improvements, as the Levelling Up White Paper intends, or strategic autonomy like the recent swathe of semi-conductor strategies.
Much has been written about what makes an effective strategy. Successful ones should be mission orientated with a clear, measurable goal, and be consistent and not constantly changing. Though they can vary in scope and scale, either focusing on sectors, the whole economy or specific cities or regions, or technologies. The success of a strategy is in flexing to meet the needs of a country or region.
This framework and, therefore, the policies that underlie it, will depend on the government of the day. Choosing not to intervene is as much a statement of industrial policy as nationalisation.
What lies beneath?
The table on page 11 attempts to breakdown what the tools underlying a strategy might be, and the relative weight different governments have put on them. It is in two parts, policies that work across the economy (often known as horizontal), and those specific to sectors (vertical).
This table isn’t exhaustive, as Cameron Witten says on page 30, trade policy can be integral. The tax system will have an effect, as will devolution, particularly for place-based strategies. Also not included are ‘softer’ elements of industrial support, like business advice.
The framework masks the diversity of the policies behind it. Take supply side subsidies. These could be direct government department spending or channelled through the UK Infrastructure Bank or the British Business Bank, competition led or formula dictated, as grants, loans or guarantees.
The lesson from the analysis in the table is that, while policy levers are important, how they are used is driven by politics. While the UK has a Plan for Growth, there has been a reluctance for firm and consistent industrial strategy since Theresa May attempted it in 2017. Goals are diffuse and clouded by competing strategies. From the outside it’s hard to tell the hierarchy between the Plan for Growth, Net Zero Strategy and Levelling Up White Paper.
To UK economy watchers, the government’s objections to subsidies are unsurprising. Sufficient public investment has been a longstanding problem which IRA has further exposed. The UK has preferred short term, competitive and limited funding pots. The Automotive Transformation Fund, for example, has been insufficient to scale up UK electric vehicle production (as Helena Bennett notes on page 17). Yet, when the UK has tried long term committed funding, adaptable to changing needs, it has worked. Look at what contracts for difference did for the UK’s offshore wind industry.
Meanwhile, regulation has been soft, often with a preference for voluntary sector led agreements (see the North Sea Transition Deal or the Automotive Sector Deal) rather than the hard measures necessary to create markets, for example in energy efficiency standards.
The US has ultimately turned to subsidies, after years of political deadlock, trying to regulate emissions or introduce carbon pricing. But the UK appears to be turning down spending without trying to regulate properly. Things are even worse on the demand side, where successive UK governments have been very tentative with either regulation or spending to bring costs down for those purchasing green tech.
Other essays in this collection will talk about how to apply industrial policy tools in specific sectors, while Green Alliance will soon release work on the next wave of green industries and how the UK might capture value from them. But looking across the economy, it is clear what is needed.
Small scale, singular interventions are ineffective. Worse, where these are used as rhetorical defences, as with the Boiler Upgrade Scheme, they stymie consideration of broader action. IRA is proving successful not just for its dollars but for its ten year commitment, and the breadth of the sectors is covers. The UK showed the world this was possible with offshore wind but the same consistency has not been applied to other sectors.
The size and comprehensiveness of a much needed UK industrial policy doesn’t only have to be counted in pounds, it should be judged by the number of years, the breadth of the package and the quality of regulation. That’s how the markets will be made, before others get there first.