STIMULATING INDUSTRIAL INNOVATION FOR SUSTAINABILITY:
AN INTERNATIONAL SURVEY FOCUSED ON TECHNOLOGY
UNITED KINGDOM
Prof.dr. Jonathan Cave (RAND Europe)
TABLE OF CONTENTS
1. GENERAL SETTING............................................................................................................1
1.1. Policy Framework ..................................................................................................1
1.2. Organizational Structure ........................................................................................2
1.3. Some other Initiatives ............................................................................................2
2. Department of Trade and Industry (DTI) ...............................................................................4
2.1. General Policy Orientation.....................................................................................4
2.2. Focus Area 1: Realising Our Potential Awards (ROPA) and Challenge Schemes 4
2.3. Focus Area 2: The Foresight/Link Programmes (F/L)...........................................4
3. Department of Environment, Transport and the Regions (DETR) ........................................6
3.1. General Structure and Policy Orientation ..............................................................6
3.2. The Environment Agency ......................................................................................7
3.3. Focus Area 3: The Energy Efficiency Standard of Performance (EESOP) ...........7
3.4. Focus Area 4: The Framework for Business Action ..............................................8
1. GENERAL SETTING
1.1. POLICY FRAMEWORK
Policy in the United Kingdom is driven by several clear distinctions. In almost every case, the
thrust of policy is to reduce the distance between the two sides. One is the distinction between
public and private entities: here the government emphasises public-private partnerships,
contracting-out of government activity, two-way exchange of objectives, assessment
frameworks and working methods between business and government and use of a wide range
of market-orientated incentive mechanisms (including incentive regulation and others
described below). A second distinction separates the so-called ‘Science Base’ (public and notfor-profit research institutions and institutions of Higher Education) from private for-profit
industry. Here, activity centres on schemes to increase the market relevance of University
Research, place government research establishments on a private or mixed footing, and
increase the scope and social relevance of industry-sponsored research and production
activities both within the private research sector and (especially) in the publicly-sponsored
Science Base. The third distinction is among economic, social and environmental interests
(with others added depending on source). Here, the emphasis is on reconciliation – using
market-oriented mechanisms to ensure that private parties face environmental and social
externalities, implementing a sustainable development agenda to ensure that all stakeholders
take account of each others’ interests and developing standards and assessment tools that
usefully combine the ‘apples and oranges.’
As part of this framework, a number of Green and White Papers have been issued, and
Ministerial Work Programmes and Spending plans contain explicit references to these goals
as well as concrete performance targets. In this connection, we should mention the oversight
procedures. First, the UK practice of ‘frame budgeting’ allows considerable ministerial
discretion within limits negotiated with the Treasury on an annual basis. Where innovation
and environmental concerns form an important part of a spending ministry’s charter (this
includes the two ministries discussed below), these issues are raised during the negotiation.
Progress towards performance targets and consistency with current policy are assessed by
concerned Treasury and Cabinet Office personnel. Second, the UK National Audit Office
evaluates specific policies for the purposes of the Parliamentary Public Accounts Committee;
these evaluations have included a number of the initiatives mentioned here (especially the
Energy Efficiency Standards of Performance – see Section 3.3. ).
Finally, the UK government has been actively pursuing a ‘Modernising Government’ agenda
that will have major effects on the organisation, if not the substance, of the initiatives
described. Among the tenets of this initiative are: joined-up government; outcome (as
opposed to output or activity) focus; and responsive civil service, which includes an explicit
emphasis on ‘customer’ (citizen) needs as the measure of policy performance.
One specific aspect of the UK situation that is worth noting is the tremendous emphasis
placed on economic and social factors. This is shown through a great reliance on private
markets and active consultation with all stakeholders (in terms of government performance
measures, regulatory procedures, consultation exercises on major policy initiatives,
Parliamentary and National Audit Office scrutiny and the broad scope of the Foresight
exercises used to set strategic research priorities). Regional development considerations are
actively pursued, and policy co-ordination is enforced on local government as well as
business. Non-governmental bodies (such as charities and NGOs) also play active roles in
determining policy. Finally, considerable attention is paid to the size and sustainability of
environmental (and other) technologies in terms of market value (including technology
export) and active engagement of the science and industrial base. Even ‘best practice’
guidelines, repressive regulation and levies (see Section 3.4. ) are consciously written to be
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technologically neutral, to permit trading and to set targets in outcome terms as far as
possible.
1.2. ORGANIZATIONAL STRUCTURE
The general structures of the UK government and RTD establishments are quite complex, and
not directly relevant to this survey. The following diagram indicates that part of the structure
most concerned with innovation on one side and environmental issues on the other. The UK
has no separate ministries of economic affairs, science and technology or environment.
Responsibility for research is divided between the Department of Trade and Industry (DTI,
which includes the Office of Science & Technology (OST), administers the Research
Councils (RCs), oversees business development and regulates competition) and the
Department for Education and Employment (DfEE, which administers ‘block grants’ for
research and teaching via the Higher Education Funding Council (HEFC)). Following a
reorganisation in the mid 1990’s responsibility for most environmental matters was placed in
the Department of the Environment, Transport and the Regions, and especially in the
Environment Agency (EA), which predates the DETR. Issues of Sustainable Development
form a particular part of the EA’s charter, and policy is overseen by a Panel on Sustainable
Development drawing on a wide range of government and other organisations and reporting
to the Prime Minister.
Prime Minister, Treasury, Cabinet Office
DETR
Other Ministries, Departments, NDPBs
Environment Agency
DTI
OST
DfEE
RCs
HEFC
Sustainable
Development
Waste
Minimisation
EESOP
Business Action
Challenge
Programmes
Industry
Local government
Foresight/LINK
ROPA
Universities
Figure Table 1-1: Structure of Ministries, Agencies, Initialives and Beneficiaries
1.3. SOME OTHER INITIATIVES
Beyond the Departmental activities described below, we should mention the existence of a
general Science and Innovation Strategy emerging in part from the Comprehensive Spending
Review. This strategy aims to:
1. Sustain the excellence of the science base, in particular by spending more on multidisciplinary research and basic technology and by adjusting the balance between core and
grant funding for research institutive.
2. Encourage private investment in innovation through such schemes as the Regional
Venture Capital Fund, the High Tech Venture Capital Fund, the Knowledge Bank, the
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3.
4.
5.
6.
7.
Phoenix Fund, ‘taper relief’ from capital gains tax, Enterprise Management Initiatives,
R&D tax credits, etc. The results of Foresight (see Section 2.3. ) will be increasingly used
to guide government science and innovation policies, and lessons learnt from the US
Small Business Innovation Programme1. Finally, the strategy proposes a policy that all
intellectual property rights should go to those who carry out publicly-funded research and
includes steps to change attitudes towards risk management in exploiting research results.
Streamline and focus knowledge transfer schemes aimed at knowledge transfer, building
innovation capacity among firms, developing collaborative research, improving
industry/academia interfacing and improving the depth and quality of the technological
infrastructure. These changes will critically involve the Small Business Service and
Regional Development Agencies.
Foster regional networks, perhaps through the establishment of a Regional Innovation
Fund to sponsor cluster formation, business incubators and science parks and improve
firms’ access to technological and business advice. Again, the Regional Development
Agencies would play a critical role.
Improve the flow of skilled researchers to industry.
Improve the ability of the Higher Education sector to play a role in the knowledge
economy by building on the Science Enterprise and University Challenge programmes
(see Section 2.2. ).
Exploit the globalisation of research by using state aids to encourage inward investment
in R&D, promoting trade in UK science & technology goods and services.
1 This programme earmarks a portion of public research budgets for SMEs. It has been noted by many that
in the US SME’s are the primary source of innovations, while in Europe large corporations do most of the R&D.
Perhaps as a partial consequence, US R&D tends to be product-oriented and job-creating, while European R&D
tends to be process-oriented and labour-saving.
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2. DEPARTMENT OF TRADE AND INDUSTRY (DTI)
2.1. GENERAL POLICY ORIENTATION
The DTI is broadly in charge of industrial and science policy in the UK. Its aims are broadly
three-fold; to strengthen and maintain the research base (including institutions and individuals
capable of generating good ideas and translating them into action; to enhance the
competitiveness of UK industry and its ability to generate value and employment; and to help
science and industry to alleviate rather than exacerbate social and collective problems.
As far as science policy is concerned, it runs the six Research Councils that provide projectbased funding to the Science Base, especially to Universities and Government Laboratories
(many of which are operated by specific research councils). These funds are channelled
through the OST, which administers the Science Budget. The RC also funds specific
initiatives intended to bring Science base research closer to market, such as the Realising Our
Potential Awards (ROPA). The OST also undertakes a number of independent initiatives to
build bridges between the Science base and industry. The DTI’s industrial policy
responsibilities include, in particular, the Foresight/Link initiatives described below.
2.2. FOCUS AREA 1: REALISING OUR POTENTIAL AWARDS (ROPA) AND
CHALLENGE SCHEMES
The ROPA scheme provides matching money to researchers who succeed in obtaining at least
£25K in private-sector support for their basic or strategic research. The awards fund
‘curiosity-driven’ projects. An additional aim is to build future collaboration opportunities,
especially in new or speculative areas. The awards, which are modest in size, typically last
18-24 months. They are administered by specific research councils, and are viewed as distinct
from the ‘normal’ research grants – both because they require private co-funding and because
they are intentionally speculative in nature. They are not to be used as ‘top-up’ money on
substantially similar projects, nor to fund collaborative efforts per se – rather, they intend to
facilitate future collaboration. They are open to all researchers at institutions eligible for
research council funding. The scheme is monitored through periodic surveys to test
awareness, incentives to collaborate and seek outside funding (among successful and
unsuccessful applicants), to validate the role of such instruments in encouraging and
rewarding collaboration and to test whether collaboration becomes wider or deeper and more
or less focused on broader social issues.
The Science Enterprise Challenge draws on £25 M of public money to fund a competition to
establish 8 University-based Centres of Enterprise. The performance targets for successful
centres will include knowledge transfer, teaching of entrepreneurship, business creation and
progress toward financial sustainability. The Centres will be strongly linked to local
businesses. A complementary programme is the University Challenge Fund, which provides
seed money to the early phases to fill the gap between research results and market application.
The government provided £20 Million, matched by an equal amount from charities.
Recipients are obliged to raise at least 25% of costs themselves from other sources. The
scheme contains elaborate provision for the establishment of University seed funds to be used
to fund specific projects. There are periodic reporting requirements, but no formal need to
demonstrate business viability. While there is no overt emphasis on environmental issues, the
management of the charities (the Wellcome Trust and Gatsby Foundation) have both
emphasised the seriousness of funding ‘gaps’ in this area.
2.3. FOCUS AREA 2: THE FORESIGHT/LINK PROGRAMMES (F/L)
The LINK scheme is the main initiative for promoting pre-competitive partnerships between
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industry and the research base, and is oriented towards innovation, wealth creation and
(importantly for this survey) quality of life. The priorities are identified by the Foresight
Programme, which is a large, ongoing (since 1994), Delphi-based technology foresight
programme. The results are used by companies of all sizes, and the process itself has broken
down barriers to collaboration and focused research and industrial activity on quality-of-life
issues. The results are also used across a range of government spending and policy decisions.
Foresight is also administered by OST.
LINK research is typically well ahead of the market but potentially viable. Participation is
open to any UK company and research institution, with an emphasis on SMEs. Currently,
there are over 1700 industrial participants (more than 50% SME) and 200 research base
parners. Multinationals can participate if they have significant UK presence and will exploit
the results of research in the European Economic Area. LINK consists of several (currently
63) programmes defined by technologies or market sectors, sponsored by Departments and/or
Research Councils. All projects must involve collaboration. Overall goals are defined by
sponsors in collaboration with industry and the research base, and each programme further
supports networks of interested parties. Projects last 2-3 years and involve specific
management structures and agreements as to how fruits will be shared.
Sponsoring bodies include DTI, DETR, Department of Health, Ministry of Agriculture,
Fisheries and Food, the Ministry of Defence and 5 of the 6 research councils. The main
programme categories are: i) electronics/communications/IT; ii) food/agriculture; iii)
biosciences/medical; iv) materials/chemicals; and v) energy/engineering. Environmentally
related activities have been funded under all of these (details available on request).
The initiative emerged during the Major government as a way of exploiting the widely
admired results of the Foresight programme while at the same time addressing specific
industrial policy issues. These included the ‘brain drain,’ dwindling private support for
research in the research base, a history of foreign exploitation of basic research developed in
publicly-funded establishments, and in particular a set of poor results on investment in
innovation by UK businesses. In addition, it was felt that particular areas of social or public
concern were underdeveloped as regards innovation.
Each programme is managed by a Programme Management Committee, which selects
projects via a two-stage process (outline, then full proposal) informed by peer review. The
1100 projects currently underway or completed have a value of some £530 Million, and the
government spends £37 Million annually. Public funding is made available on a 50% basis,
with the rest coming from industry and is based on direct costs and other factors such as
licensing. Selected projects must satisfy a list of specific criteria, including match with a
sponsor’s priorities, collaboration, innovation, synergy and the ability to catalyse something
that would not happen otherwise.
A related initiative is the Innovative Manufacturing Initiative (LINK/IMI), managed by the
Engineering and Physical Sciences Research Council. This targets specific industrial sectors
(currently aerospace, road transport, construction and process industries (e.g. chemicals,
pharmaceuticals, biotechnology, etc.). It issues calls for proposals from collaborative teams
involving industry and researchers. Technology transfer is promoted by the Teaching
Company Scheme (TCS), which facilitates establishment of project-based partnerships
between companies and research base. It is particularly concerned with taking forward the
results of LINK research. It combines technology transfer with industry-based training for
young graduates and formation of lasting partnerships.
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3. DEPARTMENT OF ENVIRONMENT, TRANSPORT AND THE REGIONS
(DETR)
3.1. GENERAL STRUCTURE AND POLICY ORIENTATION
The DETR combines policy responsibility for regional development (including the Regional
Development Agencies referred to in Section 1.3. ), the environment (particularly through the
Environment Agency) and transportation. Its policy priorities are laid down in a number of
periodic White papers and strategy documents aimed at these areas. It conducts R&D
programmes to the tune of £110 Million per year; aspects of this programme are described in
the following Table:
Table 3-1: DETR R&D expenditure
Area
Waste Policy
Air Quality
Noise
Chemical and Biotechnology
Global Atmosphere
Radioactive Substances
Environment Protection Statistics and
Economics
Water and Land
Darwin Initiative
Housing and Regeneration
Construction, Innovation and Research
Management
Wildlife and Countryside
Local Government
Land Use Planning and Minerals
Roads and traffic/Integrated and Local
Transport
Freight Distribution and Logistics
Road Safety and Environment
Aviation
Transport Security
Science and Technology Policy
Sub-Total
Other Science Engineering and Technology
programmes
Energy Efficiency Best Practice Programme
Environmental Technology Best Practice
programme
OVERALL TOTAL
ALLOCATION
(1999/2000 £m)
0.244
8.581
1.032
2.956
11.942
0.871
0.529
3.658
3.000
6.000
22.090
1.845
1.100
3.900
6.762
1.710
11.522
0.399
1.670
1.397
91.208
16.651
2.704
110.563
Further details of these allocations and historical and future data are available on request.
In addition to direct R&D sponsorship and strategic activities, DETR also co-ordinates the
‘Greening Government’ initiative, which involves a wide range of departments in
incorporating sustainable development and other environmental concerns into their activities
and policies. These include targets for energy efficiency, water conservation, waste recycling,
green procurement and green transport. These policies are separately binding on each
department. Other DETR responsibilities include: climate change; air quality and noise;
chemicals and biotechnology and environmental health; environmental management and
energy efficiency; NGO-oriented programmes such as Going for Green, Tidy Britain Group,
Environmental Campaigns Ltd and the Environmental Action Fund; waste, land, litter,
recycling and radioactive waste, and water. In each case, there are a host of specific
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initiatives2 combining a wide range of different instruments. In the interests of brevity, we
shall focus on the activities of the Environment Agency within the DETR and more
specifically on three initiatives administered by the EA.
3.2. THE ENVIRONMENT AGENCY
The EA is a non-Departmental public body (NDPB) accountable to Ministers generally, but
primarily overseen by DETR. It aims to protect and improve the environment and contribute
to sustainable development, and is responsible for pollution regulation and control,
management of water resources and provision of flood defence. 77% of the EA’s funding
(£582 Million in 1998/9) comes from environmental and abstraction licences and flood
defence levies on local authorities and the balance from a central grant.
3.3. FOCUS AREA 3: THE ENERGY EFFICIENCY STANDARD OF
PERFORMANCE (EESOP)
The DETR runs a specific Energy Efficiency Best Practice Programme, which provides
advice and assistance to public and private sector organisations. One important component is
the development and refinement of EESOPs, which have been given statutory force by the
Utilities Bill. The Electricity and Gas Regulators have been given the power to oversee
EESOPs and enforce good practice through a range of powers including monetary penalties.
These standards are imposed to encourage energy efficiency in order to address economic,
social and environmental concerns. The recent revision of the EESOP applies to separately to
licensed gas and electricity suppliers. The obligations are based on consumers’ energy
efficiency savings simulated through DETR computer programmes. There is no specific
requirement for the amount spent in meeting the obligation, and the requirement does not
specify the type of energy saving measure to be implemented – the explicit goal here is to
encourage innovation and adoption of energy- and cost-effective measures. Ministers can
require suppliers to concentrate on specific classes of consumers (especially pensioners and
low-income consumers, for whom energy efficiency translates into lower energy costs).
Obligations will be to achieved specific terawatt-hour savings (in lower bills or increased
services), and will be allocated to companies based on numbers of consumers. Companies are
supposed to achieve these savings by actively marketing EESOP programmes to consumers.
Each programme will be scored by the regulator and counted towards the supplier’s
obligation. One distinguishing feature of the new EESOPs is the outcome focus away from
specific activities or expenditure and towards savings achieved. Another is programme
features (e.g. the allocation scheme) aimed at levelling the playing field between producers of
different sizes within the framework of a competitive market. Specifically, the new policy
allows for flexibility in programme design and trading of EESOP obligations and
performance. In this way, the EESOPs are intended to facilitate competition within the energy
supply market and to lower barriers to entry.
The standards apply to all firms supplying at least 50000 customers. Firms can earn EESOP
scores by offering their programmes to other firm’s customers and will stay with the firm
even if the customer moves to another supplier (while continuing to use the programme). The
standards apply across all fuel types (coal, oil, gas, electricity) with specific weights tied to
the Climate Change Levy (see Section 3.4. ). Among other features, the implementation
2 For example, innovative tools for tackling climate change include the Climate Change Levy (CCL),
reform of electricity trading, introduction of competition in all energy markets, application of EESOPs (see Section
3.3. ) by regulators, specific renewable energy targets with elaborate transition, safety net, planning guidance and
consumer involvement provisions, exemptions from the CCL for combined heat and power plants, industry-led
carbon trading schemes, and flare consent trading for offshore gas producers. Some of the emission reduction
initiatives are discussed further in Section 3.4.
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adjusts savings so that firms do not receive undue credit for energy savings that consumers
would have taken up on their own (‘deadweight’). This should encourage firms to target
consumers who are otherwise uninterested in energy savings. Firms have full flexibility to
contract out programme design, management and conduct (encouraging specialists to develop
programmes for a UK-wide market). Collaboration is also encouraged, but responsibility
remains with the supply company.
3.4. FOCUS AREA 4: THE FRAMEWORK FOR BUSINESS ACTION
This area covers a range of Exhaust Emission Reduction policies targeted at business. The
background is provided by studies showing that business has begun to cut greenhouse
emissions, and some firms have started to report emissions and set public targets. The
programme described below combines a number of initiatives intended to stimulate
investment and innovation and cut costs. The principle economic instruments are: the climate
change levy (and levy agreements for energy intensive industries), carbon trading and
enhanced capital allowance and grant schemes. These are complemented by regulatory
instruments; integrated pollution prevention and control (IPPC) regulations compelling
adoption of best available techniques and review of the energy efficiency component of the
Building Regulations. There are also a range of market improvement measures including the
Energy Efficiency Best Practice Programme, support for improved products under the Market
Transformation Programme, and assistance to benchmarking, training and education efforts,
voluntary agreements with less energy intensive sectors, etc. In addition, there are a range of
informational and technology-promotion measures.
The climate change levy applies to all energy used by industry, commerce and the public
sector. It has been modified to improve its environmental effects and protect competitiveness,
e.g. by exempting renewable and high quality CHP plants. The levy does not apply to the
domestic (home) sector for distributional reasons. Revenue will be recycled to business via
cuts in National Insurance contributions and direct subsidies for energy efficiency measures,
and is thus consistent with environmental taxation principles. To avoid economic distortion,
sectors which are energy intensive, bound by IPPC regulations and exposed to international
competition will be granted an 80% discount on levy rates in exchange for agreements to
meet challenging targets for improving energy efficiency or reducing carbon emissions. This
inclusion of past performance marks a new departure in applying such levies. As with the
EESOPs, there is no requirement to use specific technologies; instead, outcome-based targets
are used and trading is allowed. Fiscal support for energy efficiency measures will include
enhanced capital allowances and a direct subsidy fund. The latter is targeted at SMEs and
gives priority to providing access to advice, training and technologies.
The carbon trading initiative has been piloted among 40 major companies and trade
associations in the Emissions Trading Group. Their experience has led to concrete proposals
for a nationwide scheme, which would include international trading under the Kyoto Protocol.
Firms can enter the scheme by assuming an absolute carbon emissions cap (as opposed to the
relative caps involved in the climate change levy schemes). In exchange, they will receive full
access to the carbon markets, and may be able to ‘bank’ some permits over time. Such trading
can also be used by firms who have output-related targets. It should be stressed that the intent
of the scheme is to encourage voluntary reductions (estimated to save .5-2 MtC by 2010).
Firms that develop new technologies will have a ready-made market for their services or
products, and firms where targets are difficult to meet can be protected from distorting
restrictions.
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