The Scottish Government

« Previous | Contents | Next »

Listen

Background Analysis to the Framework for Economic Development in Scotland

8. Promoting Sustainable Economic Development

FEDS was explicit about the need for economic development to be sustainable, and this has been re-iterated more recently in the Partnership Agreement. The theme of sustainability runs throughout the document:

' We want a Scotland that delivers sustainable development; that puts environmental concerns at the heart of public policy, and secures environmental justice for all of Scotland's communities.'

This chapter looks at the Executive approach to economic sustainability, or sustainable economic development, and how it can be reflected in the updated aims, objectives and priorities of FEDS. The lessons of economic history suggest that as economies become more efficient, they become wealthier , and as they become wealthier they consume more goods and services. Thus, although technological innovation and improvements in productivity can assist with the process of decoupling economic growth and resource use, in the longer-term a sustainable future will require new and less wasteful ways of meeting the needs of Scottish society. This is likely to require social and institutional change as much as it needs technological and industrial innovation.

8.1 Fiscal Sustainability

Fiscal sustainability means that present and future public expenditure is broadly covered by corresponding revenue. This idea is expressed by Treasury in its sustainable investment rule which states that public debt as a proportion of national income is to be held over the economic cycle at a stable and prudent level (deemed to be 40 per cent of GDP). Combined with Treasury's "golden rule", which demands that government only borrow to invest and not to fund current expenditure, this sets clear bounds to fiscal behaviour across the UK. It is aimed at preventing excessive government spending and borrowing that might crowd out private investment and thereby reduce the economic growth potential. Furthermore, fiscal sustainability promotes inter-generational fairness, by putting a stop to disproportional current spending that has to be funded by future generations who do not receive any tangible benefit from it.

The rules on fiscal sustainability apply as much to local authority borrowing and expenditure as to that of central government. Local authorities are free to borrow to support capital investment but not to support revenue expenditure. Under the new prudential regime for capital expenditure local authorities are free to determine their own plans for capital investment, but their decisions need to take account of the impact of their decisions on the sustainable investment rule. To this end their borrowing and expenditure continue to be monitored closely by the Treasury and Scottish Ministers have statutory powers to curtail the expenditure plans of local authorities both individually and collectively.

One major concern for the fiscal sustainability of the public sector is the future of the pension system. The UK population is ageing which raises the dependency ratio (number of retirees in relation to the workforce) and makes the funding of pensions increasingly difficult. Through the promotion of private pensions the government is trying to alleviate future pressures on the public purse. Still, the UK is relatively well positioned compared to many other European countries, which provide more generous pensions (in relation to contributions) and have less stringent rules regarding early retirement. In the Scottish context, the key long-term trends which the Executive has identified as critical to its fiscal planning are the dual trends of a declining and an ageing population.

Scottish fiscal sustainability in a narrower sense is determined by the present constitutional arrangements. The main source of revenue for the Executive is the block grant from Treasury. The Executive is raising revenue from non-domestic rates and has the power to vary the basic rate of income tax but it is not allowed to borrow. Despite the strictures on the revenue side the Executive has full autonomy over its spending decisions.

Some commentators have expressed concerns that repayments to PPP contractors will soon build up to unsustainable levels. However, at present, the Scottish Executive's contribution to PPP repayments represents a very small fraction of the Scottish Block - around 2 per cent (based on closed deals). Whilst this proportion is expected to rise in the future, it should be recognised that whilst PPP investment is important, it only represents a minority of total capital investment - around 13 per cent over 2000-2004.

Following the Spending Review, the Scottish Executive plans to publish an overall Investment Strategy, covering all capital spending funded by both the public sector and via PPPs. This will allow overall investment trends to be tracked much more clearly than has been the case in the past.

The Executive is achieving sustainability of its finances by

• creating sufficient flexibility to adjust spending decisions to changes in UK fiscal policy that impinge on the block grant;
• maximising value for money in all spending programmes;
• negotiating fair wages that rise in line with productivity increases.

8.2 Economic Sustainability

A sustainable economy is one where resources are used ever more efficiently in order to allow society to enjoy the benefits of economic growth without its damaging side effects. The concept of economic sustainability reflects the need for an economy to respond to the rapidly changing economic environment, in order to maintain competitive advantage.

Fisheries policy is one area in which sustainability concerns are in conflict with short-term private economic gain. In the sea fisheries sector, excessive exploitation of stocks has seen the need for successive decommissioning schemes for whitefish vessels, and the introduction of restrictive management measures (such as fishing effort controls), to reduce the size of the fleet and the level of fishing activity. This presents hard choices for the fishermen involved but in the long run, sustainable fisheries management leads to greater certainty and improved economic and social benefits for the businesses and communities concerned as well as environmental gains.

Promoting sustainability of the Scottish economy means supporting the ongoing transition to sectors that create wealth and jobs in the long term. While the Executive recognises that market forces are the ultimate arbiters for the economic viability of businesses, it has a role in supplying the framework that gives firms either the incentive to establish themselves in Scotland or to remain and grow here.

This does not mean that the Executive is trying to "choose winners". The Executive is making sure that enterprises have the wherewithal to grow by promoting the flexibility, adaptability and responsiveness to compete in an increasingly aggressive global economic environment. Expenditure on education and skills formation raises the adaptability of the labour force. Forging an enterprise culture enhances the responsiveness of the Scottish economy to new challenges. The Executive's strong support of more private R&D spending aims at safeguarding further productivity improvements and product innovations in order to build and retain viable industries in Scotland.

8.3 Sustainable Consumption and Production

Building on the definition of 'sustainable development' the UK government defines the core of sustainable consumption and production (SCP) as:

Continuous economic and social progress that respects the limits of the Earth's ecosystems, and meets the needs and aspirations of everyone for a better quality of life, now and for future generations to come.

Why is sustainable consumption and production important to economic development in Scotland?

There are limits to the capacity of the Earth's ecosystems to absorb the large volumes of waste and pollution that are created by economic activity. In addition economic activity can put pressure on sensitive habitats by changing land uses. The only way to maintain economic progress in the long term without approaching these limits is to decouple economic growth from environmental degradation. This means ensuring environmental degradation does not automatically grow with the economy to the extent that environmental limits could be threatened in the medium term. Structural change in the economy will be required if effective decoupling is to be achieved in certain areas, for example, CO2 emissions from energy use, the volume of waste, the use of non-renewable energy and the demand for transport.

The Executive's sustainable production and consumption agenda provides a practical focus for these high-level concerns. The policy approach is to look across the whole chain of consumption and production in a particular field before deciding the points on which to focus. In practical terms, it means getting more from less:

• More efficient and profitable production, using less raw material;
• More value added to a product with less pollution and waste in the process; and
• More consumer needs fulfilled with less energy, water or waste.

Economic development in Scotland has much to gain from making more efficient use of resources and from reducing the high costs imposed by environmental degradation. These costs are eventually paid for by businesses, consumers or the public. In 1996 the deaths of between 12,000-24,000 vulnerable people were brought forward due to air pollution in the UK and 24,000 hospital admissions were associated with short term exposure. ⁵⁰

What has happened since 1999 with respect to policy development?

The First Minister, Jack McConnell was part of the UK Delegation which attended the World Summit on Sustainable Development in South Africa in 2002. A crucial agreement at the summit was that the sustainable development of the poorest could not take place without action by the richest nations to achieve more sustainable consumption and production (SCP). World leaders committed themselves to developing a ten-year framework of programmes in support of regional and national initiatives to accelerate the shift towards sustainable consumption and production, with developed nations taking the lead in taking this action through policies such as cleaner production programmes, training programmes and partnerships.

Following up the WSSD, the UK government produced Changing Patterns in September 2003 which sets out the framework and rationale for pursuing a sustainable consumption and production approach. This closely follows the recommendations made in South Africa and include objectives such as improving resource efficiency, improving information to consumers and utilising a range of tools, including tax, regulation and information campaigns. Changing Patterns also addresses many of the issues raised in the Strategy Unit's 2001 report on Resource Productivity: making more with less. The Scottish Executive notes the Changing Patterns framework and the challenge to identify the most efficient and effective way of decoupling economic growth from environmental degradation in Scotland.

The Market Framework and Barriers

In general, markets provide the best means of allocating an economy's resources, including environmental resources. Markets are, however, subject to imperfections or failures, especially involving the environment. It is essential, therefore, to understand the nature of market failures. The Treasury publication Tax and the Environment: using economic instruments outlines how economic analysts define the relevant market failures.

At what level should action be taken?

The level at which action should be taken will depend on the nature of the specific issue being addressed. This will help to ensure that the intervention is as efficient as possible as well as addressing competitiveness issues in relation to transboundary problems. If a problem is global then there can be significant benefits in a global response. Transboundary problems such as acid rain are best dealt with at European level. Increasingly, the EU provides the legislative framework for environmental policies but gives other tiers of government flexibility in how they achieve the prescribed objectives. For example, the Scottish Executive is responsible for implementing the Water Framework Directive in Scotland. Problems which are not transboundary and do not impact on the single market can generally be best addressed by individual member states. Localised problems such as road traffic congestion may be best tackled through local instruments.

Policy and action underway

The Executive will contribute to the forthcoming review of the UK Sustainable Development Strategy which will be informed by the SCP framework and will review the action that is needed at the UK level. Within Scotland, there is a clear role for the Executive to address market failures, to work with Scottish business in addressing information failures, to provide the framework needed to stimulate and encourage innovation in Scotland, to ensure an innovative and efficient approach to the delivery of public services in Scotland and to ensure Executive's own procurement practices are sustainable.

Some of the main areas of activity are as follows:

Carbon emissions: Long-term reductions in carbon dioxide will be required to prevent dangerous climate change. In its recent White Paper on Energy the UK Government has committed itself to move down the low carbon path, with an aspiration to reduce carbon dioxide emissions by 60 per cent from current levels by 2050. Scottish Ministers support this commitment and will work in partnership with the UK Government towards delivering the 60 per cent reduction.

The main mechanism for reducing carbon emissions will be through the EU Emissions Trading Directive which represents a combination of regulation and economic instrument. The setting of a CO ₂ emissions cap will introduce a degree of certainty and should bring about an absolute decoupling of emissions from economic growth. Allowing emission allowances to be traded should allow emission reductions to be achieved in the most cost effective manner. There is a possibility of extending this approach to SO _x and NO _x trading as well.

Waste: The landfill directive means that the quantity of biodegradable municipal waste that is sent to landfill must be reduced by 2010 to 75 per cent of that produced in 1995 with further reductions required through to 2020. For Scotland, these targets are to be achieved through a statutory system of landfill allowances for local authorities. As authorities are allowed to send decreasing amounts of biodegradable municipal waste to landfill they will be required to take action to minimise waste production and increase recycling, composting and other forms of treatment. Support from the Strategic Waste Fund will allow them to put their plans into practice.

Water Environment: The Executive's Water Environment and Water Services Act, which was passed by the Scottish Parliament on 29 January and received Royal Assent on 5 March 2003. The Act will:

• Establish River Basin Management Plans to take a "source to sea" approach to managing the water environment.
• Ensure that all human impacts that have a harmful effect on the water environment - such as over abstraction or diffuse pollution - are properly controlled.
• Deliver a transparent process for managing our waters that involves and will take account of all interests.

The results will be that the First River Basin Plan will be published by 2009 and our environmental target of 'good status' will be achieved by 2015.

Energy Efficiency and Waste Minimisation: The Scottish Energy Efficiency Office works directly with the business and public sector to implement energy efficiency and environmental best practice to improve resource efficiency and encourage business to operate in a sustainable way. New and stricter building standards being introduced will also make significant inroads in this area. Energy efficiency and waste minimisation measures not only reduce greenhouse gas emissions that cause global warming but, by reducing overheads, contribute to economic development by increasing profitability and competitiveness. The uptake of energy efficiency products and energy advice services which are provided "free to customers" through the UK Action Energy and Envirowise programmes is growing. This represents a real opportunity for Scottish business to make significant savings and contribute to achieving a better environment.

Business and the Enterprise Networks: The Enterprise Networks have targets for businesses participating in environmental activities to achieve business benefits. The Energy and environment SME toolkit is a joint initiative with the Federation of Small Businesses, which offers a practical guide to businesses on the most efficient use of their resources. The Business Council for Sustainable Development (BCSD), a network of businesses committed to delivering action on sustainable development will expand its operations in Scotland. It will support the Scottish Industrial Symbiosis Programme which helps local companies to co-operate to achieve greater resource efficiency by reducing resource input costs and waste management costs and identifying new products.

Green Jobs Strategy: The Green Jobs Strategy will look at resource productivity. It will help businesses to adopt greener working practices by encouraging greater resource efficiency and higher productivity. Businesses that make better use of resources, that reduce waste and make productive use of by-products can reduce production costs, increase productivity and become more competitive in the market place. New and existing Scottish companies also need to take full advantage of the opportunities available in the developing environmental sectors - sectors like renewable energy and recycling.

Promoting more sustainable lifestyle practices: The publication of ' Do a little, change a lot' has been designed to raise awareness amongst consumers of the need to change personal behaviour and choices to achieve a more sustainable Scotland.

8.4 Appraisal and SEA

There has been a perception that environmental concerns are considered too late in the decision-making process to be taken properly into account and need to be dealt with at a higher, more strategic level. Formal announcement was made on October 23rd 2003 of the intention to bring forward a Strategic Environmental Assessment Bill to implement the partnership agreement on SEA. Comprehensive SEA legislation will ensure that every strategy, plan or programme with likely significant environmental effects will undergo proper appraisal to identify and scrutinise those effects.

The intention is to apply the following stages to all public sector strategies, plans and programmes:

1. A screening to identify strategies, plans and programmes with likely significant environmental effects. Where there are likely to be significant environmental effects, Scottish Ministers will undertake ,

2. a Consultation of designated environmental authorities; followed by

3. the production of an environmental report covering a range of environmental issues such as climate, water, biodiversity and human health;

4. a Consultation on the report and the draft plan or programme;

5. the production of a statement showing how consultation responses and environmental considerations have been taken into account. All this must take place before the plan or programme is submitted to the legislative procedure; and subsequent

6. Monitoring for unforeseen effects.

8.5 Energy Production

Renewable energy production is important to economic development in Scotland for three reasons

Environmental. The first reason is climate change. The 1990s were the warmest decade since records began. Without action to reduce greenhouse gas emissions, the earth's temperature is likely to rise faster than at any time in the last 10,000 years or more. In the UK, risks of droughts and flooding are likely to increase. Sea levels will rise, so extreme high water levels could be 10 to 20 times more frequent at some parts of the east coast by the end of the century. But the worst effects of climate change can be avoided if greenhouse gases in the atmosphere are stabilised instead of being allowed to increase.

The Executive is strongly committed to increasing renewable energy usage in order to help reduce greenhouse gas emissions and thereby contribute to national and international targets for emissions reductions.

Security and Diversity of supply. The second reason is the decline of the UK's indigenous energy supplies - oil, gas, nuclear and coal. Much of the UK's economically viable deep-mined coal is likely to be exhausted within 10 years. By around 2006 we will also be a net importer of gas and by around 2010 of oil. By 2020 we could be dependent on imported energy for three quarters of our total primary energy needs. As we shift to become a net importer, we may become potentially more vulnerable to price fluctuations and interruptions to supply caused by regulatory failures, political instability or conflict in other parts of the world.

The Executive believes that he best way of maintaining energy reliability will be through energy diversity. More renewables, can also provide greater diversity in our energy mix, which will be vital to securing security and continuity of supply as fossil fuels continue to deplete.

Economic development opportunities. The third reason is the economic development potential of the sector. Just as North Sea oil and gas continues to provide many jobs the expectation is that renewable energy will provide employment opportunities in the future. A thriving renewables sector has the potential to enhance Scotland's manufacturing capacity, to develop new indigenous industries, particularly in rural areas, and to provide significant export opportunities.

The Executive is strongly committed to developing the areas of renewable generation, technology development, and exports and thereby, in the context of the Executive's green jobs strategy, promoting the creation of sustainable employment in Scotland's renewables industry.

What is our principal strategic approach to renewable energy?

The Scottish Executive is committed to developing Scotland's very considerable renewable energy potential to the full. In March 2003 Ross Finnie, the Minister for Environment and Rural Development, announced that Scottish Ministers had agreed that Scotland should aspire to generate 40 per cent of its electricity from renewable sources by 2020. This commitment has subsequently been incorporated in A Partnership for a Better Scotland Developments in the regulation of energy markets in Great Britain could have implications for Scotland's capacity to further increase the proportion of electricity generated from renewables sources in the future. Ministers will therefore continue to seek sufficient flexibility in the regulatory framework to ensure consistent growth in this key sector for Scotland.

The commitment to renewable energy is driven both by environmental imperatives and by the potential for new economic development. Scottish Ministers believe the environmental case for renewables has been made, and following the May 2003 Scottish Parliamentary election responsibility for this area of policy was brought together within the Enterprise, Transport and Lifelong Learning portfolio, with Deputy Minister Lewis Macdonald as the lead Minister. The emphasis is now firmly on the potential for new economic development

The Executive believes that the public sector should only be involved where there is evidence of a market failure occurring and where the public sector has the necessary skills to contribute. The case for public sector intervention in renewable energy matters was eloquently put by the Chief Scientific Adviser's Energy Research Review Group in its evidence to the Prime Minister's Performance and Innovation Unit's Energy Policy Review ⁵¹ when it said that intervention could be justified on the grounds that :-

" social rates of return on for example energy technologies that can contribute to environmental problems and which involve lengthy development timescales, are higher than private rates of return. Investment in these areas is therefore likely to be low without Government support or intervention. Examples are where environmental costs will not be fully reflected in market prices, where the 'free rider' problem exists, where there are market barriers to entry such as predatory pricing or action by incumbents, or where markets fail to realise innovation benefits because of lack of information or difficulties in sharing costs and benefits."

Scotland's Renewable Energy⁵² recognised, however, that the Executive alone cannot grow a new industry in Scotland or dictate the pace at which technologies, such as wave and tidal power, will mature. Further progress depends on the continued commitment of developers, national agencies, local authorities, academia and crucially, the financial sector. But government does need to provide leadership and to create an environment which supports and promotes innovation and enterprise. The Executive believes that developing a thriving renewables sector in Scotland requires a partnership between government and the industry. The Forum for Renewable Energy Development in Scotland held its first meeting on 20 ^th October 2003 under the Chairmanship of Lewis MacDonald and is intended to provide the basis and leadership for this partnership. Its remit is to provide the leadership necessary to create the conditions which will support and promote the development of Scotland's renewable energy and maximise the economic development opportunities.

What has happened since 1999 with respect to policy development?

The Executive's has demonstrated its determination to encourage the development of renewables by a number of key actions. These include:

• In 2000, the Executive published revised policy planning guidelines, which made a more positive provision for renewable energy. The relevant Planning Advice Note was also revised and reissued in January 2002
• In April 2002, the Executive put in place the Renewables Obligation (Scotland) (the ROS), which places a legal obligation on every electricity supplier in Scotland electricity supplier in Scotland to supply electricity generated from renewable sources. The ROS provides a powerful incentive for generators to supply progressively higher levels of renewable energy. It is also the market mechanism that encourages developers to bring forward new renewable energy schemes. The Executive remains fully committed to the ROS and will maintain the level of support that it provides as planned until 2007. However in order to maintain our 2020 target of 40 per cent it may well be necessary to amend the ROS. The Executive, therefore plans to review the ROS in 2005-06, in order to ensure that it remains responsive to the needs of the market and the emergence of new renewable technologies.

  The ROS applies until 2027, but the amount of obligation on individual suppliers is currently scheduled to remain at 10.4 per cent from 2010-11 to March 2027. The review will consider the possibility of raising the level of obligation from 2010 onwards. Firms in Scotland's financial sector, which provide funding for many renewable energy projects, have argued that the current obligation levels beyond 2010 should be increased to provide greater financial security for renewable energy investments

• The Scottish Communities Renewable Initiative (SCRI) was launched by the Executive in Autumn 2002 to provide expert guidance, monitoring and aftercare for renewable energy projects. The Executive is also providing significant new grants of over 5 million in total under the Initiative for households and communities interested in installing or developing renewable energy projects.
• In December 2002 the Energy Intermediate Technology Institute was announced for Aberdeen and this became operational in October 2003. The Executive is committing 150 million to the Institute over the next 10 years. A major focus of the Institute's work will be on renewables.
• The Forum for Renewable Energy Development in Scotland (FREDS), which is chaired by the Deputy Minister for Enterprise and Lifelong Learning, brings together industry, academia and government, with the aim of enabling Scotland to capitalise on its renewable energy resource and secure significant economic development opportunities for Scotland. The first major output from FREDS was the publication, in July 2004, of the Marine Energy Group Report Harnessing Scotland's Marine Energy Potential which suggests that by 2020 10 per cent of Scotland's electricity production could come from wave and tidal resources, creating up to 7000 direct jobs. As part of our commitment to marine energy the Executive has, in partnership with the Enterprise Agencies, the DTI, Orkney Council and the Carbon Trust, funded the establishment of the European Marine Energy Centre in Orkney, a purpose built facility for the testing and certification of wave and tidal devices.
• Scottish generators have been concerned to ensure they do not have to pay more to connect new renewables generation to the National Grid than their competitors further south. The Executive have pursued these matters vigorously with colleagues in Department of Trade and Industry and on 12 February 2004 the DTI announced proposed changes to the UK Energy Bill which could help renewable energy development in Scotland. The move will allow the Secretary of State for Trade and Industry to cap or discount charges for renewable energy generators using the national grid, and so avoid higher charges for generators in areas further from the main centres of population.

These initiatives, together with developments at the UK and EU level have created a significant demand for renewable electricity which developers are moving to meet and in so doing are bringing new investment and high quality jobs to some of the more remoter parts of Scotland. Vestas, for example, have established a turbine manufacturing base at Campbelltown.

Over the longer period, the Executive see huge opportunities for Scotland to become a major player in the development and application of wave and tidal power in particular. The Executive has already provided support for the world's first commercial wave energy scheme, which is now in operation on Islay. We are working with Highlands and Islands Enterprise and contributing to the funding of the European Marine Energy Centre. The Centre's aim is to stimulate and accelerate the development of marine power devices, initially through the operation of a testing centre in Orkney. The provision of a dedicated facility for testing and proving wave and tidal technology could lead to significant export and manufacturing opportunities for Scotland, and the synergies and potential rewards for our fabrication sector could be substantial. Scotland is already an important player in the energy industry, relative to its scale, and the Executive is determined to maintain and enhance our influence on the development of new renewable technologies in the longer term.

The Renewables Supply Chain Gap Analysis⁵³, produced by groups including government and industry looked at the opportunities to develop a viable, long-term renewable energy industry, and predicts that between 17,000 and 35,000 jobs could be sustained by 2020. Around 8,000 jobs are currently sustained by the industry across the UK, with Scotland having 1940 of these. The study found that, on average, 10 full-time jobs can be sustained per new Megawatt of renewable energy produced. The report highlights employment opportunities in manufacturing, the service sector, technology research, and in the agricultural and forestry industries.

Scotland has the potential to be a world-class player in the development of marine energy technologies. Scotland already has many of the skills and capabilities required to develop a marine energy industry. It is already a world leader in the development of the technology and is home to several companies and academic institutions that are intimately involved with the marine energy industry. In this respect, Scotland is stronger than many other countries around the world. The technology has yet to be proved but there are many opportunities to ensure that Scotland becomes the home to the technology. Strong policy direction, support for R&D and a robust market support mechanism are all needed to help marine energy achieve its full potential.

Investment in upgrading and extending the existing electricity network will be crucial to the development of renewables in Scotland as well as securing reliable energy supplies in future years. This is why, despite the responsibility for network matters being a reserved matter, we are working closely with the UK Government, the regulator and the network owners to assess the implications of our renewable energy aspirations for the GB electricity network, develop the case for new power connections from the Highlands and Islands to the major centres of population in the most rational way, and co-ordinate the development of the necessary supporting work. As a result, the regulator (Ofgem) has recently announced new proposals to allow additional investment - initially some 360 million - in the Scottish electricity network.

« Previous | Contents | Next »