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Why place matters in the net zero transition

It’s nine years since George Osborne, as chancellor, delivered his Northern Powerhouse speech. He highlighted the UK’s stark regional divides and proposed linking the cities between Liverpool and Hull, to rival London’s economic dominance and help to distribute prosperity more evenly across the country.  A number of devolution deals were signed in the years that followed. It led to the creation of the Liverpool City Region Combined Authority, the Tees Valley Combined Authority in 2015 and South Yorkshire Mayoral Combined Authority in 2020. A Northern Powerhouse partnership was established between local business and civic leaders. But the economic transformation he envisioned back in 2014 has yet to fully materialise.

Many advanced nations have adopted industrial strategies to prepare their economies for a more technologically advanced future. This included the UK up until 2021, when Theresa May’s industrial strategy was scrapped by Kwasi Kwarteng. The passing of the US Inflation Reduction Act (IRA) and the EU Net Zero Industry Act have made it more imperative that other nations follow suit and don’t fall behind. Some of President Biden’s policies, such as the CHIPS and Science Act and IRA, take a place-based approach: they aim to improve overall national economic performance through geographically targeted investments. This has led some to wonder whether this strategy could also benefit the UK and, more broadly, whether the net zero transition could play a role in levelling up.

Regional disparities are strongly entrenched
The government’s Levelling Up paper, published last year, found the UK has significant regional disparities in economic performance, both in absolute terms and in comparison with other developed countries. The productivity gap between London, the best performing region, and Northern Ireland, the worst, was 60 per cent. While these differences have been around a long time, disparities in regional economic performance improved around the mid 20th century, but then widened again from the 1970s onwards, in part due to deindustrialisation.

There are two reasons regional inequalities develop: people move away from poorly performing areas looking for better jobs, and high value businesses tend to cluster where there is a large pool of skilled workers, other businesses they can share ideas with and where there are relevant infrastructure and institutions. While successive governments have tried to tackle the problem, they’ve underestimated the strength of these underlying forces and have failed, for instance due to badly targeted skills policies. Formerly industrial areas were also over reliant on very few, specialised, industries, leaving them vulnerable when manufacturing deserted to cheaper countries.

The levelling up paper recognised the net zero transition’s potential to “create huge opportunities for many of the UK’s left behind places”. For example, it attracts investment in new industries, like renewable energy and carbon capture and storage (CCS). But it also acknowledged that, for some places, the transition could bring significant risks.

Places have strengths that should be capitalised on
In our recent report, we mapped where the green industries of the future might be located in the UK, based on regions’ underlying geographic and economic strengths. We concluded that, overall, the picture looks promising for levelling up, as many areas outside London and the South East show great potential to house green service and industrial clusters (geographical concentrations of similar or complementary businesses) which could contribute to local economic growth.

The south west of England, for example, benefits from floating offshore wind (FLOW) sites in the Celtic Sea. Cornwall and the Isles of Scilly has an economy that currently performs relatively poorly, but the region’s underlying strengths make it a strong contender for clusters in critical raw material extraction, offshore wind and geothermal energy. Cumbria could also benefit from the net zero transition, as it has offshore wind, CCS sites in Morecombe Bay and plans for a green hydrogen hub in Barrow.

Targeted investment helps green industries grow
But not everywhere will benefit automatically and, for some, the green transition will bring difficulties that need to be overcome. The West Midlands, for instance, is a hub for the automotive industry. But it lacks the infrastructure, skills and geographical advantages needed to attract parts of the new electric vehicle supply chain (such as battery components) that would allow it to compete in future. Government investment aimed at improving infrastructure and the business environment would help to manage these risks, as would targeted investment to secure important parts of the supply chain and reskill workers.

Done well, a place-based green industrial strategy could be both cheaper and more effective at delivering economic growth than an untargeted approach, because it can hone in on the specific barriers holding an area back. It also allows policy makers to prioritise the highest impact, most cost effective actions for each place, identifying pockets for high productivity and high growth industries where there is low performance. Well targeted, long term public investment will also crowd in more private investment over time in a virtuous spiral of improvement.

Ultimately, with a place-based strategy, the government will have to choose which areas and industries it invests in. Work to identify each region’s underlying sectoral and geographical strengths will inform these decisions. But, to be fair and level up, it will also have to pinpoint those places and communities most at risk of being left behind and support them. If it doesn’t, there’s a risk of repeating the problems of the 1970s and 80s and driving greater inequality.