Reindustrialisation must have clean growth at its heart

Cutting regulation might sound attractive, but turning back the clock isn’t how we rebuild a sustainable industrial base argues Roz Bulleid, Research and Policy Director, Green Alliance explains.

Reindustrialistion is one of Andy Burnham’s signature promises, repeated regularly in recent months and again in his first speech as PM.

It’s welcome recognition of the high value jobs and local pride that manufacturing can offer communities up and down the country, and the greater resilience that comes with local, diverse supply chains.

So far, Burnham and his team haven’t offered much detail on how it will be delivered in practice. But, as they draw up their plans, it will be important to separate fact from fiction. For instance, they should avoid the lazy stereotyping that some political commentators have adopted of regulation – and particularly environmental legislation – as the root of all industry’s ills.

It’s easy to forget that the UK is still the eleventh largest manufacturer globally, providing 2.6 million jobs. For decades, economists, policy makers and media pundits have talked down the role of UK manufacturing, focusing instead on the service sector as the engine of growth. An approach obsessed with the UK’s comparative advantage has failed to spot where there could be future growth or spillover benefits, as with green innovation. Or to consider the many other contributions industries of all kinds can make, for instance to UK resilience, in underpinning higher value skills and prestige sectors like the automotive industry, and in bringing well paid jobs and pride to local communities outside London and the South East.

A futureproofed industrial sector is one that makes the most of growing clean energy sources and raw materials, improving its resilience, enabling it to attract investors and compete in emerging markets for green, low carbon goods. This doesn’t just mean boosting our production of clean technologies like wind turbine parts, for instance, but also futureproofing foundational sectors like steel and cement.

Reindustrialisation, clean or otherwise, is unlikely to be an easy job. But we need to make sure we’re fighting the right battles.

Historical decline

Political opponents of the UK’s net zero goal have seized on high profile industrial closures, directly linking the drive to reduce carbon emissions and deindustrialisation. Their narrative suggests the goal is illogical and elitist and driving manufacturing jobs abroad, and they offer an apparently easy way of turning back the clock in scrapping net zero.

But the reality is that continued reliance on ageing infrastructure and fossil fuels, which is increasingly subject to volatile international pricing, poses a greater long-term risk to communities and the economy.

Jobs and output in industries like steel have been falling since the 1970s, three decades before the Climate Change Act was passed, driven by a suite of wider trends including increasing globalisation and cheaper overseas labour. Job numbers across manufacturing as a whole have also been falling since then, even though output has grown. And, while UK manufacturing’s contribution to GDP has plummeted from 25% in the 1970s to eight per cent today, the same extent of decline has not been seen in other countries like Germany that are also cutting emissions. The real problem in the UK has been a lack of comprehensive industrial strategy and underinvestment.

Clean green markets are more stable

Assessments by the CBI of the UK’s net zero economy show it is growing three times faster than the rest of the economy and jobs supported by greener businesses are 48% more productive than the UK average. Similarly, analysis of resource efficient circular economy approaches by PwC shows that, if the UK matched existing international best practice in just four sectors, it could boost UK GDP by one per cent. Both of these assessments looked beyond manufacturing but they indicate the scale of the shifts taking place in the UK and other economies.

On the other hand, the impact of recent fossil fuel price crises on both people and businesses have been all too clear. Analysis by the ONS following the invasion of Ukraine found more than three quarters of the previous 12 months inflation to be the result of direct increases in the cost of energy and secondary impacts passed through in the costs of goods and services. Households and companies that have shifted to renewable energy and electric vehicles are much better insulated.

The string of geopolitical shocks since COVID has also shown how vulnerable the UK is to supply chain disruptions. The government’s recent move to support the chemicals sector (unfortunately with no expectations around green futureproofing) reflects a need to produce a greater range of products here in the UK. Three quarters of the raw materials used by the UK are imported, exposing businesses to geopolitical risks and volatile international markets and prices. Keeping materials in use longer through repair, remanufacturing and high quality recycling would reduce that dependence.

Green markets will endure

Before President Trump entered the White House, companies around the world were increasingly making and buying greener goods, driven by corporate and government climate goals and policy incentives. If manufacturing sites in the UK wanted to attract investment from parent companies to upgrade their plants, we were hearing that their best chance was if the upgrade would also bring down emissions. And, globally, governments were competing to offer subsidies for clean steel production.

Although that imperative has diminished for now, progress has not stopped. The EU still has its carbon border adjustment mechanism imposing taxes on some high carbon imports. And China is increasing its technological dominance in clean technologies. It’s impossible to imagine that rising global temperatures and climate instability won’t eventually cause the US to refocus.

With investment cycles lasting decades in some sectors, failing to anticipate future trends and markets now is handing the next generation of managers and workers a poisoned chalice.

How should Andy Burnham deliver resilient reindustrialisation?

The high cost of energy should be top of the list

Environmental groups and businesses are often pitted against each other in people’s imaginations but both want thriving UK-based industries rather than seeing jobs and valuable resources go abroad. Both agree too that the high cost of energy is a particular challenge for UK businesses.

Even with considerable concerted intervention by the government in particularly vulnerable sectors like steel, electricity prices remain higher than in competitor countries because of our gas-driven wholesale price. When it comes to gas prices, the gap in prices between the UK and our European neighbours is much smaller but Russia’s invasion of Ukraine left us all adrift, paying nearly five times more than US prices at times.

The answer is to capitalise on the UK’s growing supply of clean energy, which offers a stable price even during crises and cost savings through on-site generation and storage. Industrial heat pumps are already cost competitive with gas boilers over their lifetimes in some sectors and will become increasingly so as upfront costs fall and gas sets our electricity price less often. To encourage that, government must find more ways of rapidly bringing down electricity costs relative to gas and support the uptake of new technologies.

Regulation shouldn’t be a dirty word; businesses need certainty

The challenges of the Ukraine and Iran wars and regression in the narrative around climate ambition, are leading some sectors to push back on regulation. This includes support for the Conservative leader Kemi Badenoch’s pledge in April to scrap the UK’s emissions trading scheme (ETS).

Parts of the UK car industry, having not invested at scale in EV models, keep pushing back on the ZEV mandate – which sets sales targets for EVs in the UK – and also seem to be quietly lobbying against the longer term phase out of petrol and diesel cars. These measures both apply only to UK sales, which make up on average a quarter of the market for domestic manufacturers, so carmakers should have some flexibility when it comes to planning future ranges. The policies will also provide more cheap-to-run EVs for UK consumers.

Both the ETS and ZEV mandate have prompted billions of pounds investment in the UK across manufacturing and other supporting sectors like chargepoint installation and have predictable well signposted goals. Removing them would punish companies that have innovated and invested and send problematic signals about the certainty of other policies. Any reforms should come after analysis of the true causes of companies’ struggles.

Despite links being drawn between the ETS and the closure of the Mossmorran chemicals plant in Scotland last year, for instance, Green Alliance analysis found that the gas price differential between the US and UK was likely to have had ten times the impact of the ETS.

A broader Industrial Strategy

Rather than rushing to cut red tape and shifting the goal posts unhelpfully for market leaders, the new government should find ways to support companies to innovate and invest, including in greener products. Last summer’s Industrial Strategy has delivered some changes but lacked many tools to address the challenges in even target sectors like car making. Other sectors didn’t get much of a mention at all.

Using public procurement to support domestic manufacturing, which Andy Burnham says he wants to do, could be powerful, particularly if it’s linked to long term contracts that protect against an uncertain political backdrop.

ETS revenues could also be reinvested, as happens in the EU, to help companies bring down emissions, thereby lowering their costs. Although neither industry nor the government wants to embed reliance on subsidies, there is a wider case for intervention when you factor in the long term social, security and economic costs of upgrading our industrial base. The value for instance of clean air and green spaces, resilient supply chains and high quality, stimulating jobs.

Bringing the public and workforce along too

Public support for climate action remains high but the claim that climate measures are to blame for industrial decline is attractively simple and risks becoming entrenched.

Investment decisions are, of course, based on more than sentiment, but the stories we tell are important. That’s why the government should draw on the positives and reflect the potential of futureproofed, growing industries and our world leading research base, including for instance, the £4bn new battery plant being built in Somerset, cabling factories providing new employment in the Scottish Highlands and Port of Tyne, and plans to assemble floating wind turbines in Port Talbot and for world leading new hydrogen powered brick kilns in Greater Manchester.

We need an Industrial Strategy that speaks to local needs, building local industrial ecosystems with workers and communities. The push to reindustrialise must not come at the cost of good quality jobs or the UK’s green ambitions, it should be how we achieve them.