Our measure of productivity should be how much energy it takes to create new growth
If the UK and Europe want to compete with Joe Biden’s massive package of incentives for green energy, we need drastically change how we talk about productivity, writes Martin Rossen
Over the last decade, we stopped talking about productivity. We shelved it from our political vocabulary. As economies struggle to get back on track, it has made a slow return to our lexicon.
In February this year, Jeremy Hunt, the UK Chancellor laid out a four point plan to boost productivity. At the same time, he said billions more would be spent on the energy price cap. Productivity of our workers and our businesses is essential for growth, but what matters just as much, if not more, is energy productivity – the volume of services or products we can generate per unit of energy.
One of the biggest challenges for the UK and for Europe is maintaining competitiveness in the face of America’s muscular, pro green-business incentives laid out in Joe Biden’s Inflation Reduction Act. Productivity growth in the euro area has been muted for decades for various reasons, trending downwards. According to the ECB, average annual growth in labour productivity – measured as real GDP per hour worked – in the euro area countries that have sufficiently long time series has continuously declined from about 7 per cent in the 1960s to around 1 per cent in recent years.
Since the financial crisis, we have benefited from both cheap and relatively stable energy prices along with low interest rates, meaning that the money has been uncritically invested in overpriced properties and digital startups, instead of increased productivity.
Focusing on labour productivity, as Hunt and European leaders have done, is a useful metric. But as is energy productivity, which begins to address this question of competitiveness, while also furthering ambitions to reduce our reliance and expenditure on energy imports. It also leads to higher energy security and more job creation.
New EU-wide data from January 2021 to January 2023 show that the price of energy in the EU reached record levels in 2022. The causes of this rise are well documented, dating back to the second half of the pandemic and growing international demand, and aggravated by Ukraine and extreme weather events across Europe.
In Asia and the US, energy prices have not risen to the same highs as in Europe, and they are unlikely to do so. Our energy markets are much more closely tied to the war in Ukraine, and heatwaves from summer last year meant we needed more, while
producing less.
The erosion of Europe’s competitiveness will continue if politicians and business leaders do not integrate energy productivity at its core of their future growth strategies and place it as the new competitive parameter.
Paradoxically, efficiency progress is slowing in the industrial sector. From 2015 to 2020, the rate of improvement in the energy needed to produce one US dollar of industrial value dropped from the almost 2 per cent per year achieved over 2010-15 to just under 1 per cent. The industrial sector needs to improve its energy efficiency at a rate of 3 per cent annually to meet net zero
This is not even difficult. We have most of the solutions to reduce energy consumption and increase energy productivity and the costs are significantly lower than building out renewables. If we do nothing, we are looking into a future where high energy costs and a faltering transition to a green economy mean our future growth cannot be based on increased energy consumption. On the contrary, the key to a competitive, green European business is precisely that we manage to get more value out of each unit of energy than we do today.
In 2013, US President Obama challenged his countrymen to double U.S. energy productivity over 2010 levels by 2030. The challenge was drowned in congressional banter, but the idea was good. Europe could set a similar change. If we don’t, security of supply will decrease, competitiveness will decline relative to the US and Asia and access to affordable energy will become even more scarce.