Candidate number: JFHD5
Prompt: Within the Neoclassical Economic paradigm, market failures (e.g., public goods, negative externalities, etc.) are the only rationale for government intervention. With reference to a specific policy area of your choice, describe the type of government interventions which would be supported by a market failure rationale and contrast those interventions with those which would be supported by a market shaping rationale.
The UK’s ‘Green Industrial Revolution’ to reach net zero by 2050 is facing a crucial moment of transition. While countries around the world are encouraging investment, developing new policies and evolving their workforce to capture the net zero "economic opportunity of the 21st century" (Skidmore, 2023), the UK is stalling. This paper argues that, despite the promise of 2 million green jobs by 2030 (DESNZ, 2021), the UK's Net Zero strategy is dominated by monolithic market-fixing interventions relying on inefficient push-incentives and siloed public goods that are not effectively addressing the UK’s widening ‘green skills’ gap. By identifying, describing, and contrasting market-fixing and market-shaping interventions within the UK's Net Zero strategy, this paper demonstrates the limitations of a market-fixing approach and calls for a more dynamic, market-shaping approach to policymaking to achieve a just transition to an equitable green job economy.
The global race to capture the economic opportunity of net zero is on. With £37-57 billion of annual UK GDP growth (CBI, 2023), and a large volume of high-paying, well-skilled green jobs thought to be up for grabs through net zero initiatives (CCC, 2023), there is a emerging shift in the economic, social and regulatory policies needed to capture it. Among these policies, to mitigate against a historic pattern of socio-economic turbulence of job losses and skill obsolescence in times of change (Perez, 2002), is an increasing emphasis on a just transition – aligning net zero ambitions with the fair treatment of those affected – as a "political necessity" (Emden, Evans, and Murphy, 2023). In the UK, as part of a ten-point £12 billion plan aimed at capturing the economic benefits of net zero and kickstart an effective just transition, the government launched the 'Net Zero Strategy'. This strategy details policies and proposals for decarbonising all sectors of the UK economy and, importantly, articulated a clear ambition to support 2 million green jobs by 2030 (DESNZ, 2021). The strategy focuses on four main ambitions for green jobs: (1) reforming the skill system; (2) enhancing support for workers in high carbon industries to transition to green jobs; (3) collaborating with businesses to promote equal access to opportunities; and (4) integrating green skills into education (DESNZ, 2021).
On the surface, you can argue that these efforts have been rewarded. Research by Lightcast, a labour market analytics company, estimated that there were more green jobs advertised in the UK in 2022 than the total number of people in green jobs in 2020, showing a 43% increase from 2021 – a rapid rise in the number of available roles from a relatively small starting point (Green Jobs Foundation, 2023). However, there is an emerging consensus that the UK is falling behind the rest of the world with an approach that is piecemeal, limited, or absent altogether (Emden, Evans, and Murphy, 2023) with a recent independent review of the government's approach to net zero finding a resounding sense of frustration from stakeholders across sectors. The report cited “a lack of long-term thinking, siloed behaviour from government departments, and uncertainty over the length of funding commitments" (Skidmore, 2023). Coupled with a backdrop of one in five jobs in the UK (approximately 6.3 million workers) requiring change as a result of the transition to net zero (Robins et al., 2020) and we are left with an ever-widening green skill gap that PwC reports to be up to 200,000 workers and growing (PwC, 2023) due to the increasingly rapid increase in the number of green jobs available (Green Jobs Foundation, 2022).
To start to understand the cause of an increasing green skills gap in the UK, we must first accept that the UK’s Net Zero strategy is dominated with policies derived from a neoclassical paradigm of market-failure theory. These policies rely on a romanticised fascination with markets, an unyielding focus on individual rationality and utility maximisation, and a complete disregard for historical or social context (Dequech, 2007; Institute for New Economic Thinking, 2017). They are based on the belief that the idea market equals optimal resource allocation, and any deviation from a 'Pareto-efficient' market is seen as a failure. Put simply, if any of the conditions established by Arrow’s First Fundamental Theorem of welfare economics aren't met - such as incorrect prices, irrational behaviour by individual actors, or lack of equilibrium - the market is considered failing (Arrow, 1951). It is this theory of market failure that policymakers have historically interpreted and utilised as a justification for public policy intervention and one that has resulted in limiting the role of the state to “fixing”, or at best “facilitating” change (Mazzucato, Ryan-Collins, 2016, 2022). Unfortunately, for a just transition to green jobs, it means that net-zero policies are focused on correcting market externalities through public goods and market mechanisms, rather than shaping or directing a future economy – an approach that Lundvall (1992) argues, often leads to suboptimal societal outcomes despite it’s aim to create optimal market conditions.
The net zero ‘public goods’ problem
In the scripting of neoclassical economics, public goods and collective action are seen as a problem because, being 'non-rivalrous' and 'non-excludable', they are not amenable to market production (Sekera, 2020). For firms, this means they have no reason to invest in public goods that improve the skills of the workforce because the value from the investment might not always be fully captured - even if it is positive for the wider economy (Green Alliance, 2022). It's an interesting paradox. One that results in a heavy reliance on the state as the sole actor, needing to upskill a rapidly growing workforce without the involvement of the very firms that require the skills, because they lack the incentive to do so. This can be seen in data from 2022 where the UK government offered more than 289 courses related to green jobs and skills in 2022 (Green Jobs Foundation, 2023), yet was unable to prevent a growing skills gap amid the rapid rise in demand for green jobs. This issue is further complicated by the Net Zero Strategies' lack of clear definitions for green jobs, green skills, or a specific national skill plan to achieve net zero (DESNZ, 2021; LGA, 2023), despite recurring recommendations (Skidmore, 2023). As a consequence it becomes exponentially more difficult to measure the impact of these training courses and to align the skills they are developing across sectors. What the results in is a set of public goods - demonstrating a lack of collective ownership or action. They are costly to deliver, often through third-party contractors, and are not linked to any guarantees that they will lead to employment within the green economy making them ineffective in delivering an economy-wide skills transformation which a just transition to an equitable green job economy requires.
Inefficient net zero ‘push’ incentives