Category: Science policy

On UK Research and Innovation’s new start

The UK’s new science funding agency – UK Research and Innovation – is now 2 years old, and its founding Chief Executive, Sir Mark Walport, has recently stepped down, being replaced by the plant scientist Dame Ottoline Leyser. This is a short piece I wrote on the occasion of the transition, for the trade magazine “Research Professional”.

The question UKRI faces, as the custodian of the UK’s public research sector, is this: is the shape of the UK’s research sector right for the problems the country faces? There is much that is excellent about the sector, but it has three big problems: it is too small for the scale of the economy, it is too regionally concentrated, and it is underweight in translational research.

The government is committed to addressing the problem of scale through a very ambitious spending uplift. But where, and on what, should the new money be spent? As Tom Forth and I have recently argued (in our NESTA report, “The Missing £4 billion”), the concentration of research spending in those parts of the country that are already the most prosperous is politically and economically unsustainable. New institutions need to be set up to support the lagging economies outside London and the South East.

International comparisons show that the UK has tended to neglect applied and translational research. To meet the government’s target for R&D intensity, public investment must be designed to induce the private sector to spend more on R&D too.

Yet, paradoxically, many feel that UKRI hasn’t effectively supported the most basic, undirected research well enough either, in contrast to the high reputation of the European Research Council, whose important role in the UK system is now under threat. The role of the new ARPA-like agency planned by the government to sit outside UKRI is another complication. In my view, UKRI should be flexible enough to accommodate such an organisation, and the fact that it is not perceived to be so is a problem.

The new CEO’s hands are not tied by an existing well-developed strategy for UKRI, and more work remains to create a sense of common purpose amongst UKRI’s nine constituent organisations. But Dame Ottoline has a well-earned reputation as a serious thinker about the place of research in the economy and society, not afraid to be critical of some aspects of the existing research system and its cultures and behaviours. She will have the support and good wishes of the research community at a crucial time for UKRI.

Give the UK’s nations and regions the tools they need to prosper

This piece is based on talks I’ve given to present some of the arguments of the paper Tom Forth and I have just published with NESTA. The full paper is available here: The Missing £4 Billion: Making R&D work for the whole UK.

The UK is two countries, economically. In terms of productivity, “Greater South East England” – London, the South East and some of the East of England – is a country with a level of productivity comparable to richest parts of the rest of Northern Europe. But much of the rest of the UK – including the Midlands, the North, much of the Southwest of England, together with Wales and Northern Ireland – is more comparable to East Germany and Southern Italy in its productivity

The differences aren’t quite as stark when we look at living standards, because the UK runs an effective transfer union, where money generated in London and the South East is used to run the public services in the rest of the country. In terms of the balance between the tax and other revenues generated, and current government expenditure, only three regions of the UK put in more than they take out – the highly productive regions of London, the South East and the East of England.

The argument about “levelling up” economic performance across the country is often presented in terms of fairness. But we would have a fairer country if the Greater South East could keep more of the money it generates, while the rest of the country was able to pay its own way. A less economically unbalanced country would be both fairer and more prosperous.

But while the current expenditures of the less productive parts of the country are heavily subsidised by the greater South East, the opposite is the case for those types of investments that would enhance the productivity of the economically lagging regions. For investments like research and development, we spend the most money in exactly those regions that are already the most prosperous and productive. In effect, for many decades, we have been operating an anti-regional policy.

Currently, the regions and subregions containing London, Oxford and Cambridge account for 46 per cent of public and charitable R&D in the UK, with just 21 per cent of the population. Strikingly, public spending on R&D is even more concentrated than private sector spending.

By general agreement, the UK invests too little overall on R&D anyway. The nation’s R&D intensity – total spending on R&D, public and private, as a fraction of GDP – is 1.66 per cent, closer to countries like Italy and Spain than Germany or France, let alone innovation leaders like South Korea, with a total R&D spending of 4.55% of GDP. That’s why it’s welcome that the government has committed to increasing public spending on R&D to £22 billion a year by 2025, to get closer to the OECD average R&D intensity of 2.4%.

How much money would it take to increase R&D spending in the nations and regions to the level in greater South East England? To “level up” per capita investment right across the country would take a bit more than £4 billion a year – £1.6 billion would need to go to the North of England, £1.4 billion to the Midlands, £420 million to Wales, £580 million to South West England and £250 million to Northern Ireland, with spending in Scotland largely unchanged.

These are large numbers. The problem of regional R&D imbalances is a long-standing one, and there’s a tendency among some policy makers to say, “we’ve tried to solve this before and nothing’s worked”. The Regional Development Agencies in England spent about £100 million a year on innovation in the mid-2000’s. This did some useful things but was an order of magnitude too small to make a material difference. We failed in the past because we didn’t really try.

But in the context of a planned increase in R&D spending to £22 billion, given a current 20/21 budget for UKRI (the UK’s single research and innovation agency) of £8.4 billion (itself a substantial increase on earlier years, the necessary increases in the nations and regions are entirely feasible within the planned funding uplift.

Of course, it’s easy to spend money, but more difficult to do this well in a way that maximises the chances that it will lead to better economic outcomes for the whole of the UK, at the same time contributing to the nation’s wider goals. But there are some general guiding principles.

Firstly, we should follow the signals that the market sector gives us. Regions like the English Midlands and North West are characterised by private sector investment in R&D that is disproportionately large compared to the public sector investment. Here there are innovation systems that are strong already, but they need to be supported by public sector investment in the same way as happens in more prosperous Greater South East England. There is a more immediate crisis, here, as well. The impact of Covid-19 on the aerospace and automotive industries is a threat to these innovation systems, and we need to preserve the massive concentrations of know-how in companies like Rolls-Royce and JLR, and their suppliers.

Secondly, where we need to build innovation capacity in those parts of the country which are relatively weak in both public and private sector R&D, we should look to those entirely new industries and clusters we need to build up to meet future challenges. For example, we might want to ask, as we emerge from the current pandemic, whether the life sciences sector we have is right one to meet this kind of public health crisis.

This short term pandemic crisis shouldn’t blind us to the fact we’re immersed in the much longer term crisis of climate change. The government has signed up to a target of net zero greenhouse gas emissions by 2050. This implies a massive transition for our economy, which needs to be underpinned by innovation to make it affordable and achievable. We could be building a new hydrogen economy on Teeside and the Humber, deep sea floating offshore wind in the South West, next generation small modular reactors in Cumbria, all underpinned by research and innovation.

Thirdly, we need to break out of the trap that many of our towns and urban fringes have found themselves in, where low skills, low innovation and low productivity reinforce each other in a bad equilibrium leading to low wages and poor health outcomes. To break this cycle, we need at the same time to raise the demand for skills by attracting inward investment from technologically leading companies and driving up the innovative capacity of the existing business base, and create the supply of skills by a much more joined up approach between further and higher education. The creation of more Advanced Manufacturing Innovation Districts, like the one that’s grown up around the Advanced Manufacturing Research Centre in Rotherham, is one way to do this.

Different places have different problems, so there won’t a single solution. Our major cities outside the greater South East still underperform compared to second tier cities in France or Germany – agglomeration effects are important, but in the UK we don’t seem to be able to capture them fully. These cities need more R&D as part of a wider expansion of high value, knowledge intensive business services. Meanwhile some of the most intractable economic and social problems are to be found in the UK’s coastal and rural fringes – but more R&D probably isn’t the right recipe here. R&D is important, but it’s far from the only tool we have.

The UK’s economic imbalances are long-standing problems, that have been long recognised – and yet little progress has been made towards solving them. The UK’s highly centralised state is part of the problem. At this unique moment, where total R&D investment is planned to increase, we can rebalance R&D across the country without jeopardising the strong innovation systems of the greater South East, which remain a national asset.

A substantial fraction of the planned uplift in R&D spending should be devolved – to the devolved nations, and in England to cities and regions. This isn’t completely straightforward, because of the messy nature of the incomplete English devolution settlement. And it’s a fair comment that many cities and regions don’t yet have the capacity they need to make effective choices about how to spend R&D funds. But these aren’t reasons not to make the changes that are needed; they underline the need to take devolution further and develop that capacity.

To read the whole paper, see: The Missing £4 Billion: Making R&D work for the whole UK.

The Missing £4 billion: making R&D work for the whole UK

Tom Forth and I have a new policy paper out, published by the Innovation Foundation NESTA, called The Missing £4 billion: making R&D work for the whole UK

This was covered by the Financial Times, complete with celebrity endorsement: Academic cited by Cummings wants to redraw map of research spending

Here is the Executive Summary:

The Missing £4 billion: making R&D work for the whole UK

The UK’s regional imbalances in economic performance are exacerbated by regional imbalances in R&D spending

There are two economies in the UK. Much of London, South East England and the East of England has a highly productive, prosperous knowledge-based economy. But in the Midlands and the North of England, in much of South West England and in Wales and Northern Ireland, the economy lags behind our competitors in Northern Europe. Scotland sits in between. In underperforming large cities, in towns that have never recovered from deindustrialisation, in rural and coastal fringes, weak innovation systems are part of the cause of low productivity economies.

The government supports regional innovation systems through its spending on public sector research and development (R&D). This investment is needed now more than ever; we have an immediate economic crisis because of the pandemic, but the long-term problems of the UK economy – a decade of stagnation of productivity growth, which led to stagnant wages and weak government finances, and persistent regional imbalances – remain. Government investment in R&D is highly geographically imbalanced. If the government were to spend at the same intensity in the rest of the country as it does in the wider South East of England, it would spend £4 billion more. This imbalance wastes an opportunity to use public spending to ‘level up’ areas with weaker economies and achieve economic convergence.

The UK’s research base has many strengths, some truly world leading. But three main shortcomings currently inhibit it from playing its full role in economic growth. It is too small for the size of the country, it is relatively weak in translational research and industrial R&D, and it is too geographically concentrated in already prosperous parts of the country, often at a distance from where business conducts R&D.

The UK’s R&D intensity is too low

The UK’s overall R&D intensity is low. Measured as a ratio to (pre-COVID-19 crisis) gross domestic product (GDP), the Organisation for Economic Co-operation and Development (OECD) average is 2.37 per cent. The UK, at 1.66 per cent, is closer to countries like Italy and Spain than Germany or France.

The UK government has committed to matching the current OECD average by 2027, pledging an increase in public spending to £22 billion by 2025. Looking internationally shows us that substantial increases in R&D intensity are possible. Austria, Belgium, Denmark and Korea have all dramatically increased R&D intensity in recent decades. The major part of these increases is funded by the private sector, but public sector increases are almost always required alongside or in advance of this. The ratio of R&D funding from the two sources is typically 2:1, and this is a good rule of thumb for considering how increased R&D might be funded in the UK.

The UK’s R&D is highly regionally imbalanced

Looking at both the total level of spending on R&D and the ratio of public to private R&D spending is a good way to classify innovation systems within regions.
• The South East and East of England are highly research intensive with high investment by the state combined with business investment exceeding what we would expect from a 2:1 ratio.
• London and Scotland receive above-average levels of state investment but have lower- than-average levels of business investment.
• The East Midlands, the West Midlands and North West England are business-led innovation regions with business investment in R&D at or above the UK average but low levels of public investment.
• Wales, Yorkshire and the Humber, and North East England are regional economies with notably low R&D intensities in both the market and non-market-led sectors.
• South West England and Northern Ireland sit between these two groups with similarly low levels of public investment but slightly higher private sector spending on R&D.

A single sentence can summarise the extent to which the UK’s public R&D spending is centralised in just three cities. The UK regions and subregions containing London, Oxford and Cambridge account for 46 per cent of public and charitable R&D in the UK, but just 31 per cent of business R&D and 21 per cent of the population.

How the current funding system has led to inequality

The current situation is the result of a combination of deliberate policy decisions and a natural dynamic in which these small preferences combined with initial advantages are reinforced with time.

For example, of a series of major capital investments in research infrastructure between 2007 and 2014, 71 per cent was made in London, the East and South East of England, through a process criticised by the National Audit Office. The need for continuing revenue funding to support these investments lock in geographical imbalances in R&D for many years.

Imbalanced investment in R&D is, at most, only part of why the UK’s regional economic divides widened in the past and have failed to close in recent decades. But it is a factor that the government can influence. It has failed to do so. Where attempts have been made to use R&D to balance the UK’s economic strengths, they have been insufficient in scale. For example, in the 2000s the English regional development agencies allocated funding with preference to regions with weaker economies, but their total R&D spend was equivalent to just 1.6 per cent of the national R&D budget. These efforts could never have hoped to succeed. Unsurprisingly, and in contrast to vastly larger schemes in Germany, they failed.

We need to do things differently

The sums needed to rebalance R&D spending across the nation are substantial. A crude calculation shows that to level up per capita public spending on R&D across the nations and regions of the UK to the levels currently achieved in London, the South East and East England, additional spending of more than £4 billion would be needed: £1.6 billion would need to go to the North of England, £1.4 billion to the Midlands, £420 million to Wales, £580 million to South West England and £250 million to Northern Ireland. Spending in Scotland would be largely unchanged.

These numbers give a sense of the scale of the problem, but equalising per capita spending is not the only possible criterion for redistributing funding.

We want people to explore other criteria that might guide thinking on where UK public sector and charity spending on R&D is generating the most value possible. The online tool accompanying this paper models different geographical distributions of public R&D spending obtained according to the weight attached to factors such as research excellence, following business R&D spending, targeting economic convergence and investing more where the manufacturing sector is stronger.

Importantly, we do not propose that UK R&D funding is assigned purely by algorithm. We have found that the scale of current imbalances in funding and the scale by which current spending fails to meet even its own stated goal of funding excellence are widely underappreciated. Our tool aims to inform and challenge, not replace existing systems.

To spread the economic benefits of innovation across the whole of the UK, changes are needed. These will include a commitment to greater transparency on how funding decisions are made in the government’s existing research funding agencies, an openness to a broader range of views on how this might change and devolution of innovation funding at a sufficient scale to achieve a better fit with local opportunities.

For the full paper, see The Missing £4 billion: making R&D work for the whole UK.

More reactions to “Resurgence of the Regions”

The celebrity endorsement of my “Resurgence of the regions” paper has led to a certain amount of press interest, which I summarise here.

The Times Higher naturally focuses on the research policy issues. I’m interviewed in the piece “Tory election victory sets scene for UK research funding battle”, which focuses on a perceived tension between a continuing emphasis on supporting “excellence” and disruptive innovation based on existing centres, and my agenda of boosting R&D in the regions to redress productivity imbalances.

Peter Franklin asks, in UnHerd, “Is this the Tories’ real manifesto?”

“Alas, no”, I expect is the answer to that question, but this article does a really great job of summarising the content of my paper. It also includes this hugely generous quotation from Stian Westlake: “The mini-storm over Dom Cummings citing @RichardALJones’s recent paper on innovation policy prompted me to re-read it, and *boy* is it good. I agree with more or less everything, and as a bonus it is delightfully written… On a couple of occasions I’ve been asked by a new science minister ‘what should I read on innovation?’, and it was always quite a hard question to answer. But now, I’d just say ‘read that’.”

I suspect Franklin’s excellent article was instrumental in focusing some wider attention on my paper. The Sunday Times’s Economics Editor, David Smith, agreed that “A renewed focus on innovation can deliver a resurgence in the regions”, while Oliver Wright, in the Times, focused on the industrial strategy implications of the net zero greenhouse gas target, and in particular nuclear energy, in a piece entitled “Reinvigorate north with nuclear power stations”.

It was left to Alan Lockey, writing in CapX, to point out the tension between the government activism I call for and more traditional laissez-faire Conservative attitudes, putting this tension at the centre of what he called “The coming battle for modern Conservatism”. On the one hand, Lockey described the arguments as being “a bit boring”, “comfort-zone industrial policy instincts of Ed Miliband-era social democracy” from “a hitherto politically obscure physicist”… but he also found it “as an object lesson in how to construct an expansive and data-rich case for systemic public policy change … pretty near faultless. The ideas too, I find to be entirely unproblematic”. As he later graciously put it on Twitter, “I was merely just trying to convey that it seemed less controversial perhaps to those of us who are, basically, boring social democrats who see nothing wrong with industrial activism!”

On being endorsed by Dominic Cummings

The former chief advisor to the Prime Minister, Dominic Cummings, wrote a blogpost yesterday about the need for leave voters to mobilise to make sure the Conservatives are elected on the 12 December. At the end of the post, he writes “Ps. If you’re interested in ideas about how the new government could really change our economy for the better, making it more productive and fairer, you’ll find this paper interesting. It has many ideas about long-term productivity, science, technology, how to help regions outside the south-east and so on, by a professor of physics in Sheffield”. He’s referring to my paper “A Resurgence of the Regions: rebuilding innovation capacity across the whole UK”.

As I said on Twitter,“Pleased (I think) to see my paper “Resurgence of the regions” has been endorsed in Dominic Cummings’s latest blog. Endorsement not necessarily reciprocated, but all parties need to be thinking about how to grow productivity & heal our national divides”.

I provided a longer reaction to a Guardian journalist, which resulted in this story today: Academic praised by Cummings is remain-voting critic of Tory plans. Here are the comments I made to the journalist which formed the basis of the story:

I’m pleased that Dominic Cummings has endorsed my paper “Resurgence of the regions”. I think the analysis of the UK’s current economic weaknesses is important and we should be talking more about it in the election campaign. I single out the terrible record of productivity growth since the financial crisis, the consequences of that in terms of flat-lining wages, the role of the weak economy in the fiscal difficulties the government has in balancing the books, and (as others have done) the profound regional disparities in economic performance across the country. I’d like to think that Cummings shares this analysis – the persistence of these problems, though, is hardly a great endorsement for the last 9.5 years of Conservative-led government.

In response to these problems we’re going to need some radical changes in the way we run our economy. I think science and innovation is going to be important for this, and clearly Cummings thinks that too. I also offer some concrete suggestions for how the government needs to be more involved in driving innovation – especially in the urgent problem we have of decarbonising our energy supply to meet the target of net zero greenhouse gas emissions by 2050. It’s good that the Conservative Party has signed up to a 2050 Net Zero Greenhouse Gas target, but the scale of the measures it proposes are disappointingly timid – as I explain in my paper, reaching this goal is going to take much more investment, and more direct state involvement in driving innovation to increase the scale and drive the cost down of low carbon energy. This needs to be a central part of a wider industrial strategy.

I welcome all three parties’ commitment to raise the overall R&D intensity of the economy (to 2.4% of GDP by 2027 for the Conservatives, 3% of GDP by 2030 for Labour, 2.4% by 2027 with longer term aspiration for 3% for the Lib Dems). The UK’s poor record of R&D investment compared to other developed countries is surely a big contributing factor to our stagnating productivity. But this is also a stretching target – we’re currently at 1.7%. It’s going to need substantial increases in public spending, but even bigger increases in R&D investment from the private sector, and we’re going to need to see much more concrete plans for how government might get this might happen. Again, my paper has some suggestions, with a particular focus on building new capacity in those parts of the country where very little R&D gets done – and which, not coincidentally, have the worst economic performance (Wales, Northern Ireland, the North of England in particular).

As for Cummings’s views on Brexit: I voted remain, not least because I thought that a “leave” vote would result in a period of very damaging political chaos for the UK. I can’t say that subsequent events have made me think I was wrong on that. I do think that it would be possible for the UK to do ok outside the EU, but to succeed post-Brexit we’ll need to stay close to Europe in matters such as scientific cooperation (preferably through associating with EU science programmes like the European Research Council),and in matters related to nuclear technology. We will need to be a country that welcomes talented people from overseas, and provides an attractive destination for overseas investment – particularly important for innovation, where more than half of the UK’s business R&D is done by overseas owned firms. The need to have a close relationship with our major trading partners will mean that we’ll need to stay in regulatory alignment with the EU (very important, for example, for the chemicals industry) and minimise frictions for industries, like the automotive industry where the UK is closely integrated into European supply chains, and in the high value knowledge based services which are so important for the UK economy. It doesn’t look like that’s the direction of travel the Conservatives are currently going down.

Whatever happens in the next election, anyone who has any ambition to heal the economic and social divides in this country needs to be thinking about the issues I raise in my paper.

What do we mean by scientific productivity – and is it really falling?

This is the outline of a brief talk I gave as part of the launch of a new Research on Research Institute, with which I’m associated. The session my talk was in was called “PRIORITIES: from data to deliberation and decision-making
. How can RoR support prioritisation & allocation by governments and funders?”

I want to focus on the idea of scientific productivity – how it is defined, and how we can measure it – and whether it is declining – and if it is, what can we do about it?

The output of science increases exponentially, by some measures…

…but what do we get back from that? What is the productivity of the scientific enterprise – the output of the enterprise, as defined by some measure of the output of science per unit input?

It depends on what we think the output of science is, of course.

We could be talking of some measure of the new science being produced and its impact within the scientific community.

But I think many of us – from funders to the wider publics who support that science – might also want to look outside the scientific community. How can we measure the effectiveness with which scientific advances are translated into wider socio-economic goals? As the discourses of “grand challenges” and “mission driven” research become more widely taken up, how will we tell whether those challenges and missions have been met?

There is a gathering sense that the productivity of the global scientific endeavour is declining or running into diminishing returns. A recent article by Michael Nielsen and Patrick Collison asserted that “Science is getting less bang for its buck”, while a group of distinguished economists have answered in the affirmative their own question: “Are ideas getting harder to find?” This connects to the view amongst some economists, that we have seen the best of economic growth and are living in a new age of stagnation.

Certainly the rate of innovation in some science-led industries seems to be slowing down. The combination of Moore’s law and Dennard scaling which brought us exponential growth in computing power in the 80’s and 90’s started to level off around 2004 and has since slowed to a crawl, despite continuing growth in resources devoted to it. Continue reading “What do we mean by scientific productivity – and is it really falling?”

Carbon Capture and Storage: technically possible, but politically and economically a bad idea

It’s excellent news that the UK government has accepted the Climate Change Committee’s recommendation to legislate for a goal of achieving net zero greenhouse emissions by 2050. As always, though, it’s not enough to will the end without attending to the means. My earlier blogpost stressed how hard this goal is going to be to reach in practise. The Climate Change Committee does provide scenarios for achieving net zero, and the bad news is that the central 2050 scenario relies to a huge extent on carbon capture and storage. In other words, it assumes that we will still be burning fossil fuels, but we will be mitigating the effect of this continued dependence on fossil fuels by capturing the carbon dioxide released when gas is burnt and storing it, into the indefinite future, underground. Some use of carbon capture and storage is probably inevitable, but in my view such large-scale reliance on it is, politically and economically, a bad idea.

In the central 2050 net zero scenario, 645 TWh of electricity is generated a year – more than doubled from 2017 value of 300 TWh, reflecting the electrification of sectors like transport. The basic strategy for deep decarbonisation has to be, as a first approximation, to electrify everything, while simultaneously decarbonising power generation: so far, so good.

But even with aggressive expansion of renewable electricity, this scenario still calls for 150 TWh to be generated from fossil fuels, in the form of gas power stations. To achieve zero carbon emissions from this fossil fuel powered electricity generation, the carbon dioxide released when the gas is burnt has to be captured at the power stations and pumped through a specially built infrastructure of pipes to disused gas fields in the North Sea, where it is injected underground for indefinite storage. This is certainly technically feasible – to produce 150 TWh of electricity from gas, around 176 million tonnes of carbon dioxide a year will be produced. For comparison currently about 42 million tonnes of natural gas a year is taken out of the North Sea reservoirs, so reversing the process at four times the scale is undoubtedly doable.

In fact, more carbon capture and storage will be needed than the 176 million tonnes from the power sector, because the zero net greenhouse gas plan relies on it in four distinct ways. In addition to allowing us to carry on burning gas to make electricity, the plan envisages capturing carbon dioxide from biomass-fired power stations too. This should lead to a net lowering of the amount of carbon dioxide in the atmosphere, amounting to a so-called “negative emissions technology”. The idea of these is one offsets the remaining positive carbon emissions from hard to decarbonise sectors like aviation with these “negative emissions” to achieve overall net zero emissions.

Meanwhile the plan envisages the large scale conversion of natural gas to hydrogen, to replace natural gas in industry and domestic heating. One molecule of methane produces two molecules of hydrogen, which can be burnt in domestic boilers without carbon emissions, and one of carbon dioxide, which needs to be captured at the hydrogen plant and pumped away to the North Sea reservoirs. Finally some carbon dioxide producing industrial processes will remain – steel making and cement production – and carbon capture and storage will be needed to render these processes zero carbon. These latter uses are probably inevitable.

But I want to focus on the principal envisaged use of carbon capture and storage – as a way of avoiding the need to move to entirely low carbon electricity, i.e. through renewables like wind and solar, and through nuclear power. We need to take a global perspective – if the UK achieves net zero greenhouse gas status by 2050, but the rest of the world carries on as normal, that helps no-one.

In my opinion, the only way we can be sure that the whole world will decarbonise is if low carbon energy – primarily wind, solar and nuclear – comes in at a lower cost than fossil fuels, without subsidies or other intervention. The cost of these technologies will surely come down: for this to happen, we need both to deploy them in their current form, and to do research and development to improve them. We need both the “learning by doing” that comes from implementation, and the cost reductions that will come from R&D, whether that’s making incremental process improvements to the technologies as they currently stand, or developing radically new and better versions of these technologies.

But we will never achieve these technological improvements and corresponding cost reductions for carbon capture and storage.

It’s always tempting fate to say “never” for the potential for new technologies – but there’s one exception, and that’s when a putative new technology would need to break one of the laws of thermodynamics. No-one has ever come out ahead betting against these.

To do carbon capture and storage will always need additional expenditure over and above the cost of an unabated gas power station. It needs both:

  • up-front capital costs for the plant to separate the carbon dioxide in the first place, infrastructure to pipe the carbon dioxide long distances and pump it underground,
  • lowered conversion efficiencies and higher running costs – i.e. more gas needs to be burnt to produce a given unit of electricity.

    • The latter is an inescapable consequence of the second law of thermodynamics – carbon capture will always need a separation step. Either one needs to take air and separate it into its component parts, taking out the pure oxygen, so one burns gas to produce a pure waste stream consisting of carbon dioxide and water. Or one has to take the exhaust from burning the gas in air, and pull out the carbon dioxide from the waste. Either way, you need to take a mixed gas and separate its components – and that always takes an energy input to drive the loss of entropy that follows from separating a mixture.

    The key point, then, is that no matter how much better our technology gets, power produced by a gas power station with carbon capture and storage will always be more expensive that power from unabated gas. The capital cost of the plant will be greater, and so will the revenue cost per kWh. No amount of technological progress can ever change this.

    So there can only be a business case for carbon capture and storage through significant government interventions in the market, either through a subsidy, or through a carbon tax. Politically, this is an inherently unstable situation. Even after the capital cost of the carbon capture infrastructure has been written off, at any time the plant operator will be able to generate electricity more cheaply by releasing the carbon dioxide produced when the gas is burnt. Taking an international perspective, this leads to a massive free rider problem. Any country will be able to gain a competitive advantage at any time by turning the carbon capture off – there needs to be a fully enforced international agreement to impose carbon taxes at a high enough level to make the economics work. I’m not confident that such an agreement – which would have to cover every country making a significant contribution to carbon emissions to be effective – can be relied to hold on the scale of many decades.

    I do accept that some carbon and capture and storage probably is essential, to capture emissions from cement and steel production. But carbon capture and storage from the power sector is a climate change solution for a world that does not exist any more – a world of multilateral agreements and transnational economic rationality. Any scenario that relies on carbon capture and storage is just a politically very risky way of persuading ourselves that fossil-fuelled business as usual is sustainable, and postponing the necessary large scale implementation and improvement through R&D of genuine low carbon energy technologies – renewables like wind and solar, and nuclear.

    A Resurgence of the Regions: rebuilding innovation capacity across the whole UK

    The following is the introduction to a working paper I wrote while recovering from surgery a couple of months ago. This brings together much of what I’ve been writing over the last year or two about productivity, science and innovation policy and the need to rebalance the UK’s innovation system to increase R&D capacity outside London and the South East. It discusses how we should direct R&D efforts to support big societal goals, notably the need to decarbonise our energy supply and refocus health related research to make sure our health and social care system is humane and sustainable. The full (53 page) paper can be downloaded here.

    We should rebuild the innovation systems of those parts of the country outside the prosperous South East of England. Public investments in new translational research facilities will attract private sector investment, bring together wider clusters of public and business research and development, institutions for skills development, and networks of expertise, boosting innovation and leading to productivity growth. In each region, investment should be focused on industrial sectors that build on existing strengths, while exploiting opportunities offered by new technology. New capacity should be built in areas like health and social care, and the transition to low carbon energy, where the state can use its power to create new markets to drive the innovation needed to meet its strategic goals.

    This would address two of the UK’s biggest structural problems: its profound disparities in regional economic performance, and a research and development intensity – especially in the private sector and for translational research – that is low compared to competitors. By focusing on ‘catch-up’ economic growth in the less prosperous parts of the country, this plan offers the most realistic route to generating a material change in the total level of economic growth. At the same time, it should make a major contribution to reducing the political and social tensions that have become so obvious in recent years.

    The global financial crisis brought about a once-in-a-lifetime discontinuity in the rate of growth of economic quantities such as GDP per capita, labour productivity and average incomes; their subsequent decade-long stagnation signals that this event was not just a blip, but a transition to a new, deeply unsatisfactory, normal. A continuation of the current policy direction will not suffice; change is needed.

    Our post-crisis stagnation has more than one cause. Some sources of pre-crisis prosperity have declined, and will not – and should not – come back. North Sea oil and gas production peaked around the turn of the century. Financial services provided a motor for the economy in the run-up to the global financial crisis, but this proved unsustainable.

    Beyond the unavoidable headwinds imposed by the end of North Sea oil and the financial services bubble, the wider economy has disappointed too. There has been a general collapse in total factor productivity growth – the economy is less able to create higher value products and services from the same inputs than in previous decades. This is a problem of declining innovation in its broadest sense.

    There are some industry-specific issues. The pharmaceutical industry, for example, has been the UK’s leading science-led industry, and a major driver of productivity growth before 2007; this has been suffering from a world-wide malaise, in which lucrative new drugs seem harder and harder to find.

    Yet many areas of innovation are flourishing, presenting opportunities to create new, high value products and services. It’s easy to get excited about developments in machine learning, the ‘internet of things’ and ‘Industrie 4.0’, in biotechnology, synthetic biology and nanotechnology, in new technologies for generating and storing energy.

    But the productivity data shows that UK companies are not taking enough advantage of these opportunities. The UK economy is not able to harness innovation at a sufficient scale to generate the economic growth we need.

    Up to now, the UK’s innovation policy had been focused on academic science. We rightly congratulate ourselves on the strength of our science base, as measured by the Nobel prizes won by UK-based scientists and the impact of their publications.

    Despite these successes, the UK’s wider research and development base suffers from three faults:
    • It is too small for the size of our economy, as measured by R&D intensity,
    • It is particularly weak in translational research and industrial R&D,
    • It is too geographically concentrated in the already prosperous parts of the country.

    Science policy has been based on a model of correcting market failure, with an overwhelming emphasis on the supply side – ensuring strong basic science and a supply of skilled people. We need to move from this ‘supply side’ science policy to an innovation policy that explicitly creates demand for innovation, in order to meet society’s big strategic goals.

    Historically, the main driver for state investment in innovation has been defence. Today, the largest fraction of government research and development supports healthcare – yet this is not done in a way that most effectively promotes either the health of our citizens or the productivity of our health and social care system.

    Most pressingly, we need innovation to create affordable low carbon energy. Progress towards decarbonising our energy system is not happening fast enough, and innovation is needed to decrease the price of low carbon energy and increase its scale, and increase energy efficiency.

    More attention needs to be paid to the wider determinants of innovation – organisation, management quality, skills, and the diffusion of innovation as much as discovery itself. We need to focus more on the formal and informal networks that drive innovation – and in particular on the geographical aspects of these networks. They work well in Cambridge – why aren’t they working in the North East or in Wales?

    We do have examples of new institutions that have catalysed the rebuilding of innovation systems in economically lagging parts of the country. Translational research institutions such as Coventry’s Warwick Manufacturing Group, and Sheffield’s Advanced Manufacturing Research Centre, bring together university researchers and workers from companies large and small, help develop appropriate skills at all levels, and act as a focus for inward investment.

    These translational research centres offer models for new interventions that will raise productivity levels in many sectors – not just in traditional ‘high technology’ sectors, but also in areas of the foundational economy such as social care. They will drive the innovation needed to create an affordable, humane and effective healthcare system. We must also urgently reverse decades of neglect by the UK of research into new sustainable energy systems, to hasten the overdue transition to a low carbon economy. Developing such centres, at scale, will do much to drive economic growth in all parts of the country.

    Continue to read the full (53 page) paper here (PDF).

    The climate crisis now comes down to raw power

    Fifteen years ago it was possible to be optimistic about the world’s capacity to avert the worst effects of climate change. The transition to low carbon energy was clearly going to be challenging and it probably wasn’t going to be fast enough. But it did seem to be going with the grain of the evolution of the world’s energy economy, in this sense: oil prices seemed to be on an upward trajectory, squeezed between the increasingly constrained supplies predicted by “peak oil” theories, and the seemingly endless demand driven by fast developing countries like China and India. If fossil fuels were on a one-way upward trajectory in price and availability, then renewable energy would inevitably take its place – subsidies might bring forward their deployment, but the ultimate destination of a decarbonised energy system was assured.

    The picture looks very different today. Oil prices collapsed in the wake of the global financial crisis, and after a short recovery have now fallen below the most pessimistic predictions of a decade ago. This is illustrated in my plot, which shows the long-term evolution of real oil prices. As Vaclav Smil has frequently stressed, long range forecasting of energy trends is a mugs game, and this is well-illustrated in my plot, which shows successive decadal predictions of oil prices by the USA’s Energy Information Agency.


    Successive predictions for future oil prices made by the USA’s EIA in 2000 and 2010, compared to the actual outcome up to 2016.

    What underlies this fall in oil prices? On the demand side, this partly reflects slower global economic growth than expected. But the biggest factor has been a shock on the supply side – the technological revolution behind fracking and the large-scale exploitation of tight oil, which has pushed the USA ahead of Saudi Arabia as the world’s largest producer of oil. The natural gas supply situation has been transformed, too, through a combination of fracking in the USA and the development of a long-distance market in LNG from giant reservoirs in places like Qatar and Iran. Since 1997, world gas consumption has increased by 25% – but the size of proven reserves has increased by 50%. The uncomfortable truth is that we live in a world awash with cheap hydrocarbons. As things now stand, economics will not drive a transition to low carbon energy.

    A transition to low carbon energy will, as things currently stand, cost money. Economist Jean Pisani-Ferry puts this very clearly in a recent article – “let’s be clear: the green transition will not be a free lunch … we’ll be putting a price on something that previously we’ve enjoyed for free”. Of course, this reflects failings of the market economy that economics already understands. If we heat our houses by burning cheap natural gas rather than installing an expensive ground-source heat pump and running that off electricity from offshore wind, we get the benefit of saving money, but we impose the costs of the climate change we contribute to on someone else entirely (perhaps the Bangladesh delta dweller whose village gets flooded). And if we are moved to pay out for the low-carbon option, the sense of satisfaction our ethical superiority over our gas-guzzling neighbours gives us might be tempered by resentment of their greater disposable income.

    The problems of uncosted externalities and free riders are well known to economists. But just because the problems are understood, it doesn’t mean they have easy solutions. The economist’s favoured remedy is a carbon tax, which puts a price on the previously uncosted deleterious effects of carbon emissions on the climate, but leaves the question of how best to mitigate the emissions to the market. It’s an elegant and attractive solution, but it suffers from two big problems.

    The first is that, while it’s easy to state that emitting carbon imposes costs on the rest of the world, it’s very difficult to quantify what those costs are. The effects of climate change are uncertain, and are spread far into the future. We can run a model which will give us a best estimate of what those costs might be, but how much weight should we give to tail risk – the possibility that climate change leads to less likely, but truly catastrophic outcomes? What discount rate – if any – should we use, to account for the fact that we value things now more than things in the future?

    The second is that we don’t have a world authority than can impose a single tax uniformly. Carbon emissions are a global problem, but taxes will be imposed by individual nations, and given the huge and inescapable uncertainty about what the fair level of a carbon tax would be, it’s inevitable than countries will impose carbon taxes at the low end of the range, so they don’t disadvantage their own industries and their own consumers. This will lead to big distortions of global trade, as countries attempt to combat “carbon leakage”, where goods made in countries with lower carbon taxes undercut goods which more fairly price the carbon emitted in their production.

    The biggest problems, though, will be political. We’ve already seen, in the “Gilets Jaune” protests in France, how raising fuel prices can be a spark for disruptive political protest. Populist, authoritarian movements like those led by Trump in the USA are associated with enthusiasm for fossil fuels like coal and oil and a downplaying or denial of the reality of the link between climate change and carbon emissions. To state the obvious, there are very rich and powerful entities that benefit enormously from the continued production and consumption of fossil fuels, whether those are nations, like Saudi Arabia, Australia, the USA and Russia, or companies like ExxonMobil, Rosneft and Saudi Aramco (the latter two, as state owned enterprises, blurring the line between the nations and the companies).

    These entities, and those (many) individuals who benefit from them, are the enemies of climate action, and oppose, from a very powerful position of incumbency, actions that lesson our dependence on fossil fuels. How do these groups square this position with the consensus that climate change driven by carbon emissions is serious and imminent? Here, again, I think the situation has changed since 10 or 15 years or so ago. Then, I think many climate sceptics did genuinely believe that anthropogenic climate change was unimportant or non-existent. The science was complicated, it was plausible to find a global warming hiatus in the data, the modelling was uncertain – with the help of a little motivated reasoning and confirmation bias, a sceptical position could be reached in good faith.

    I think this is much less true now, with the warming hiatus well and truly over. What I now suspect and fear is that the promoters of and apologists for continued fossil fuel burning know well that we’re heading towards a serious mid-century climate emergency, but they are confident that, from a position of power, their sort will be able to get through the emergency. With enough money, coercive power, and access to ample fossil fuel energy, they can be confident that it will be others that suffer. Bangladesh may disappear under the floodwaters and displace millions, but rebuilding Palm Beach won’t be a problem.

    We now seem to be in a world, not of peak oil, but of a continuing abundance of fossil fuels. In these circumstances, perhaps it is wrong to think that economics can solve the problem of climate change. It is a now a matter of raw power.

    Is there an alternative to this bleak conclusion? For many the solution is innovation. This is indeed our best hope – but it is not sufficient simply to incant the word. Nor is the recent focus in research policy on “grand challenges” and “missions” by itself enough to provide an implementation route for the major upheaval in the way our societies are organised that a transition to zero-carbon energy entails. For that, developing new technology will certainly be important, and we’ll need to understand how to make the economics of innovation work for us, but we can’t be naive about how new technologies, economics and political power are entwined.

    What drives productivity growth in the UK economy?

    How do you get economic growth? Economists have a simple answer – you can put in more labour, by having more people working for longer hours, or you can put in more capital, building more factories or buying more machines, or – and here things get a little more sketchy – you can find ways of innovating, of getting more outputs out of the same inputs. In the framework economists have developed for thinking about economic growth, the latter is called “total factor productivity”, and it is loosely equated with technological progress, taking this in its broadest sense. In the long run it is technological progress that drives improved living standards. Although we may not have a great theoretical handle on where total factor productivity comes from, its empirical study should tell us something important about the sources of our productivity growth. Or, in our current position of stagnation, why productivity growth has slowed down so much.

    Of course, the economy is not a uniform thing – some parts of it may be showing very fast technological progress, like the IT industry, while other parts – running restaurants, for example, might show very little real change over the decades. These differences emerge from the sector based statistics that have been collected and analysed for the EU countries by the EU KLEMS Growth and Productivity Accounts database.

    Sector percentage of 2015 economy by GVA contribution versus aggregate total factor productivity growth from 1998 to 2015. Data from EU KLEMS Growth and Productivity Accounts database.

    Here’s a very simple visualisation of some key results of that data set for the UK. For each sector, the relative importance of the sector to the economy as a whole is plotted on the x-axis, expressed as a percentage of the gross value added of the whole economy. On the y-axis is plotted the total change in total factor productivity over the whole 17 year period covered by the data. This, then, is the factor by which that sector has produced more output than would be expected on the basis of additional labour and capital. This may tell us something about the relative effectiveness of technological progress in driving productivity growth in each of these sectors.

    Broadly, one can read this graph as follows: the further right a sector is, the more important it is as a proportion of the whole economy, while the nearer the top a sector is, the more dynamic its performance has been over the 17 years covered by the data. Before a more detailed discussion, we should bear in mind some caveats. What goes into these numbers are the same ingredients as go into the measurement of GDP as a whole, so all the shortcomings of that statistic are potentially issues here.

    A great starting point for understanding these issues is Diane Coyle’s book GDP: a brief but affectional history. The first set of issues concern what GDP measures and what it doesn’t measure. Lots of kinds of activity are important for the economy, but they only tend to count in GDP if money changes hands. New technology can shift these balances – if supermarkets replace humans at the checkouts by machines, the groceries still have to be scanned, but now the customer is doing the work for nothing.

    Then there are some quite technical issues about how the measurements are done. This includes properly accounting for improvements in quality where technology is advancing very quickly; failing to fully account for the increased information transferred through a typical internet connection will mean that overall inflation will be overestimated, and productivity gains in the ICT will be understated (see e.g. A Comparison of Approaches to Deflating Telecoms Services Output, PDF). For some of the more abstract transactions in the modern economy – particularly in the banking and financial services sector, some big assumptions have to be made about where and how much value is added. For example, the method used to estimate the contribution of financial services – FISIM, for “Financial intermediation services indirectly measured” – has probably materially overstated the contribution of financial services to GDP by not handling risk correctly, as argued in this recent ONS article.

    Finally, there’s the big question of whether increases in GDP correspond to increases in welfare. The general answer to this question is, obviously, not necessarily. Unlike some commentators, I don’t take this to mean that we shouldn’t take any notice of GDP – it is an important indicator of the health of an economy and its potential to supply people’s needs. But it does need looking at critically. A glazing company that spent its nights breaking shop windows and its days mending them would be increasing GDP, but not doing much for welfare – this is a ridiculous example, but there’s a continuum between what economist William Baumol called unproductive entrepreneurship, the more extractive varieties of capitalism documented by Acemoglu and Robinson – and outright organised crime.

    To return to our plot, we might focus first on three dynamic sectors – information and communications, manufacturing, and professional, scientific, technical and admin services. Between them, these sectors account for a bit more than a quarter of the economy, and have shown significant improvements in total factor productivity over the period. In this sense it’s been ICT, manufacturing and knowledge-based services that have driven the UK economy over this period.

    Next we have a massive sector that is important, but not yet dynamic, in the sense of having demonstrated slightly negative total factor productivity growth over the period. This comprises community, personal and social services – notably including education, health and social care. Of course, in service activities like health and social care it’s very easy to mischaracterise as a lowering of productivity a change that actually corresponds to an increase in welfare. On the other hand, I’ve argued elsewhere that we’ve not devoted enough attention to the kinds of technological innovation in health and social care sectors that could deliver genuine productivity increases.

    Real estate comprises a sector that is both significant in size, and has shown significant apparent increases in total factor productivity. This is a point at which I think one should question the nature of the value added. A real estate business makes money by taking a commission on property transactions; hence an increase in property prices, given constant transaction volume, leads to an apparent increase in productivity. Yet I’m not convinced that a continuous increase in property prices represents the economy generating real value for people.

    Finance and insurance represents a significant part of the economy – 7% – but its overall long term increase in total factor productivity is unimpressive, and probably overstated. The importance of this sector in thinking about the UK economy represents a distortion of our political economy.

    The big outlier at the bottom left of the plot is mining and quarrying, whose total factor productivity has dropped by 50% – what isn’t shown is that its share of the economy has substantially fallen over the period too. The biggest contributor to this sector is North Sea oil, whose production peaked around 2000 and which has since been rapidly falling. The drop in total factor productivity does not, of course, mean that technological progress has gone backwards in this sector. Quite the opposite – as the easy oil fields are exhausted, more resource – and better technology – are required to extract what remains. This should remind us of one massive weakness in GDP as a sole measure of economic progress – it doesn’t take account of the balance sheet, of the non-renewable natural resources we use to create that GDP. The North Sea oil has largely gone now and this represents an ongoing headwind to the UK economy that will need more innovation in other sectors to overcome.

    This approach is limited by the way the economy needs to be divided up into sectors. Of course, this sectoral breakdown is very coarse – within each sector there are likely to be outliers with very high total productivity growth which dramatically pull up the average of the whole sector. More fundamentally, it’s not obvious that the complex, networked nature of the modern economy is well captured by these rather rigid barriers. Many of the most successful manufacturing enterprises add big value to their products with the services that come attached to them, for example.

    We can look into the EU Klems data at a slightly finer grained level; the next plot shows importance and dynamism for the various subsectors of manufacturing. This shows well the wide dispersions within the overall sectors – and of course within each of these subsectors there will be yet more dispersion.

    Sub-sector fraction of 2015 economy by GVA contribution versus aggregate total factor productivity growth from 1998 to 2015 for subsectors of manufacturing. Data from EU KLEMS Growth and Productivity Accounts database.

    The results are perhaps unsurprising – areas traditionally considered part of high value manufacturing – transport equipment and chemicals, which include aerospace, automotive, pharmaceuticals and speciality chemicals – are found in the top right quadrant, important in terms of their share of the economy, dynamic in terms of high total factor productivity growth. The good total factor productivity performance of textiles is perhaps more surprising, for an area often written off as part of our industrial heritage. It would be interesting to look in more detail at what’s going on here, but I suspect that a big part of it could be the value that can be added by intangibles like branding and design. Total factor productivity is not just about high tech and R&D, important though the latter is.

    Clearly this is a very superficial look at a very complicated area. Even within the limitations of the EU Klems data set, I’ve not considered how rates of TFP growth have varied by time – before and after the global financial crisis, for example. Nor have I considered the way shifts between sectors have contributed to overall changes in productivity across the economy – I’ve focused only on rates, not on starting levels. And of course, we’re talking here about history, which isn’t always a good guide to the future, where there will be a whole new set of technological opportunities and competitive challenges. But as we start to get serious about industrial strategy, these are the sorts of questions that we need to be looking into.