Investment for inclusive and sustainable growth in cities

Increased, well-targeted investments in capital, innovation and skills in cities – where the majority of people live and work - will be key for moving to stronger, more inclusive and environmentally sustainable growth.

On aggregate, capital investment in the UK is around 10 per cent of GDP, compared with over 12 per cent on average across France, Germany and the US. This needs to rise if we are to start seeing productivity growth again; a crucial driver of much-needed improvements in living standards. Investment in cities outside London will be needed to improve their relative performance, bringing gaps more in line with those we see in other comparator countries such as France.

Net zero also requires significant increases in capital investment – rising to £50 billion per annum by 2030. These investments will generate change across energy, transport and urban systems that will impact on firms, workers and households – creating opportunities for cities where the majority of the UK population lives and works but also challenges in delivery given the scale and pace of change required.

Local growth strategies seeking to attract productive and sustainable investments should build on existing or potential sectoral or technological strengths, including in net zero products and services that are seeing increased demand at home and overseas, equip workers with the skills they need to drive change, and ensure that benefits and costs in the transition are managed equitably.

Net zero and improved living standards

While cities account for a large share of the UK’s emissions, they have a lower carbon footprint on a per capita basis. This is because their higher densities are better able to support public transport networks and lower-carbon homes. Nevertheless, this next phase of the UK’s journey to net zero requires much more rapid decarbonisation of buildings and transport – two areas where action in cities will be crucial.

The good news is that the required net zero investments bring with them a series of co-benefits which have the potential to improve the liveability of cities. Making the switch to electric vehicles cleans up the air, with significant health benefits (over 30,000 deaths per year in the UK are attributed to long-term exposure to air pollution - largely from fossil fuels). Likewise, more active travel and energy efficiency improvements in buildings will bring health benefits to people in cities. Moreover, cost savings for households follow initial investments in clean technologies such as heat pumps or electric vehicles helping to ease cost of living pressures and build resilience over time.

Net zero cities making these changes, together with investments in green space and nature, will become more liveable and attractive, and this is likely to have benefits for productivity and growth. More broadly, cities with smart and integrated transport systems are likely to encourage the clustering of mobile capital, talent, ideas, skills, knowledge and creativity. But further opportunities are available for cities that are able to leverage underlying strengths in creating technologies, products or services demanded by the net zero transition.

Seizing growth opportunities in the transition

The UK is primarily a services superpower – including in areas such as finance, business services and the creative industries. Such sectors benefit from agglomeration economies and will be a key component of driving growth in cities. But the UK has a number of real strengths that are relevant for the net zero transition. It is a prominent innovator in a number of clean technologies such as offshore wind, tidal stream, carbon capture usage and storage; a competitive exporter of certain green goods; and is considered to be a centre of green finance. But how are these strengths distributed across the UK’s cities?

It turns out that the UK’s net zero strengths are relatively spread out. For example, taking patents – we see that places outside of London and the South East (with lower average productivity) tend to be more specialised in clean tech patenting, Derbyshire and Nottinghamshire stand out on this measure. Estimates of the returns to investments in clean tech innovation (such as offshore wind and tidal stream) outside the “golden triangle” of London, Oxford and Cambridge show that these are relatively high compared to other technology areas. A broader view of the net zero economy shows that less productive areas in the UK are more likely to be specialised firms providing low carbon energy generation or heat and buildings products and services, implying that net zero investments might provide a route to 'levelling up' the country.

The UK’s universities are a key source of strength on the world stage. And our current analysis suggests that universities in the core cities are making an important contribution to net zero innovation (as measured via chains of citations of academic research into UK patents), including in Manchester, Cardiff, Sheffield, Birmingham and Belfast.

But building on the UK’s strengths in growing areas requires deeper analysis at the local level, giving policymakers, investors and other stakeholders more information on where relevant capabilities exist, the shape of existing clusters, and the local conditions that could stimulate growth. For places to deliver net zero, and capture its benefits, it will be necessary to ensure that the local workforce is equipped with the right skills. Encouraging deeper partnerships between universities, colleges, local leaders and businesses can help build on local strengths and address local weaknesses.

Managing distributional consequences for a fair transition

Strong national and local policies and incentives are needed to generate net zero investments, and broader investments in productive firms and assets across the economy. But public support is crucial for a successful transition to net zero – it is ultimately the choices that people make as voters in local and general elections, consumers, workers and investors that will determine the scale, pace and nature of change that is achieved.  

Successful cities will be those that are inclusive – places where all inhabitants and workers can access local (and broader) economic opportunities, amenities and public services. And while – as we have seen - the net zero transition brings with it many opportunities, these might not be initially accessible to all, and the financial and other costs can be particularly difficult for some to bear. In the labour market, while the net zero transition is expected to be a net job creator, some workers might become displaced in the transition and might face particular challenges to re-skilling or moving to other available work. Many households will struggle to invest in electric vehicles, energy efficiency and zero carbon heating systems, particularly in a cost of living crisis. It will be crucial therefore that appropriate support is provided for those who need it, and that this is well communicated and understood such that crucial public support is built and maintained. 

Anna Valero is a Distinguished Policy Fellow at the LSE's Centre for Economic Performance and member of the UK Urban Futures Commission.