Reflections on the UK’s new Innovation Strategy

The UK published an Innovation Strategy last week; rather than a complete summary and review, here are a few of my reflections on it. It’s a valuable and helpful document, though I don’t think it’s really a strategy yet, if we expect a strategy to give a clear sense of a destination, a set of plans to get there and some metrics by which to measure progress. Instead, it’s another milestone in a gradual reshaping of the UK’s science landscape, following last year’s R&D Roadmap, and the replacement of the previous administration’s Industrial Strategy – led by the Department of Business, Energy and Industrial Strategy – by a Treasury driven “Plan for Growth”.

The rhetoric of the current government places high hopes on science as a big part of the UK’s future – a recent newspaper article by the Prime Minister promised that “We want the UK to regain its status as a science superpower, and in so doing to level up.” There is a pride in the achievements of UK science, not least in the recent Oxford Covid vaccine. And yet there is a sense of potential not fully delivered. Part of this is down to investment – or the lack of it: as the PM correctly noted: “this country has failed for decades to invest enough in scientific research, and that strategic error has been compounded by the decisions of the UK private sector.”

Last week’s strategy focused, not on fundamental science, but on innovation. As the old saying goes, “Research is the process of turning money into ideas, innovation is turning ideas into money” – and, it should be added, other desirable outcomes for the nation and society – the necessary transition to zero carbon energy, better health outcomes, and the security of the realm in a world that feels less predictable. But the strategy acknowledges that this process hasn’t been working – we’ve seen a decline in productivity growth that’s unprecedented in living memory.

This isn’t just a UK problem – the document refers to an apparent international slowing of innovation in pharmaceuticals and semiconductors. But the problem is worse in the UK than in comparator nations, and the strategy doesn’t shy away from connecting that with the UK’s low R&D intensity, both public and private: “One key marker of this in the UK is our decline in the rate of growth in R&D spending – both public and private. In the UK, R&D investment declined steadily between 1990 and 2004, from 1.7% to 1.5% of GDP, then gradually returned to be 1.7% in 2018. This has been constantly below the 2.2% OECD average over that period.”

One major aspiration that the government is consistent about is the target to increase total UK investment in R&D (public and private) to reach 2.4% of GDP by 2027, from its current value of about 1.7%. As part of this there is a commitment to increase public spending from £14.9 bn this year to £22 bn – by a date that’s not specified in the Innovation Strategy. An increase of this scale should prompt one to ask whether the institutional landscape where research is done is appropriate, and the document announces a new review of that landscape.

Currently the UK’s public research infrastructure is dominated by universities to a degree that is unusual amongst comparator nations. I’m glad to see that the Innovation Strategy doesn’t indulge in what seems to be a widespread urge in other parts of government to denigrate the contribution of HE to the UK’s economy, noting that “in recent years, UK universities have become more effective at attracting investment and bringing ideas to market. Their performance is now, in many respects, competitive with the USA in terms of patents, spinouts, income from IP and proportion of industrial research.” But it is appropriate to ask whether other types of research institution, with different incentive structures and funding arrangements, might be needed in addition to – and to make the most of – the UK’s academic research base.

But there are a couple of fundamentally different types of non-university research institutions. On the one hand, there are institutions devoted to pure science, where investigators have maximum freedom to pursue their own research agendas. Germany’s Max Planck Institutes offer one model, while the Howard Hughes Medical Institute’s Janelia Research Campus, in the USA, has some high profile admirers in UK policy circles. On the other hand, there are mission-oriented institutes devoted to applied research, like the Fraunhofer Institutes in Germany, the Industrial Technology Research Institute in Taiwan, and IMEC (the Interuniversity Microelectronics Centre) in Belgium. The UK has seen a certain amount of institutional evolution in the last decade already, with the establishment of the Turing Institute, the Crick Institute, the Henry Royce Institute, the Rosalind Franklin Institute, the network of Catapult Centres, to name a few. It’s certainly timely to look across the landscape as it is now to see the extent to which these institutions’ missions and the way they fit together in a wider system have crystallised, as well as to ask whether the system as a whole is delivering the outcomes we want as a society.

There is one inescapable factor about the institutional landscape we have now that is seriously underplayed – that is that what we have now is a function of the wider political and economic landscape – and the way that’s changed over the decades. For example, there’s a case study in the Innovation Strategy of Bell Laboratories in the USA. This was certainly a hothouse of innovation in its heyday, from the 1940’s to the 1980’s – but that reflected its unique position, as a private sector laboratory that was sustained by the monopoly rents of its parent. But that changed with the break-up of the Bell System in the 1980’s, itself a function of the deregulatory turn in US politics at the time, and the institution is now a shadow of its former self. Likewise, it’s impossible to understand the drastic scaling back of government research laboratories in the UK in the 1990’s without appreciating the dramatic policy shifts of governments in the 80’s and 90’s. A nation’s innovation landscape reflects wider trends in political economy, and that needs to be understood better and the implications made more explicit.

With the Innovation Strategy was published a “R&D People and Culture Strategy”. This contains lots of aspirations that few would disagree with, but not much in the way of concrete measures to fix things. To connect this with the previous discussion, I would have liked to have seen much more discussion of the connection between the institutional arrangements we have for research, the incentive structure produced by those arrangements, and the culture that emerges. It’s a reasonable point to complain that people don’t move as easily from industry to academia and back as they used too, but it needs to be recognised that this is because the two have drifted apart; with only a few exceptions, the short term focus of industry – and the high pressure to publish on academics – makes this mobility more difficult. From this perspective, one question we should ask about our institutional landscape, is whether it is the right one to allow the people in the system to flourish and fulfil their potential?

We shouldn’t just ask in what kind of institutions research is done, but also where those are institutions situated geographically. The document contains a section on “Levelling Up and innovation across the UK”, reasserting as a goal that “we need to ensure more places in the UK host world-leading and globally connected innovation clusters, creating more jobs, growth and productivity in those areas.” In the context of the commitment to increase the R&D intensity of the economy, “we are reviewing how we can increase the proportion of total R&D investment, public and private, outside London, the South East, and East of England.”

The big news here, though, is that the promised “R&D and Place Strategy” has been postponed and rolled into the forthcoming “Levelling Up” White Paper, expected in the autumn. If this does take the opportunity of considering in a holistic way how investments in transport, R&D, skills and business support can be brought together to bring about material changes in the productivity of cities and regions that currently underperform, that is not a bad thing. I was a member of the advisory group for the R&D and Place strategy, so I won’t dwell further on this issue here, beyond saying that I recognise many of the issues and policy proposals which that body has discussed, so I await the final “Levelling Up” White Paper with interest.

A strategy does imply some prioritisation, and there are a number of different ways in which one might define priorities. The Coalition Government defined 8 Great Technologies; the 2017 Industrial Strategy was built around “Grand Challenges” and “Sector Deals” covering industrial sectors such as Automotive and Aerospace. The current Innovation Strategy introduces seven “technology families” and a new “Innovation Missions Programme”.

It’s interesting to compare the new “seven technology families” with the old “eight great technologies”. For some the carry over is fairly direct, albeit with some wording changes reflecting shifting fashions – robotics and autonomous systems becomes robotics and smart machines, energy and its storage becomes energy and environment technologies, advanced materials and nanotechnology becomes advanced materials and manufacturing, synthetic biology becomes engineering biology. At least two of the original 8 Great Technologies always looked more like industry sectors than technologies – satellites and commercial applications of space, and agri-science. Big data and energy-efficient computing has evolved into AI, digital and advanced computing, reflecting a genuine change in the technology landscape. Regenerative medicine looks like it’s out of favour, replaced in the biomedical area by bioinformatics and genomics. Quantum technology became appended to the “8 great” a year or two later, and this is now expanded to electronics, photonics and quantum.

Interesting thought the shifts in emphasis may be, the key issue is the degree to which these high level priorities are translated into different outcomes in institutions and funding programmes. How, for example, are these priority technology families reflected in advisory structures at the level of UKRI and the research councils? And, most uncomfortable of all, a decision to emphasise some technology families must imply, if it has any real force, a corresponding decision to de-emphasise some others.

One suspects that organisation through industrial sectors is out of favour in the new world where HM Treasury is in the driving seat; for HMT a focus on sectors is associated with incumbency bias, with newer fast-growing industries systematically under-represented, and producer capture of relevant government departments and agencies, leading to a degree of policy attention that reflects a sector’s lobbying effectiveness rather than its importance to the economy.

Despite this colder new environment, the ever opportunistic biomedical establishment has managed to rebrand their sector deal as a “Life Sciences Vision”. The sector lens remains important, though, because industrial sectors do face their own individual issues, all the more so at a time of rapid change. Successfully negotiating the transition to electric vehicles represents an existential challenge to the automotive sector, while for the persistently undervalued chemicals sector, withdrawal from the EU regulatory framework – REACH – threatens substantial extra costs and frictions, while the transition to net zero presents both a challenge for this energy intensive industry, and a huge set of new potential markets as the supply chain for new clean-tech industries like batteries is developed.

One very salutary clarification has emerged as a side-effect of the pandemic. The vaccination programme can be held up as a successful exemplar of an “innovation mission”. This emphasises that a “mission” shouldn’t just be a vague aspiration, but a specific engineering project with a product at the end of it – with a matching social infrastructure developed to ensure that the technology is implemented to deliver the desired societal outcome. Thought of this way, a mission can’t just be about discovery science – it may need the development of new manufacturing capacity, new ICT systems, repurposing of existing infrastructures. Above all, a mission needs to be executed with speed, decisiveness, and a willingness to spend money in more than homeopathic quantities, characteristics that aren’t strongly associated with recent UK administrations.

What further innovation missions can we expect? It isn’t characterised in these terms, but the project to build a prototype power fusion reactor – the “Spherical Tokamak for Energy Production” – could be thought as another one. By no means guaranteed to succeed, it would be a significant development if it did work, and in the meantime it probably will support the spinning out of a number of potentially important technologies for other applications, such as new materials for extreme environments, and further developments in robotics.

Who will define future “innovation missions”? The answer seems to be the new National Science and Technology Council, to be chaired by the Prime Minister and run by the government’s Chief Scientific Advisor, Sir Patrick Vallance, given an expanded role and an extra job title – National Technology Adviser. In the words of the Prime Minister, “It will be the job of the new National Science and Technology Council to signal the challenges – perhaps even to specify the breakthroughs required – and we hope that science, both public and commercial, will respond.”

But here there’s a lot to fill in terms of the mechanisms of how this will work. How will the NSTC make its decisions – who will be informing those discussions? And how will those decisions be transmitted to the wider innovation ecosystem – government departments and their delivery agencies like UKRI, and its component research councils and innovation agency InnovateUK? There is a new system emerging here, but the way it will be wired is as yet far from clear.

The Prime Minister’s office asserts control over UK science policy

The Daily Telegraph published a significant article from the Prime Minister about science and technology this morning, to accompany a government announcement “Prime Minister sets out plans to realise and maximise the opportunities of scientific and technological breakthroughs”.

Here are a few key points I’ve taken away from these pieces.

1. There’s a reassertion in the PM’s article of the ambition to raise government spending on science from its current value of £14.9 billion to a new target of £22 bn (though no date is attached to this target), together with recognition that this needs to lever in substantially more private sector R&D spending to meet the overall target of the goal of total R&D spending – public and private – of 2.4% of GDP. The £22bn spending goal was promised in the March 2020 budget, but had since disappeared from HMT documents.

2. But there’s a strong signal that this spending will be directed to support state priorities: “It is also the moment to abandon any notion that Government can be strategically indifferent”.

3. A new committee, chaired by the Prime Minister, will be set up – the National Science and Technology Council. This will establish those state priorities: “signalling the challenges – perhaps even to specify the breakthroughs required”. This could be something like the ministerial committee recommended in the Nurse Review, which it was proposed would coordinate the government’s response to science and technology challenges right across government.

4. There is an expanded role for the Government Chief Scientific Advisor, Sir Patrick Vallance, as National Technology Advisor, in effect leading the National Science and Technology Council.

5. A new Office for Science and Technology Strategy is established to support the NSTC. This is based in the Cabinet Office – emphasising its whole-of-government remit. Presumably this supersedes, and/or incorporates, the existing Government Office of Science, which is now based in BEIS.

6. There is a welcome recognition of some of the current weaknesses of the UK’s science and innovation – the article talks about restoring Britain’s status as a science superpower” (my emphasis), after decades of failure to invest, both by the state and by British industry: “this country has failed for decades to invest enough in scientific research, and that strategic error has been compounded by the decisions of the UK private sector”. The article highlights the UK’s loss of capacity in areas like vaccine manufacture and telecoms.

7. The role of the new funding agency ARIA is defined as looking for “Unknown unknowns”, while NSTC sets out priorities supporting missions like net zero, cyber threats and medical issues like dementia. There is no mention of the UK’s current main funder of upstream research – UKRI – but presumably its role is to direct the more upstream science base to support the missions as defined by NSTC.

8. The role of science and technology in creating economic growth remains important, with an emphasis on scientifically led start-ups and scale-ups, and a reference to “Levelling up” by spreading technology led economic growth outside the Golden Triangle to the whole country.

As always, the effectiveness with which a reorganised structure delivers meaningful results will depend on funding decisions made in the Autumn’s spending review – and thus the degree to which HM Treasury is convinced by the arguments of the NSTC, or compelled by the PM to accept them.

What next for UK Industrial Strategy?

The UK’s industrial strategy landscape was overturned again in the March budget, with the previous strategy (as described in the 2017 White Paper from Greg Clark, Business Minister in the May government, superseded by a Treasury document: “Build back better: our plan for growth”. Is this merely a “rebranding”, or a more substantial repudiation of the very idea of industrial strategy?

From what I can deduce, it is neither of these extremes – instead it reflects some unresolved tension inside government between two views of how industrial policy should be framed. In one view – traditionally associated with HM Treasury – the government should restrict itself to general measures that it is thought will promote productivity growth across the whole economy, resisting any measures that selectively one sector of the economy over another. This is often called “horizontal” industrial policy, in contrast to so-called “vertical” industrial strategy, in which particular sectors of the economy that are thought to be of particular importance are singled out for special support. The 2017 White Paper did signal some return to “vertical” industrial strategy, though we can see recent precursors for this going back to Mandelson’s return to the Department of Business, Innovation and Skills (as BEIS – the department for Business, Energy and Industrial Strategy was called then) in 2008, and in the continuing support for sectors such as aerospace, automotive and life sciences since then. It seems that the Treasury “Plan for Growth” marks a swing of the pendulum back towards a focus on “horizontal” industrial policy, though the signals remain somewhat mixed.

The biggest signal of a change of direction following the March budget was the abolition of the Industrial Strategy Council. This was a non-statutory body set up by BEIS to monitor and provide advice about the implementation of the Industrial Strategy, chaired by the Bank of England’s Chief Economist, Andy Haldane, and featuring a stellar array of economists and business people. The Industrial Strategy Council’s final annual report gives a great outline of what an industrial strategy should be – “a programme of supply-side policies to drive prosperity in and across the economy”, whose key ingredients should be “scale, longevity and policy co-ordination”. The regional dimensions of industrial strategy, they say, should be co-created with businesses and regional actors (as we’ve seen in the development of local industrial strategies). The report calls for the use of clear metrics to judge success by, but to look “beyond these “traditional” drivers of productivity to measures of social, human, and natural capital, as well as broader welfare impacts”. Naturally, the Industrial Strategy Council thinks it’s a good idea to have an independent – and preferably statutory – body to provide independent monitoring and advice. There’s an good summary in this FT article by Andy Haldane – UK industrial strategy is dead, long may it live.

Leaving aside the signals that winding up the Industrial Strategy Council might be sending, what’s the substance in the new Treasury document “Build back better: our plan for growth”?

I don’t find a lot to argue with in the diagnosis of the problems. The UK’s poor productivity performance since the global financial crisis is placed front and centre. A telling graph highlights the growing gap in productivity between the UK and France, Germany and the USA, while another graph (shown below) makes it clear that this isn’t just an abstract issue of economics – the stagnation of wages and living standards the UK has seen since the financial crisis closely tracks the productivity slow-down. The UK’s persistent regional disparities in productivity, about which I’ve written at length in the past, are highlighted, too, with the problem identified (correctly, in my view) as arising from “cities outside London not fully capturing the benefits of their size”. The level of analysis of the causes of these issues is somewhat more sketchy, with the Treasury ascribing the problem primarily to be persistent low investment in physical capital and skills.


A lost decade. UK Labour productivity and real wages since 2000. From HM Treasury’s Build back better: our plan for growth. Open Government License.

The new framework for Treasury industrial strategy is built on three “pillars for growth” – infrastructure, skills and innovation. This is classical “horizontal” industrial strategy, without a focus on any particular sectors. But there are priorities – three goals, each of rather different character.

The first of these is “levelling up” – a (commendable) commitment to “ensure the benefits of growth are spread to all corners of the UK”, tackling regional disparities in health and education outcomes, supporting struggling towns, and ensuring that “every region and nation of the UK [has] at least one globally competitive city, acting as hotbeds of innovation and hubs of high value activity”. The second is the 2050 net zero greenhouse gas target, where the stress is laid on the number of “green jobs” this will produce. The third priority is the post-Brexit one of “taking advantage of the opportunities that come with our new status as a fully sovereign trading nation” – as “Global Britain”.

The plans for building on these three pillars and three priorities remain vague – some existing commitments are reasserted, such as the plan to increase public infrastructure spending, to meet an total R&D spending target of 2.4% of GDP, to deliver the FE White Paper, to introduce the new science funding agency “ARIA”, and to introduce “Freeports”. Further details are promised later, including an Innovation Strategy and the R&D Places Strategy.

The reduction of emphasis in this document on the sectors that were so prominent in the previous industrial strategy – such as aerospace, automotive, and life sciences – has clearly caused some anxiety in business circles. There’s been a response to this, in the shape of a joint letter from BEIS Secretary of State Kwarteng & Chancellor of the Exchequer Sunak. This emphasises continuity with the previous industrial strategy, asserting that the new plan “builds on the best of the Industrial Strategy from 2017 and makes the most of our strengths right across the economy”. They promise that “this government remains committed to its industrial sectors” and that the existing sector deals (e.g. for Aerospace, Automotive and Life Sciences) will be honoured. And there is the promise of more in the future – “we will follow up the plan for growth with an Innovation Strategy, as well as strategies for net zero, hydrogen and space” and “we will also develop a vision for high-growth sectors and technologies.”

There’s another indication that the words “industrial strategy” may not yet be completely unspeakable in the current government – shortly after the budget, the Ministry of Defense published their “Defense and Security Industrial Strategy”. I think this is positive – another way of creating some priorities in industrial strategy without entirely going down the sector route is for the government to focus on strategically important, long-term goals of the state, and systematically to evaluate what innovation is required and what industrial capacity needs to be built to deliver those goals.

What other goals should be pursued besides defense? The obvious two are net zero and healthcare. As a matter of urgency, the government should be developing a long-term Net Zero Industrial Strategy, to accompany a more detailed road-map for the huge job of transforming the UK’s energy economy. And as we recover from the pandemic, there needs to be a refocused Healthcare Industrial Strategy, building on the successes of the old “Life Sciences Strategy” but focusing more on population health, and learning both the positive and negative lessons from the way the UK’s health and life sciences sector responded to the pandemic. The lately departed Industrial Strategy Council produced a very helpful paper on the lessons that industrial strategy should learn from the state’s involvement in the development of the Oxford/AstraZeneca Covid-19 vaccine.

What would worry me most if I were in government is time. “Developing visions” is all well and good, but budgets are now set until 2022, and there are suggestions of funding “pauses” in some parts of the existing industrial strategy, such as the industry research and development supported by the Aerospace Technology Institute. If new programmes are to begun in 2022, they will take time to ramp up. Meanwhile other dates will be creeping up – 2027 is the date for the 2.4% R&D target, which needs the private sector to make decisions to commit substantial extra funds to business R&D in response to any increase in government R&D. And although 2050 seems far away now for the net zero greenhouse gas target, the scale of the transition and the lifetime of the assets, and the need for innovation to bring down the cost of the transition, means that the next ten years is crucial.

Not least, the latest date the government can hold an election is the end of 2024. Having repealed the Fixed Term Parliament Act, the government will probably want to use the regained flexibility to hold the election as much as a year early. There are some who say that this is a government that likes to mark its own homework. Ultimately, though, the homework will be marked by the voters. The government has raised high expectations about a return to economic growth and a levelling up of living standards, especially in the so-called “Red Wall” seats of the Midlands and the North. There’s not a lot of time to demonstrate that the country has even started on that journey, let alone made any substantial progress on it. So whatever the government has decided is the future of industrial strategy, it needs to get on with it.

How does the UK rank as a knowledge economy?

Now the UK has withdrawn from the European single market, it will need to rethink its current and potential future position in the world economy. Some helpful context is provided, perhaps, by some statistics summarising the value added from knowledge and technology intensive industries, taken from the latest edition of the USA’s National Science Board Science and Engineering Indicators 2020.

The plot shows the changing share of world value added in a set of knowledge & technology intensive industries, as defined by an OECD industry classification based on R&D intensity. This includes five high R&D intensive industries: aircraft; computer, electronic, and optical products; pharmaceuticals; scientific R&D services; and software publishing. It also includes eight medium-high R&D intensive industries: chemicals (excluding pharmaceuticals); electrical equipment; information technology (IT) services; machinery and equipment; medical and dental instruments; motor vehicles; railroad and other transportation; and weapons. It’s worth noting that, in addition to high value manufacturing sectors, it includes some knowledge intensive services. But it does exclude public knowledge intensive services in education and health care, and, in the private sector, financial services and those business services outside R&D and IT services.

From this plot we can see that the UK is a small but not completely negligible part of world advanced economy. This is perhaps a useful perspective from which to view some of the current talk of world-beating “global Britain”. The big story is the huge rise of China, and in this context, inevitable that the rest of the world’s share of the advanced economy has fallen. But the UK’s fall is larger than competitors (-46%, cf -19% for the USA and -13% for rest of EU).

The absolute share tells us about the UK’s overall relative importance in the world economy, and should be helpful in stressing the need, in developing industrial strategy, for some focus. Another perspective is provided if we normalise the figures by population, which give us a sense of the knowledge intensity of the economy, which might give a pointer to prospects for future productivity growth. The table shows a rank ordered list by country of value added in knowledge & technology intensive industries per head of population in 2002 and 2018. The values for Ireland & possibly Switzerland may be distorted by transfer pricing effects.

Measuring up the UK Government’s ten-point plan for a green industrial revolution

Last week saw a major series of announcements from the government about how they intend to set the UK on the path to net zero greenhouse gas emissions. The plans were trailed in an article (£) by the Prime Minister in the Financial Times, with a full document published the next day – The ten point plan for a green industrial revolution. “We will use Britain’s powers of invention to repair the pandemic’s damage and fight climate change”, the PM says, framing the intervention as an innovation-driven industrial strategy for post-covid recovery. The proposals are patchy, insufficient by themselves – but we should still welcome them as beginning to recognise the scale of the challenge. There is a welcome understanding that decarbonising the power sector is not enough by itself. The importance of emissions from transport, industry and domestic heating are all recognised, and there is a nod to the potential for land-use changes to play a significant role. The new timescale for the phase-out of petrol and diesel cars is really significant, if it can be made to stick. So although I don’t think the measures yet go far enough or fast enough, one can start to see the outline of what a zero-emission economy might look like.

In outline, the emerging picture seems to be of a power sector dominated by offshore wind, with firm power provided either by nuclear or fossil fuels with carbon capture and storage. Large scale energy storage isn’t mentioned much, though possibly hydrogen could play a role there. Vehicles will predominantly be electrified, and hydrogen will have a role for hard to decarbonise industry, and possibly domestic heating. Some hope is attached to the prospect for more futuristic technologies, including fusion and direct air capture.

To move on to the ten points, we start with a reassertion of the Manifesto commitment to achieve 40 GW of offshore wind installed by 2030. How much is this? At a load factor of 40%, this would produce 140 TWh a year; for comparison, in 2019, we used a total 346 TWh of electricity. Even though this falls a long way short of what’s needed to decarbonise power, a build out of offshore wind on this scale will be demanding – it’s a more than four-fold increase on the 2019 capacity. We won’t be able to expand the capacity of offshore wind indefinitely using current technology – ultimately we will run out of suitable shallow water sites. For this reason, the announcement of a push for floating wind, with a 1 GW capacity target, is important.

On hydrogen, the government is clearly keen, with the PM saying “we will turn water into energy with up to £500m of investment in hydrogen”. Of course, even this government’s majority of 80 isn’t enough to repeal the laws of thermodynamics; hydrogen can only be an energy store or vector. As I’ve discussed in an earlier post (The role of hydrogen in reaching net zero), hydrogen could have an important role in a low carbon energy system, but one needs to be clear about how the hydrogen is made in a zero-carbon way, and how it is used, and this plan doesn’t yet provide that clarity.

The document suggests the first use will be in a natural gas blend for domestic heating, with a hint that it could be used in energy intensive industry clusters. The commitment is to create 5 GW of low carbon hydrogen production capacity by 2030. Is this a lot? Current hydrogen production amounts to 3 GW (27 TWh/year), used in industry and (especially) for making fertiliser, though none of this is low carbon hydrogen – it is made from natural gas by steam methane reforming. So this commitment could amount to building another steam reforming methane plant and capturing the carbon dioxide – this might be helpful for decarbonising industry, on on Deeside or Teeside perhaps. To give a sense of scale, total natural gas consumption in industry and homes (not counting electricity generation) equates to 58 GW (512 TWh/year), so this is no more than a pilot. In the longer term, making hydrogen by electrolysis and/or process heat from high temperature fission is more likely to be the scalable and cost-effective solution, and it is good that Sheffield’s excellent ITM Power gets a namecheck.

On nuclear power, the paper does lay out a strategy, but is light on the details of how this will be executed. For more detail on what I think has gone wrong with the UK’s nuclear strategy, and what I think should be done, see my earlier blogpost: Rebooting the UK’s nuclear new build programme. The plan here seems to be for one last heave on the UK’s troubled programme of large scale nuclear new build, followed up by a possible programme implementing a light water small modular reactor, with research on a new generation of small, high temperature, fourth generation reactors – advanced modular reactors (AMRs). There is a timeline – large-scale deployment of small modular reactors in the 2030’s, together with a demonstrator AMR around the same timescale. I think this would be realistic if there was a wholehearted push to make it happen, but all that is promised here is a research programme, at the level of £215 m for SMRs and £170m for AMRs, together with some money for developing the regulatory and supply chain aspects. This keeps the programme alive, but hardly supercharges it. The government must come up with the financial commitments needed to start building.

The most far-reaching announcement here is in the transport section – a ban on sales of new diesel and petrol car sales after 2030, with hybrids being permitted until 2035, after which only fully battery electric vehicles will be on sale. This is a big deal – a major effort will be required to create the charging infrastructure (£1.3 bn is ear-marked for this), and there will need to be potentially unpopular decisions on tax or road charging to replace the revenue from fuel tax. For heavy goods vehicles the suggestion is that we’ll have hydrogen vehicles, but all that is promised is R&D.

For public transport the solutions are fairly obvious – zero-emission buses, bikes and trains – but there is a frustrating lack of targets here. Sometimes old technologies are the best – there should be a commitment to electrify all inter-city and suburban lines as fast as feasible, rather than the rather vague statement that “we will further electrify regional and other rail routes”.

In transport, though, it’s aviation that is the most intractable problem. Three intercontinental trips a year can double an individual’s carbon footprint, but it is very difficult to see how one can do without the energy density of aviation fuel for long-distance flight. The solutions offered look pretty unconvincing to me – “we are investing £15 million into FlyZero – a 12-month study, delivered through the Aerospace Technology Institute (ATI), into the strategic, technical and commercial issues in designing and developing zero-emission aircraft that could enter service in 2030.” Maybe it will be possible to develop an electric aircraft for short-haul flights, but it seems to me that the only way of making long-distance flying zero-carbon is by making synthetic fuels from zero-carbon hydrogen and carbon dioxide from direct air capture.

It’s good to see the attention on the need for greener buildings, but here the government is hampered by indecision – will the future of domestic heating be hydrogen boilers or electric powered heat pumps? The strategy seems to be to back both horses. But arguably, even more important than the way buildings are heated is to make sure they are as energy-efficient as possible in the first place, and here the government needs to get a grip on the mess that is our current building regulation regime. As the Climate Change Committee says, “making a new home genuinely zero-carbon at the outset is around five times cheaper than retrofitting it later” – the housing people will be living in in 2050 is being built today, so there is no excuse for not ensuring the new houses we need now – not least in the neglected social housing sector – are built to the highest energy efficiency standards.

Carbon capture, usage and storage is the 8th of our 10 points, and there is a commendable willingness to accelerate this long-stalled programme. The goal here is “to capture 10Mt of carbon dioxide a year by 2030”, but without a great deal of clarity about what this is for. The suggestion that the clusters will be in the North East, the Humber, North West, and in Scotland and Wales suggests a goal of decarbonising energy intensive sectors, which in my view is the best use of this problematic technology (see my blogpost: Carbon Capture and Storage: technically possible, but politically and economically a bad idea). What’s the scale proposed here – is 10 Mt of carbon a year a lot or a little? Compared to the total CO2 emissions for the UK – 350 Mt in 2019 – it isn’t much, but on the other hand it is roughly in line with the total emissions of the iron and steel industry in the UK, so as an intervention to reduce the carbon intensity of heavy industry it looks more viable. The unresolved issue is who bears the cost.

There’s a nod to the effects of land-use changes, in the section on protecting the natural environment. There are potentially large gains to be had here in projects to reforest uplands and restore degraded peatlands, but the scale of ambition is relatively small.

Finally, the tenth point concerns innovation, with the promise of a “£1 billion Net Zero Innovation Portfolio” as part of the government’s aspiration to raise the UK’s R&D intensity to 2.4% of GDP by 2027. The R&D is to support the goals in the 10 point plan, with a couple of more futuristic bets – on direct air capture, and on commercial fusion power through the Spherical Tokomak for Energy Production project.

I think R&D and innovation are enormously important in the move to net zero. We urgently need to develop zero-carbon technologies to make them cheaper and deployable at scale. My own somewhat gloomy view (see this post for more on this: The climate crisis now comes down to raw power) is that, taking a global view incorporating the entirely reasonable aspiration of the majority of the world’s population to enjoy the same high energy lifestyle that is to be found in the developed world, the only way we will effect a transition to a zero-carbon economy across the world is if the zero-carbon technologies are cheaper – without subsidies – than fossil fuel energy. If those cheap, zero-carbon technologies can be developed in the UK, that will make a bigger difference to global carbon budgets than any unilateral action that affects the UK alone.

But there is an important counter-view, expressed cogently by David Edgerton in a recent article: Cummings has left behind a No 10 deluded that Britain could be the next Silicon Valley. Edgerton describes a collective credulity in the government about Britain’s place in the world of innovation, which overstates the UK’s ability to develop these new technologies, and underestimates the degree to which the UK will be dependent on innovations developed elsewhere.

Edgerton is right, of course – the UK’s political and commentating classes have failed to take on board the degree to which the country has, since the 1980’s, run down its innovation capacity, particularly in industrial and applied R&D. In energy R&D, according to recent IEA figures, the UK spends about $1.335 billion a year – some 4.3% of the world total, eclipsed by the contributions of the USA, China, the EU and Japan.

Nonetheless, $1.3 billion is not nothing, and in my opinion this figure ought to increase substantially both in absolute terms, and as a fraction of rising public investment in R&D. But the UK will need to focus its efforts in those areas where it has unique advantages; while in other areas international collaboration may be a better way forward.

Where are those areas of unique advantage? One such probably is offshore wind, where the UK’s Atlantic location gives it a lot of sea and a lot of wind. The UK currently accounts for about 1/3 of all offshore wind capacity, so it represents a major market. Unfortunately, the UK has allowed the situation to develop where the prime providers of its offshore wind technology are overseas. The plan suggests more stringent targets for local content, and this does make sense, while there is a strong argument that UK industrial strategy should try and ensure that more of the value of the new technologies of deepwater floating wind are captured in the UK.

While offshore wind is being deployed at scale right now, fusion remains speculative and futuristic. The government’s strategy is to “double down on our ambition to be the first country in the world to commercialise fusion energy technology”. While I think the barriers to developing commercial fusion power – largely in materials science – remain huge, I do believe the UK should continue to fund it, for a number of reasons. Firstly, there is a possibility that it might actually work, in which case it would be transformative – it’s a long odds bet with a big potential payoff. But why should the UK be the country making the bet? My answer would be that, in this field, the UK is genuinely internationally competitive; it hosts the Joint European Torus, and the sponsoring organisation UKAEA retains, rare in UK, capacity for very complex engineering at scale. Even if fusion doesn’t deliver commercial power, the technological spillovers may well be substantial.

The situation in nuclear fission is different. The UK dramatically ran down its research capacity in civil nuclear power, and chose instead to develop a new nuclear build programme on the basis of entirely imported technology. This was initially the French EPR currently being built in Hinkley Point, with another another type of pressurised water reactor, from Toshiba, to be built in Cumbria, and a third type of reactor, a boiling water reactor from Hitachi, in Anglesea. That hasn’t worked out so well, with only the EPRs now looking likely to be built. The current strategy envisages a reset, with a new programme of light water small modular reactors – that is to say, a technologically conservative PWR designed with an emphasis on driving its capital cost down, followed by work on a next generation fission reactor. These “advanced modular reactors” would be relatively small high temperature reactor. The logic for the UK to be the country to develop this technology is that it is only country that has run an extensive programme of gas cooled reactors, but it still probably needs collaboration with other like-minded countries.

How much emphasis should the UK put into developing electric vehicles, as opposed to simply creating the infrastructure for them and importing the technology? The automotive sector still remains an important source of added value for the UK, having made an impressive recovery from its doldrums in the 90’s and 00’s. Jaguar Land Rover, though owned by the Indian conglomerate Tata, is still essentially a UK based company, and it has an ambitious development programme for electric vehicles. But even with its R&D budget of £1.8 bn a year, it is a relative minnow by world standards (Volkswagen’s R&D budget is €13bn, and Toyota’s only a little less); for this reason it is developing a partnership with BMW. The government should support the UK industry’s drive to electrify, but care will be needed to identify where UK industry can find the most value in global supply chains.

A “green industrial strategy” is often sold on the basis of the new jobs it will create. It will indeed create more jobs, but this is not necessarily a good thing. If it takes more people, more capital, more money to produce the same level of energy services – houses being heated, iron being smelted, miles driven in cars and lorries – then that amounts to a loss of productivity across the economy as a whole. Of course this is justified by the huge costs that burning fossil fuels impose on the world as a whole through climate change, costs which are currently not properly accounted for. But we shouldn’t delude ourselves. We use fossil fuels because they are cheap, convenient, and easy to use, and we will miss them – unless we can develop new technologies that supply the same energy services at a lower cost, and that will take innovation. New low carbon energy technologies need to be developed, and existing technologies made cheaper and more effective.

To sum up, the ten point plan is a useful step forward, The contours of a zero-emissions future are starting to emerge, and it is very welcome that the government has overcome its aversion to industrial strategy. But more commitment and more realism is required.

UK Industrial Strategy’s three horsemen: COVID, Brexit and trade wars (and a fourth horseman of my own)

A couple of weeks ago, on 9 October 2020, I took part in a seminar for the Tony Blair Institute for Global Change, called “UK Industrial Strategy’s three horsemen: COVID, Brexit and trade wars”. This featured as speakers me, the economist Dame Kate Barker, and Anand Menon (Director of “UK in a changing Europe” at Kings College London), and was chaired by Ian Mulheirn. There is a YouTube video of the event here. Here is a slightly tidied up version of what I said.

It’s a real pleasure to be speaking at this event – and especially to be sharing a virtual platform with Kate Barker, from whom I learnt so much as a colleague working on the Industrial Strategy Commission back in 2017. Our final report then was intended to inform the discussion around the 2017 White Paper on industrial strategy. Now industrial strategy is back on the agenda – we read that the the government is planning to “rip up” the 2017 strategy, producing a new document with a heavy focus on science and technology.

Despite everything that’s happened since 2017, I agree with Kate that the principles we laid down do stand the test of changing times. Since then, the focus of my own work has been on the link between R&D, innovation and productivity, and the way regional imbalances in economic performance reflect regional imbalances in state spending in R&D.

But how is this all changed by the three horseman of the apocalypse – COVID, Brexit and trade wars – that we’re asked to discuss?

Brexit

We can talk about the link between Brexit and industrial strategy both in terms of cause and effect. Failures of industrial strategy contributed to the political conditions that led to Brexit, and the changes that Brexit will force on the UK’s economy will demand a different industrial strategy for the new economic model that the country will have to adopt.

Much written on the connection between “left behind communities” and the Brexit vote, and the relationship is possibly more complicated than simple accounts might suggest. But, as the economic geographer Philip McCann has demonstrated in his analysis of “geographies of discontent” , the UK is an outlier amongst developed countries in the scale of its economic imbalances. The greater Southeast looks like a prosperous Northern European country. The rest of the country looks like East Germany, Southern Italy or Portugal. In fact, East Germany has recovered from 40 years of communism faster than the North of England has recovered from the deindustrialisation of the 1980’s.

These regional imbalances are reflected in living standards and other measures of prosperity, including life expectancy and health outcomes. But at the root of the issue is a huge imbalance in productivity. In fact, the imbalances show up more strongly in productivity than in living standards, because the UK runs an effective transfer union – money is moved up from the greater Southeast – the only parts of the country to make a surplus on the government current account – to the rest of the country.

But the paradox is that while we transfer money to cover current spending, we concentrate the investments that build productivity growth in the already prosperous greater southeast. My own focus has been on Research and Development: here nearly half the public spending on R&D is concentrated in London and the two two subregions containing Oxford and Cambridge. R&D isn’t the only thing that matters in driving productivity growth, but it is associated with high value companies operating at the technological frontier and innovative start-ups, which anchor strong regional innovation ecosystems and produce highly prosperous knowledge intensive economies like those around Cambridge and Oxford.

Even more paradoxical is the fact that public spending on R&D is even more geographically concentrated than private sector spending. This means that potential spillovers from private sector R&D spending are being left uncaptured. We have regions like the North West, with highly productive, R&D intensive industries such as chemicals and pharmaceuticals, and the East Midlands, with its strong private sector innovation in automotive and aerospace, where the innovation potential of the regional economies isn’t being exploited to the full because the public money doesn’t follow the private.

On the other hand, there are some places that don’t have enough R&D of any kind, public or private. In Wales and the Northeast, for example, low investment in R&D leads to weak innovation economies, with poor productivity performance and low demand for skills

It is failures of industrial strategy that have led to a divided country, and those divisions have brought us sour politics.

Trade Wars

Moving onto the effects of Brexit – and the wider sense of a retreat from globalisation – we’re likely to find that the economic model that the UK has chosen is likely to be particularly threatened. Some of our highest productivity and most export oriented sectors have succeeded by becoming highly integrated in transnational value chains, and it is these sectors that are most at risk from the trade dislocations that Brexit threatens.

The UK’s automobile industry is a prime example. This has made a remarkable comeback from a low-point in the mid-2000’s – perhaps an unsung success of a modern industrial strategy which began with Mandelson’s time in the Business department at the end of the new Labour period, and persisted into the Coalition, with considerable policy continuity. But a finished car that rolls off a production line in Sunderland or Solihull combines components and parts that have been shuffled back and forth from a network of suppliers all across the world. This leads to efficient car production, but it’s going to be very difficult to adapt to a post-Brexit world where there are likely to detailed rules on local origin for the export of vehicles to the EU.

Brexit isn’t the only event that’s likely to give us hard lessons about technological self-sufficiency. We can see the effects of a much colder attitude to China in the USA in the pressure on the UK to lessen the involvement of Huawei in the 5G network, and the exclusion of the UK from the EU’s Galileo project for a satellite positioning has resulted in a scramble for a UK alternative. I suspect that politicians and policy makers severely underestimate the degree to which the UK has lost technological self-sufficiency in a whole range of sectors. I also wonder whether a wider sense of loss of what one might call technological sovereignty has itself contributed to the anxiety that culminated in Brexit.

I believe that the UK will need to rebuild some of its technological capacity if it is to remain a prosperous country, and that this will need to be a central ingredient of a more activist industrial policy. But that leaves some big questions. How much, in what sectors? The UK is a relatively small country in a big world economy. We will need to think very deeply about our place in the evolving trading systems of a world that might look very different to the post-cold-war, globalising world that policy makers have grown up in. An industrial strategy does need to be founded on a clear view about what kind of economy the UK wants – and can realistically hope – to become.

COVID-19

We’ve known for some time that increasing globalisation puts the world at greater risk of a pandemic, and with COVID-19 those fears have been realised. The closer entanglement of natural ecosystems with human society leads to more pathogens crossing from the animal world into people; then the worldwide traffic of business people and tourists spread the disease across the world before health systems have a chance to respond, as we have seen with such tragic consequences over the last year.

It’s too soon to unpick all the effects COVID-19 will have on the economy, and the implications that those effects have for the UK’s industrial strategy, but we can already start to see some themes emerging. Different sectors have been affected in different ways, with an obvious severe (but hopefully time-limited) blow to hospitality and tourism, and perhaps more far-reaching effects on commercial real estate as some pandemic induced changes in working practises are permanently adopted.

One very important question for the UK concerns the shape of the future civil aerospace industry. It’s difficult to know how future patterns of international mobility will change, but any permanent reduction will have a serious impact on one of the UK’s highest productivity industries. As a specific example, Rolls-Royce is one of the UK’s few world class innovative engineering companies of any size, but its dependence on long-haul air traffic makes the company – and the cities like Derby that depend on it – very vulnerable.

Rolls-Royce has been bailed out by the government once before, following its bankruptcy in 1971. I believe that letting Rolls-Royce fail now should be unthinkable, because of the dissipation of concentrations of high level skilled people, and the loss of innovation capacity in areas like the East Midlands that would follow. But what form should any bail-out take – and how should it take into account bigger imperatives such as the net zero greenhouse gas target?

What can we learn about our industrial strengths and weaknesses from the experience of our response to the pandemic? We went into the pandemic thinking we had the advantage of a world-class life sciences sector, but after the event we can’t say the UK has excelled in its response.

It’s certainly true that parts of our life sciences sector are excellent, and if the Oxford group or the Imperial group produce an effective vaccine against covid-19, and if the pharmaceutical industry is successful in rapidly scaling up its manufacture, that will be a huge achievement and an invaluable contribution to world health.

But in other important areas – in public health, diagnostics, the care sector – the UK’s weaknesses have been savagely exposed. We have learnt about weaknesses in supply chains for basic supplies like PPE and generic pharmaceuticals.

I think we made a category error in thinking that the “life sciences sector” is a sector at all. We have a strong pharmaceutical sector which historically been enormously productive (though not without recent difficulties), exploiting the UK’s excellent biomedical science base to produce drugs for the most lucrative world markets (particularly those of the USA). But we have done much worse in driving and implementing the kinds of innovation that serve the health needs of the UK’s own population.

The fourth horseman

There is, of course, a fourth horseman of the industrial strategy apocalypse, that is more important than any of the three we have been asked to discuss. That is climate change and the huge economic transition that the need to decarbonise our energy economy requires. It is an entirely positive development that the government has committed to a target of net zero greenhouse gas emissions by 2050, and that there is a wide political consensus in support of this target, or indeed a more ambitious goal. But I’m not convinced that policy makers and the public fully understand the magnitude of the task.

We need not just to decarbonise the electricity sector as it stands now; as we electrify other forms of energy use, we will need to at least double generating capacity. We need to decarbonise transport and domestic heating, probably using hydrogen as an energy store and vector, especially for hard to decarbonise industries like steel. We will need as much offshore wind as we can get (probably including new technologies like floating wind), we will need new nuclear build, possibly including new high temperature designs to make hydrogen from process heat.

This energy transition will be a huge dislocation. We have to do it, but we shouldn’t expect it to be without cost. People rightly talk about the new “green” jobs this transition will produce – but that’s not an unmixed blessing. If the new energy systems need to employ more people than our current fossil fuel based system, that implies a drop in productivity. We will have to apply more resources to achieve the same energy benefits, and those resources won’t be available to satisfy other wants and needs. Innovation, to create new zero carbon technologies and improve existing ones, will be urgently needed to drive down those costs, and that innovation – carried out in parallel with the deployment of existing technologies – should be a priority of industrial strategy.

The energy transition does have potential benefits for regional economic inequality, though. Much of the innovation and deployment of low carbon technologies should happen outside the prosperous Southeast – for example in Teeside and the Humber, in Cumbria and the Wirral. This should be an important part of the “levelling up” agenda.

An industrial strategy for our times

To sum up, the ravages of these four horseman mean that our economy will need to be transformed. That transformation needs to be driven by innovation, and it needs to be informed by a clear view of the enduring challenges the UK faces and a realistic assessment of the UK’s place in the world. As Kate stressed, the challenges are obvious: climate change, weak wage growth, the cost and effectiveness of health and social care, failing places. The need for a new start does give us a chance to spread the benefits of innovation more widely across the country, and we should seize that opportunity.

On the UK’s chemicals industry

I did a webinar a couple of weeks ago, for the Society of Chemical Industry, about the role of the chemicals industry in addressing the UK’s problems of stagnant productivity and regional economic disparities. The recording of the talk should be on their website soon, but in the meantime here (5 MB PDF) are the slides I used. Here’s a summary of what I said.

I started by setting out the economic context the UK finds itself in. The very slow productivity growth since the 2007/8 global financial crisis has had the result that real wages have stagnated, while economic performance across the regions of the UK remains very uneven.

The most important contributor to productivity growth – and thus to rising living standards – is what economists call “total factor productivity” – the measure of how effectively an economy converts inputs, in the form of labour and capital, into valuable outputs. This includes, but is not limited to, the technological advances that allow us to produce existing products more efficiently and to create entirely new products and services.

We can thus map the different sectors of the UK’s economy on 2 dimensions – how big a share of the economy they take, and how much their total factor productivity increases. I argue that industrial strategy should focus on those areas that are both significant in scale relative to the economy as a whole, and that are dynamic in terms of showing long-term increases in total factor productivity. The three crucial sectors in the UK economy by these measures are knowledge intensive business services, information and communication technologies, and manufacturing. Within manufacturing, transport equipment – automotive and aerospace – stand out, but chemicals and pharmaceuticals are also highly significant.

Cumulative growth in total factor productivity in selected UK sectors and sub-sectors, indexed to 1995. Data from EU KLEMS Growth and Productivity Accounts database.”

Looking at the changes in total factor productivity over the last couple of decades offers an instructive window on the way the UK’s economy has changed.

Because normally manufacturing to grows productivity faster than services, we’d usually expect total factor productivity in the manufacturing sector to grow faster than the whole market economy. In the UK, that wasn’t so in the mid-1990’s – manufacturing lagged behind the economy as a whole. But from 1998 to the global financial crisis, manufacturing TFP grew faster than the economy as a whole; since the crisis both have stagnated.

Part of the explanation for this comes from the figures for the financial services industry. This showed very fast growth in the late 1990’s, booming right up to the financial crisis – since when it has fallen precipitately. It’s at least possible that some of the apparent boom was due to the way value is measured – or mismeasured – in financial services, but it’s clear that this sector, so influential politically, has been a drag on the whole economy over the last decade.

Focusing on manufacturing subsectors, transport equipment – including automotive and aerospace – stagnated in the late 90’s, began a recovery in the 00’s, which took off dramatically after the global financial crisis. It’s intriguing that the timing of this recovery almost exactly coincides with the UK government’s rediscovery of industrial policy – with an initial focus on automotive and aerospace industries. Pharmaceutical total factor productivity boomed from the late 90’s to the end of the 00’s, then collapsing, for reasons I’ve discussed extensively elsewhere.

But the surprise – to many, I suspect – is the performance of the chemicals sector. Written off in the late 90’s as the “old economy”, the chemicals industry has delivered the steadiest gains in total factor productivity, its cumulative performance exceeding both financial services and pharmaceuticals.

What’s more, if we look at where the chemicals industry takes place, in the context of regional economic inequality and the “levelling up” agenda of the government, we find that it is located outside the prosperous southeast, in Northwest England, the Humber and Teeside.

What sectors should industrial strategy focus on? My criteria would look at relative scale, the potential to produce significant and sustained gains in total factor productivity, and to contribute to economic growth in economically lagging parts of the UK. The chemicals industry qualifies on all counts.

What, though, of the future? Economic statistics don’t capture some of the costs of the chemicals industry, but these costs are borne by society more widely. The feedstocks it uses may be unsustainable and deplete the planet’s natural capital, pollution may damage local environments and ecosystems. Improper disposal of products – like plastic packaging – at their end of life causes yet more environmental damage.

Perhaps most importantly, the energy the industry uses produces carbon dioxide and thus accelerates climate change. 3% of the UK’s greenhouse gas emissions are directly associated with the chemicals industry, which accounts for about 20% of all emissions associated with manufacturing.

There is another side of the ledger, too. The products of the chemicals industry – like batteries and fuel cells – will be crucial in decarbonising the economy. In the future we might see the widespread use of hydrogen as an energy vector, direct capture of carbon dioxide from the air, and the synthesis of hydrocarbons from green hydrogen and captured carbon dioxide for zero-carbon aviation. Much of the net zero agenda is in fact a chemical industry agenda.

We need an industrial strategy for the UK chemicals industry, justified by its scale and its record of steady total factor productivity improvement. It’s a pity that the government hasn’t responded to the Chemistry Council’s proposed Sector Deal, which would provide a good start. In addition to a focus on productivity growth, that strategy should have a regional element, building on the existing chemical industry clusters in the North West and North East with further interventions to promote innovation and skills and all levels. Above all, it should emphasise the important role and responsibility of the chemicals industry as part of the wider economic transformation that needs to take place to achieve the government’s 2050 Net Zero emissions target.

The role of hydrogen in reaching net zero

The good news from the latest release of the UK government’s energy statistics is that the fraction of electrical power generated from renewable sources in 2019 reached a record high of 37.1%, driven largely by an increase in offshore wind of 20%, to a new high of 32 TWh a year. The bad news is how little difference this makes to the UK’s overall energy consumption – of the 2300 TWh used, 78.3% was obtained from burning fossil fuels. This is a decrease from last year’s fraction – 79.4% – but progress remains much too slow.

It’s tempting to focus on the progress we are making in decarbonising the electricity supply, and this isn’t insignificant. But while the UK used 346 TWh of electricity in 2019, the country directly burnt gas to provide 512 TWh heat for domestic and industrial purposes (not counting here the gas converted to electricity in power stations), and 152 TWh of petrol and 301 TWh of diesel to power vehicles. We’ve no chance of reaching net zero greenhouse gas emissions by 2050 without displacing this directly burnt fossil fuel contribution. And given the longevity of energy infrastructures, we haven’t got long to start building out the technologies to do this at scale.

Can hydrogen help? This technology – or more accurately, group of potential technologies – is having a moment of attention, not for the first time. I think it could well make a significant contribution, but there are some awkward choices to make. Implementing any use of hydrogen in our energy system at scale will involve massive, long-term investments, and making the right choices involve difficult economic judgements, not just about the technologies as they currently exist, but as they may evolve under the pressures of energy markets across the world. Of course that evolution can be steered by incentives, regulation, and targeted support for research and development.

To begin with the basics, because there aren’t any reserves of molecular hydrogen lying around, it isn’t a source of energy, but a way of storing, transmitting and using energy. When burnt, or combined with oxygen in a fuel cell, it produces nothing but water. So the issue is how you make it without producing carbon dioxide in its manufacture. There are three broad options:

  • Currently, most hydrogen is made from natural gas through a process called steam methane reformation. By adding heat to water and methane, with suitable catalysts, one can obtain hydrogen and carbon dioxide. The carbon dioxide produced in the reaction, and any that results from generating the heat needed to make the reaction run, would need to be captured and stored underground in old gas fields. This process, including separating the carbon dioxide, are mature technologies, used for example at scale to produce ammonia for fertiliser.
  • If zero-carbon energy is available cheaply, from wind, solar or nuclear, intrinsically zero carbon hydrogen can be produced by electrolysis of water. The most effective current technology uses a proton exchange membrane to separate anode and cathode.
  • If zero-carbon process heat is available cheaply, from high temperature nuclear reactors or solar concentrators, hydrogen can be made by the thermochemical splitting of water. (As a combination of the last two ideas, given both process heat and electricity, high temperature electrolysis is another option).
  • How then might the hydrogen be used to attack the carbon dioxide currently produced by the nearly 1000 TWh of energy we derive from burning gas, petrol and diesel for heating and transport?

  • Right now we could add some hydrogen to natural gas – perhaps up to 20% – making a significant lowering of its carbon intensity without substantial changes in our existing systems.
  • The complete replacement of natural gas by zero-carbon hydrogen for domestic heating and many industrial processes is probably technically feasible, but quite a lot more expensive. Some changes will need to be made to the gas distribution system (e.g. replacement of iron/steel pipes with thermoplastic pipes), and boilers and appliances would probably have to be replaced too.
  • Hydrogen can be used for transport, as fuel for internal combustion engines, or more likely, converted to electricity via fuel cells to power cars and trucks.
  • Finally, hydrogen might make possible the very large scale seasonal storage of energy (potentially on the scale of 10’s or even 100’s or TWh) generated by intermittent renewables, by storing it underground in rock salt formations.
  • All of these ways of making hydrogen and using it are technically possible. They’re also all potentially enormously expensive, with the potential for locking the country into solutions which turn out to be inappropriate or made redundant by rival technologies. Some experimentation is necessary, and some blind alleys are probably inevitable, but what needs to be taken into account as we make our choices?

    To start with the basic physics and chemistry, hydrogen is a light gas which burns completely and cleanly to yield only water vapour. Perceptions of hydrogen are inevitably shaped by the Hindenburg disaster – but all flammable gases are potentially dangerous, and these are risks of the kind that industrial societies have got used to managing. Hydrogen is more easily set aflame than methane and it burns hotter, but on the other hand at atmospheric pressure burning a given volume of hydrogen produces less energy than the equivalent volume of methane, and much less than petrol vapour. In fact it’s this low volumetric energy density of hydrogen that poses the biggest problem. Even compressed to 70 MPa (as it would be in typical compressed gas tanks) its energy density is only 1.3 MWh per cubic meter, compared to petrol or aviation spirit eat about 10 MWh per cubic meter. Even liquified its energy density is still only 2 MWh per cubic meter, and this needs a temperature of -250 °C, considerably colder than liquid nitrogen.

    Moving on to economics, how can we find the most cost-effective solutions? The problem is that technologies don’t stand still – indeed, it’s essential that costs come down, and substantial research efforts are needed to make sure that happens. Where can we hope to see the biggest cost reductions? Existing technologies – like steam reforming of natural gas with carbon capture – are probably the cheapest options with current technology, but being mature further improvements are likely to be more difficult to find than with newer technologies like proton exchange membrane or high temperature electrolysis.

    It’s important to remember that the UK accounted for just 1.4% of the world’s energy consumption in 2018, and this fraction will inevitably (and desirably) fall over the next few decades. The choices we make must take into account what the rest of the world is likely to do; while the UK might hope to influence that path, perhaps by helping develop new technologies cheap enough for wide adoption, the UK isn’t a big enough market to be able to make unilateral decisions about technology directions. If battery electric vehicles win the race for zero-carbon personal transport, it would be pointless for the UK to develop a hydrogen network for fuel cell cars. Likewise, if the UK is the only country to back hydrogen boilers for domestic heating while the rest of the world chooses electric heat pumps, it won’t be a big enough market to justify the development of hydrogen domestic boilers by itself, so its plans would be left high and dry.

    We have well developed existing energy distribution systems, so the question for any new energy vector is whether these systems can be incrementally adapted, or do new ones need to be built out entirely from scratch? We currently have a well developed electricity distribution system. Distributed PEM electrolysis plants could take zero-carbon from the grid, and produce hydrogen locally. We also have systems for distributing natural gas: it’s likely that the core high pressure network would have to be entirely rebuilt for hydrogen, but the low pressure local distribution system could be adapted. We don’t have a cryogenic liquid distribution system at scale, and this is likely to limit global trade in hydrogen.

    Finally, we have to consider our plans for low carbon electricity. Whatever we do, we need to replace the 512 TWh of gas we use for heating, and the 453 TWh of petrol and diesel we use for transport, with zero carbon alternatives. If this involves electrification – either directly or through the production of hydrogen from zero-carbon electricity – this will need a huge expansion of power generation capacity from the current 346 TWh/yr. I find it difficult to see how this can happen without both a massive increase in offshore wind – possibly including floating offshore wind – and new nuclear build, possibly next generation nuclear able to produce high temperature process heat for production of additional hydrogen.

    These are difficult choices, but we haven’t got much time. Let’s get on with it!

    Some references:

    Current UK energy statistics from DUKES 2020.
    Hydrogen supply chain evidence base.
    On hydrogen storage (US Dept of Energy PDF)
    Royal Society Policy Brief Options for producing low-carbon hydrogen at scale.

    The right road to higher UK research and development spending?

    The UK government published a “Research and Development Roadmap” last week, setting out “the UK’s vision and ambition for science, research and innovation”. It’s not by itself a strategy; instead it’s a document that sets out the issues that a subsequent strategy will need to address. The goals of the government here are very ambitious, and need to be thought of as part of a wider plan to remake the UK state as a global centre for science and innovation, after its departure from the European Union. In the recent words of the Prime Minister, “though we are no longer a military superpower we can be a science superpower”. Does this Roadmap give us a realistic route for translating this aspiration into policy?

    What’s at stake?

    The context for the roadmap is the commitment to raise the UK government’s R&D spend to £22 billion by 2024/25. The roadmap is important as a reassertion of this goal, set in the March 2020 budget, despite the strains that the pandemic have put on the public finances.

    What does this mean in practise? Total government spending on R&D was £12.8 billion in 2018 (the most recent year for which full figures are available). The implication is that this must rise by £1.5 billion per year on average. This amounts to introducing new spending amounting to the total budget of two large research councils (e.g. EPSRC and BBSRC combined), every year. There is very little clarity of how this is planned to happen. Will the change be evolutionary – just increasing spending through existing institutions, or revolutionary – introducing entirely new, large scale institutions, agencies and mechanisms?

    In very rough terms (rounded to the nearest half billion), Research Councils spend £4 billion a year, another £2.5 billion go to Universities through Research England and the devolved nations’ funding agencies, and InnovateUK gets a bit less than £1 billion. This is now bundled up in UKRI (except university funding in devolved nations). We’ve seen a £1.5 billion increase for UKRI in 2020/21, mostly in new funding instruments like the Industrial Strategy Challenge Fund.

    But it’s important to remember that the Research Councils are not the only means by which the government spends money on R&D. £1 billion goes into health research, mostly through the Department of Health’s National Institute for Health Research, £1.5 billion is spend on defence R&D by MoD, and BEIS spends a bit less than £1 billion outside UKRI (e.g. for space, UKAEA for the fusion programme, the National Physical Laboratory, and various industry programmes). The other government departments spend about another £1 billion between them.

    Finally, the UK Government spends money indirectly via its participation in the EU programmes. This amounts to another notional £1 billion.

    What are the government’s current imperatives?

    Where will the extra £1.5 billion a year go? Choices will be steered by the government’s current and emerging priorities. Here is a (no doubt) incomplete list, in no particular order:

    Increasing business R&D. The £22 billion is the government’s contribution to a bigger target – to increase the UK economy’s total R&D intensity from its current proportion of 1.7% of GDP to 2.4%. But most R&D comes from the private sector, in a roughly 2:1 ratio. So to achieve the overall target, the public money must be deployed in a way that maximises the chance of the private sector increasing its own spending in that 2:1 ratio. What will best persuade businesses – both UK owned and overseas owned – to spend another £18 billion or so a year on R&D in the UK?

    Translating R&D spending into economic outcomes. The current economic crisis makes this even more pressing, so there will be even more emphasis on interventions which will plausibly lead to productivity increases and new jobs, on timescales of years rather than decades.

    “Levelling up.” The economic underperformance of the UK outside the greater Southeast – including the relative underperformance of core cities like Manchester, the difficulties of deindustrialised towns and urban fringes, and the economic and social problems of rural and coastal peripheries, have achieved real political salience as the electoral centre of gravity of the Conservative party has moved north. The concentration of public R&D resources in the prosperous Southeast – as Tom Forth and I recently highlighted in our NESTA “Missing £4 billion” report – is increasingly recognised as part of the problem.

    Solving big societal problems. I believe the commitment of the government to net zero greenhouse gas emissions by 2050 is serious, but I don’t think policy makers yet realise the full scale of this economic transition. As this realisation takes hold the expectations on innovation and technology to deliver affordable solutions will only increase. Meanwhile the aftermath of the pandemic will prompt a reassessment of whether our “life sciences sector” has the optimal shape to support national health and well-being. The problems the UK is having in deploying a large-scale testing programme illustrate that strength in biotech and pharmaceutical research doesn’t automatically translate into diagnostic capacity. If and when vaccines and antibody therapeutics for COVID come on stream, there will be a tough test of the UK’s manufacturing capacity in the face of worldwide demand.

    Perceived problems in the culture of research in the UK and internationally. There is a strong perception in parts of government that all is not well in the culture of research in the UK. There’s a view that research culture itself is unhealthy, with insufficient autonomy for younger researchers and problems in the career structure, while the culture of funding bodies is believed to be too risk averse and bureaucratic.

    Life after Brexit. The position of UK science in an international context is clearly in question in the aftermath of Brexit. The immediate problem is the nature of the UK’s relationship with the EU’s science programmes. It’s clear that there is a desire for the UK to associate with Horizon Europe, but this is a second order issue for the government so if negotiations falter for other reasons then this may not happen, in which case there will be a need to find replacement programmes (particularly for the ERC, which is highly prized by the science establishment). The longer term issues are the nature of scientific relationships with other existing and emerging and science powers, and ensuring an openness to scientific talent from the rest of the world.

    Economic and technological sovereignty. Finally, the rapidly changing attitude of the government to China has raised questions of the degree to which the UK can be autonomous in key areas of strategic technology. The saga of Huawei’s involvement in the 5G network, questions about the involvement of China in the nuclear new build programme, and a realisation of the limitations of global supply chains in the pandemic, have led to talk of retaining or rebuilding some of the UK’s technological sovereign capability in key areas. I don’t think policy makers yet fully appreciate how much this capability has been run down over the last few decades.

    Possible new policies suggested by the Roadmap

    The roadmap reads as a rather open-ended document, but within it are some strong hints and indications of possible new policy directions. Here I’ve tried to extract some possible new policies that seem to be being suggested, expressing them in a more concrete way than the Roadmap does, where necessary reading between the lines, and possibly on occasion extrapolating somewhat. I’ve suggested some of the questions that these proposals might provoke. We need to keep in mind the scale of interventions implied by the £22 billion target – i.e. £1.5 billion additional spending each year, in considering these possible new policies.

    Raising our research ambitions

    New mechanisms for funding will be introduced, which involve less bureaucracy and taking bigger bets: more long-term, investigator-led funding. The new UK-ARPA like agency is already announced, but at £200m a year this is relatively small. It will sit outside UKRI. Will any other new mechanisms be left to the research councils, or can we expect more new agencies to be created?

    Defense-related R&D could be substantially increased. This would address the funding gap for development relative to research, and it’s a sector in which there is existing capacity which could be expanded – in both the public and private sectors. But how can we avoid the waste that defense procurement is often accused of, and maximise spillovers to the civilian economy?

    The government will fund large-scale “Moonshot” projects. Again, if done seriously this would lead to more development funding. What do we mean by a “moonshot”? To me, it needs to be an ambitious, engineering project that delivers a concrete outcome (i.e. at least a full scale prototype) on a defined timescale, but which is difficult enough that it drives a substantial associated R&D programme to solve the problems that arise on the way. The questions it prompts include – how would we select them, how can we be confident that the UK has the capacity to deliver, what scale of spending is involved? My first guess on the latter question is that if this isn’t measured in £ billions it’s either not a proper moonshot or we’re not serious about succeeding.

    What are possible concrete examples?

  • An all electric long haul aeroplane, as mentioned in the Prime Minister’s recent speech. (I think this is technologically implausible – my guess now is that if we want long-haul flying in a zero carbon world we will do it by making synthetic hydrocarbon fuel from green hydrogen and carbon dioxide captured directly from air).
  • A generation 4 advanced modular fission reactor which is low waste, intrinsically fail-safe and generates enough process heat to produce hydrogen as well as electricity (I think the government should do this).
  • A working, scalable, quantum computer (In my view this would be an example of a bad choice because the UK is not competitive with existing major projects elsewhere in the world).
  • A commercial fusion reactor supplying significant, low cost electricity to the grid by 2040 (i.e. STEP – the Spherical Tokomak for Energy Production. I think the government will do this, and it probably should, in case it works.)
  • Inspiring and enabling talented people and teams

    A big increase in R&D spending won’t deliver results if there aren’t the talented people – at all levels – to do the work. Much potential homegrown talent is currently missed, due to the underrepresentation of women and black and minority ethnic people in research. The roadmap announces the creation of an “Office of Talent” to make it easier for overseas researchers to work and settle in the UK.

    The relationship between higher education and further education will be rethought, especially in the context of expanding intermediate level technical training. I believe that we need much more joined-up systems for further and higher education on a regional basis, with much easier routes between the different parts of the system, and much more cooperation to expand provision for adult and continuing education.

    Catapult Centres could be given a more explicit mandate to embrace technical training in their missions. Again, this needs to be done in a regional context, working with existing HE and FE institutions.

    There will be an expansion of postgraduate research training. Will responsibility for PGR training be left with the research councils? Do we think of PhD students as primarily researchers or as trainees? Currently, PhD students are funded at a level far below the actual cost of training them, so given the current financial difficulties of universities the appropriate funding level will need to be reconsidered.

    Innovation and productivity

    The proportion of public R&D funding devoted to translational and applied research will be increased, with a particular focus on new medicines and treatment, and on defense research. What agencies will this funding be pushed through? Will funding for NIHR be substantially increased? What will be the role of Innovate UK?

    Universities will be further incentivised to carry out knowledge exchange activities: HEIF funding is being increased, and the Knowledge Exchange Framework introduced. Care will be needed to create the right incentives here – perhaps they could be structured to encourage more regional collaboration between institutions?

    The Catapult Network of translational research institutes could be restructured “We will review whether they should all continue in their current form, exploring the potential to seize new opportunities.” There’s a broader question of whether the Catapult Network should continue to be run by InnovateUK, or developed as an independent translational research agency with greater central coordination?

    New innovation zones and clusters should be created, based around existing and new innovation assets such as Catapult Centres, and the role of Catapult Centres in promoting local and regional economic growth made more explicit in their goals. What is the right balance between the regional and national missions of Catapult Centres?

    Levelling up R&D across the UK

    “We have already committed to developing a comprehensive and ambitious UK R&D Place Strategy together with the devolved administrations over the coming months.” Tom Forth and I have published a comprehensive set of suggestions for “levelling up” in our recent NESTA paper “The Missing £4 billion”.

    Central government will support local leaders in co-creating effective innovation approaches for their local economies. Should this be made formal, with cities/regions coming forward with “innovation deals” in return for devolved funding, as Tom Forth and I suggested?

    Some proportion of national R&D funding should be ring-fenced for particular regions, in order to make progress towards “levelling-up” R&D funding across the country, and/or devolved to those cities and regions that have demonstrated the capacity to create robust innovation strategies. How much of the “levelling up” agenda should be driven top-down as opposed to created bottom-up?

    All future decisions on R&D infrastructure investments should include an explicit consideration of their impacts on local and regional economies. This commitment is explicitly made in the Roadmap, though the issue will be the weight that is in practise attached to these factors relative to national considerations.

    There should be mechanisms for more local and regional voices in the advice given to central government agencies. The emphasis so far has been on UKRI, but what about NIHR, MoD, and any new agencies that emerge?

    Being at the forefront of global collaboration

    The immediate question here is what happens to the UK’s participation in EU science programs. The stated intention is to negotiate participation in Horizon Europe and the Euratom research programme – but there is an if: “It is our ambition to fully associate to both programmes if we can agree a fair and balanced deal”. So there is a plan B:

    “If we do not formally associate to Horizon Europe or Euratom R&T, we will implement ambitious alternatives as quickly as possible from January 2021 and address the funding gap. As a first step we will launch an ambitious new Discovery Fund offering sizeable grants over long periods of time to talented early, mid and late-career researchers, whether already in the UK or coming here from anywhere in the world, to pursue discovery-led, ground- breaking research.” This is clearly intended as a substitute for the European Research Council. One shouldn’t underestimate the difficulty of rapidly establishing a single-nation programme that reproduces the rigour and credibility of the ERC.

    More funding will be made for bilateral programmes with appropriate national partners across the world, in a way that is more responsive to new opportunities. This in part is a response to a long-standing complaint by Science Ministers that they don’t have any flexibility to assign such funds during overseas visits, but this raises the problem of how to make the choice of partner countries strategic rather than simply depending on the travel schedule of the Minister. European partners shouldn’t be neglected here.

    Ensuring a healthy R&D system

    Public sector research establishments (PSREs) will be strengthened and integrated into the wider system. They will be allowed to bid for funding from UKRI, which should come with full economic costs. What is the right division of labour between university-based research and R&D in PSREs? Is there a danger of the two parts of the system entering into sub-optimal competition?

    The PSRE network will be integrated into a true network of national laboratories, strengthened where necessary, with new organisations being created to fill obvious gaps. This needs a very clear view of national strategic priorities. One answer to the previous question is to differentiate more clearly between strategic science in support of national priorities and discovery science, but then this needs clarity about how universities and PSREs can most effectively collaborate.

    My concrete suggestion would be to create a new “Net Zero Delivery Agency” to take responsibility for the innovation that will be needed to reach the net zero greenhouse gas goal.

    The Government Office for Science will be strengthened and its resources increased, so that it can coordinate better science advice government and act as an authoritative technology assessment agency. Increased funding for GO Science was announced in the March budget, which I welcome.

    The Research Excellence Framework will be reformed to reduce its bureaucratic overhead and focus more on measuring change and development. How to do this without introducing perverse incentives?

    University research will be funded at closer to full economic cost. Part of the reason that a larger proportion of the UK’s public research enterprise happens in universities than in other comparable countries is that this has seemed a cheaper way of doing research than carrying it out in free-standing research institutes. But, as we’re now about to find out, that’s been an illusion – in reality, universities have subsidised the cost of research using the surplus from teaching overseas students. This subsidy – amounting to about a couple of billion pounds a year across the system – has been dramatically exposed by the pandemic.

    What’s next?

    The last section of the document begins by saying: “This Roadmap is the start of a conversation”. This conversation needs to take place with some speed: over this summer and autumn, the government needs to put in place its future spending plans in a Comprehensive Spending Review. In normal times, we’d expect this to cover the next three years – 21/22, 22/23 and 23/24. It’s the year after that – 24/25 – that the commitment to £22 billion R&D spending has been made, so these three years need to see substantial progress towards reaching that target, with concrete plans for those £billion scale increases. But it takes time to build new institutions, to recruit suitable people, to make evidence-based decisions about what projects to support.

    It’s natural to ask, how robust will this spending target, and the general priority being attached to R&D, be to the shifting winds of politics? While the commitment of the current Number 10 operation to R&D seems not to be in doubt, it’s not obvious that there’s a deep commitment to research throughout the Conservative Party. It’s not difficult to imagine circumstances – perhaps a change in leadership following the inevitable economic difficulties that we’ll encounter recovering from the pandemic – in which that commitment will be diluted.

    Of course, the spending target isn’t the ultimate goal, it’s the means to an end. That end is a more prosperous, more productive nation, with prosperity spread more equally across the country, on track to rapidly move its energy economy to a sustainable, net zero greenhouse emissions, basis. It is these goals that should drive our emerging R&D strategy.

    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.