I recently set out my vision of our industrial strategy, and part of this is being responsive to new opportunities and challenges as they emerge.
One major opportunity is the growth potential created by our transition to a low carbon economy. It can help UK businesses to manage risks such as fluctuating fossil fuel prices, while creating opportunities, new industries and serious fundamental overseas markets.
Green sectors have outperformed the wider economy since the economic downturn. The UK share of the global Low Carbon Environmental Goods & Services market was estimated to be more than £122 billion in 2010/11 – the sixth largest in the world, and growing at approximately five per cent a year. The UK is the largest single market for offshore wind in the world, and we are currently leading the world in terms of marine energy devices and installation development.
Recognising the potential of the low carbon economy, we have put in place policies to accelerate innovation and incentivise investment in both energy efficiency and low carbon electricity generation. Capitalised with £3 billion, the Green Investment Bank will stimulate private investment in green activities.
Our Offshore Renewable Energy Catapult will transform capability in the sector, helping to drive down costs and support the establishment of a UK supply chain. The Government is also helping to position Britain as a global leader in the design, production and use of ultra-low emission vehicles with provision for over £400 million for the lifetime of this Parliament.
In the transition to a low carbon economy, we must be careful not to undermine the competitiveness of other UK industries. A green economy is fully compatible with a competitive and efficient manufacturing industry.
Indeed, energy intensive industries have a big role to play in a green economy by providing many of the components for low carbon goods. Steel, cement and high-tech textiles are part of the supply chain for wind turbines.
Furthermore, the fact that energy makes up such a large proportion of their costs has meant that they have been leaders in energy efficiency for years.
However, alongside this opportunity comes a challenge. The policies we have rightly put in place to support low carbon investment have the impact of raising electricity prices for those same industries.
This is a transitional cost, but it will have a real impact in the short to medium term. We estimate that energy and climate change policies will add up to 28 per cent to electricity costs for these companies in 2020 – a significant increase for companies where electricity is the highest operating cost.
The majority of our energy intensive industries operate in highly competitive global markets and have limited ability to pass on increased costs, meaning that increases in the cost base directly impact on the profitability of industry and, therefore, the ability of companies to invest in the UK.
If energy intensive manufacturers are unable to invest in the UK there is a risk that they will no longer produce here once their equipment has come to the end of its operating life. This would mean that we would lose companies and jobs. We would then be in the position of importing goods, such as steel, with the carbon cost from shipping that this entails.
In addition, these goods might come from countries with lower energy efficiency standards, raising the overall carbon emissions of the goods that we consume in the UK. This is what we mean by carbon leakage.
We, of course, want to do everything possible to avoid this outcome. It is in this context that we announced in the 2011 Autumn Statement, a £250 million package to support energy intensive industries most at risk of being made uncompetitive by energy and climate change policies, so that we are able to protect jobs and avoid carbon leakage.
In October, my Department, along with the Department of Energy and Climate Change, published a consultation on our proposals for compensating energy intensive industries for two of the costs they face – the costs of the EU Emissions Trading System and the Carbon Price Floor.
The proposals demonstrate our continued focus on ensuring that this work is shaped by the industries it is designed to help, so that support reaches those industries most at risk of carbon leakage.
This compensation is a material example of our industrial strategy in action. It also demonstrates the work that the Government is doing to support growth and rebalance the economy towards manufacturers and to regions outside of London and the South East. Reduced electricity costs for these manufacturers will be vital in protecting jobs and allowing firms to create the components that will lead to a greener economy.
This is in addition to our ongoing policies, such as the creation of the Green Investment Bank, support for innovation and the roll out of low emission vehicles. Taken together, these policies show that we can have green growth in the UK, and we will continue to work towards delivering both for the benefit of UK PLC.