Sustainability and economic development


This document shows how environmental sustainability can be integrated with local economic development.

Accurate measurement of economic growth is required to develop a strategy for sustainable local development.

Councils and other local agencies are realising the potential of new environmental markets. There's an example of how to embed environmental appraisal into local policy-making for economic development and we outline what the UK government is doing at a national level in designing a framework for a sustainable economy.

Introduction: economic development after Stern

The Stern Review on the Economics of Climate Change, published by HM Treasury in October 2006, signalled official acceptance of the imminent catastrophe of climate change. If climate change continues unabated, Stern predicted, the damage apparent now will accelerate.

Higher temperatures will trigger abrupt and large-scale changes in regional weather patterns. Likely consequences include flooding and water shortages. Rising sea levels will eventually threaten large cities in the developed world, including London, Tokyo and New York. But the impacts will be worst in the developing world. Floods, famines and droughts caused by climate change could prompt refugee migration on an unprecedented scale.

Just as significant as the Stern Report's acceptance of the science of climate change was its focus on the economics of climate change. Abatement will not be costless. If it were, for reasons outlined below, most of the actions necessary to achieve it would already have happened.

Prompt action on carbon emissions, Stern argues, will only entail a small slowing in global economic growth. On the other hand, delay or failure to act could mean an economic catastrophe as least as great as the last world war.

Stern's formulation of present and future costs of environmental sustainability should inform the thinking of all agencies involved in economic development. But the formulation is especially relevant to local government. This has the capacity to coordinate a range of functions in planning, transport and housing that can potentially support sustainable economic development.

Many people accept that changes are needed in the way we live our economic lives - the ways we produce and consume. But it is likely that far fewer people are willing to accept that we should produce and consume less. An unwillingness to accept lower living standards can only make it harder to communicate the sustainability message. But it is by no means certain that sustainability need entail drastically compromised living standards.

The challenge for those in local economic development is to find ways of securing jobs and incomes for local people while not compromising environmental sustainability. There might have to be a trade-off between economic growth and environmental sustainability. Stern pointed out that climate change abatement will not be entirely costless.

But he also argued that there are interventions that could help create ‘integrated outcomes' for the economy and the environment. In particular, the transition to a low-carbon economy will create many opportunities across a wide range of markets in environmental goods and services.

The emerging environmental sector encompasses firms devoted specifically to this sector. These may be concerned with cleaning up pollution or promoting better resource management in processes, products or materials. In addition, more traditional sectors - such as engineering - are diversifying in response to this opportunity.

Building the ‘Green economy'

Councils are already important players in securing sustainability. Their range of powers and duties include:

  • statutory waste reduction targets, including recycling targets to divert waste from landfill
  • a duty to consider biodiversity
  • a duty to consider government recommendations for improving energy efficiency, increasing micro-generation, reducing greenhouse gas emissions and alleviating fuel poverty
  • for authorities with housing responsibilities, a duty to report on energy saving measures in housing.

Councils are required to produce a Sustainable Community plan, in consultation with the local community. This should address local economic, environmental, and social concerns. There are new indicators in the proposed comprehensive area assessment (CAA) for carbon reduction, air quality, resilience and biodiversity. These can be selected as targets in the economic development and the environment block of the new local area agreements (LAAs).

The Transport Bill, currently before parliament, will give local authorities powers to shape local bus services and freedoms and flexibilities to develop road pricing schemes.

Policy and regulation for climate change is in ongoing development. However, there is much opportunity for local initiatives outside the scope of statutory and performance frameworks. These can be undertaken by local government and its partners to encourage the transition to a sustainable economy. Many local authority initiatives, as indicted, anticipate national policy.

The Nottingham Declaration

The Nottingham Declaration is a voluntary pledge to address climate change.

In signing it, councils are committing to ensure that tackling climate change is an integral part of their strategy.

The initiative encourages councils to reduce their own carbon emissions, in addition to those of their partners and other stakeholders. It also encourages adaptation and damage mitigation actions in their services and communities.

By March 2007, about 195 local authorities had signed the declaration.

The Nottingham Declaration - on the Energy Saving Trust website

The Merton Rule

The Merton Rule requires the use of renewable energy onsite to reduce annual carbon dioxide (CO2) emissions in the built environment. Merton became the first council to formalise government renewable energy targets in its development plan. It is using onsite renewable energy to reduce annual CO2 emissions for all new major developments by 10 per cent. The first project to comply with this target - 10 light industrial units - was completed in June 2005. It used micro-turbines and solar power to meet the requirement.

The Merton Rule website

Manchester City Council

Economic development practitioners need to work with local businesses in improving energy efficiency and encouraging the development of environmentally-friendly products. Manchester City Council is promoting ‘green business advice' through the ‘green business pledge'. Increasing business innovation and development of environmental technologies and market opportunities is seen as a key area for the city. The city has declared its ambition of becoming England's greenest city. In addition to working closely with business, it has plans for further extension of the Metrolink light rail scheme.

Manchester City Council is a founding member of Manchester: Knowledge Capital. This is a partnership of all 10 Greater Manchester authorities, four universities, the strategic health authority (SHA), other key public agencies and leading businesses. It is working to secure sustainable economic growth in the region.

Among its programmes is ‘Manchester is my Planet'. This raises awareness about climate change and creates the conditions that allow sustainable energy initiatives to be first among local authority, business and household choices. It contributes to social and economic sustainability and moves Greater Manchester along the path to a low-carbon future.

Building on the 2006 Stern Review, Manchester Enterprises (now 'Commission for the New Economy') commissioned a ‘Manchester Mini-Stern'. The aim was to identify potential economic impacts of the UK and EU climate change legislation for the Manchester City Region and the North West.

It found that the city region economy could lose £20bn by 2020 if it fails to adapt.

However, significant economic opportunities could be available if early action is taken. By creating the right conditions for new and emerging as well as existing low carbon businesses, not least in the growing environmental technology sector, the city has the opportunity to build an international reputation that would attract inward investment.


Be Birmingham, the local strategic partnership (LSP) for Birmingham, has developed a sustainable community strategy. It includes policies on cycling, climate change adaptation and corporate social responsibility. It is tackling the latter through a partnership with Business in the Community, the Confederation for British Industry (CBI) and the Chamber of Commerce.

The LSP has launched the new ‘Better Together' offering a business charter for social responsibility. It has also funded climate change ambassadors and developed a sustainable procurement policy. Be Birmingham is now focusing on sustainable wealth creation developing a ‘vibrant low-carbon economy'.

Be Birmingham website

London Borough of Hounslow

The London Borough of Hounslow developed a sustainability matrix tool to assess LAA targets and other policies and projects. The project was funded by Department for Environment, Food and Rural Affairs (Defra) innovation fund and developed by the London Sustainability Exchange.

The toolkit builds on sustainability as a cross cutting theme within the LAA . It centers on making sustainability information accessible to those involved in developing projects and analysing performance measures.

The council has been working with the Carbon Trust to get its own house in order - a necessary prerequisite to asking approaching business and wider partners to do the same.

Durham County Council

In Durham County Council, the sustainability team has worked in close partnership over several years with the GlaxoSmithKline (GSK) site at Barnard Castle. They have achieved a series of environmental improvements that have had direct economic benefits.

GSK is the main employer in this rural area of County Durham. Since 2001 the site has reduced its energy consumption by 20 per cent and has become the first GSK site worldwide to install two wind turbines. These generate up to 500KW - six per cent of the site's energy requirements. This is in addition to significant local community involvement and the planting of over 2,000 trees and shrubs within the 69 acre site. As a result, this rural GSK site has been promoted worldwide by the parent company. It has won new contracts, and has strengthened its chances of survival during a difficult time for GSK globally.

London Remade

London Remade works closely with the Greater London Assembly (GLA) and London Boroughs to encourage better waste management. Although not a local government organisation, it nonetheless illustrates the range of local actions that can be taken to stimulate green business practices.

Its 'Enhance' programme helped develop businesses and social enterprises that reduce London's waste, reuse resources or work with recycled materials. The programme was delivered with London Community Recycling Network and ran until 2008 helping grow over 210 ‘green enterprises' in London.

This support has now has been renamed London Remade Solutions and offers advice on making reducing environmental impacts and making business greener covering green procurement, waste management and recycling.

London Remade website

Low Carbon Cornwall

Low Carbon Cornwall (formerly the Cornwall Sustainable Energy Partnership) is an innovative sub-regional approach to addressing the social, environmental and economic issues of energy supply and demand. It maps and tackles fuel poverty, improves energy efficiency in both public and private housing sectors and promotes the uptake of renewable energy. The scheme has brought in more than £4 million for homes in the county.

Currently, more than 5,000 homes in the most deprived parts of Cornwall have been fitted with energy saving measures. This has saved more than 110,800 tonnes of carbon dioxide. There has been a 35 per cent increase in annual carbon savings reported by councils since the Home Health scheme was launched in 2002.

Through CSEP's pioneering Energy Deprivation Local Public Service Agreement, more than 13,000 homes were made more energy efficient between 2003 and 2006. This saved more than 283,278 tonnes of CO2.

A landmark project involved retro-fitting ground source heat pumps (GSHP) into 16 existing housing association properties at Chy an Gweal, Ludgvan, West Cornwall. This was a UK ‘first'. The strategy also covers large scale projects with CSEP taking a strong role in the development of major schemes, including the Cornwall-based Wave Hub project.

Working in partnership

Local authorities can act in partnership with business and other groups to steer the transition to sustainability. New powers, including levying a supplementary business rate, should allow councils to build closer and more constructive relationships with businesses. Local authority involvement in economic development should aim to stimulate more innovation in the ‘green economy', including:

  • encouraging the development of environmentally-friendly products
  • supporting training in business skills for ‘green entrepreneurs'
  • helping invest in renewable energy
  • helping businesses cut fuel bills and reduce CO2 emissions
  • supporting corporate social responsibility through carbon offsetting.

An important task in engineering the transition to sustainability, however, is getting the strategic framework right. This means re-engineering the standard metrics of economic development to account for environmental benefits and costs. This is not, perhaps, a task for councils, but it is one that requires their understanding. This is because environmental valuation should inform the design of local strategies and programmes. The next section shows why it is important and how it can be done.

Getting the metrics right

The notion of sustainable development enlarges a narrowly-construed definition of economic growth based on real income to encompass environmental quality and other aspects of wellbeing. Development, as opposed to growth, is the key distinction. In this context, the word development has positive connotations, referring to change or transformation that leads to progress and improvement.

However, a society which is growing in terms of per capita income will not be developing if it fails to meet social goals - including the needs of the most disadvantaged. Nor will it develop if its income growth is accompanied by severe environmental degradation. Conversely, a society is unlikely to be developing if it fails to secure real income growth.

But there are two important qualifications to the positive view of sustainable development. The first of these is that it should always be attached to inter-generational equity - meaning that the consumption patterns of the current generation should not compromise those of the next generation. In turn, this means maintaining at least a constant level of capital - to produce the goods we want to consume - relative to population.

The second qualification is that ‘man-made capital' - buildings, factories, machines, etc - cannot be easily substituted for ‘natural capital' or the environment. This grounds sustainability in environmental concerns because there is a finite supply of many natural resources and because damage to ecosystems could be irreversible. Hence sustainable development, however defined, must always include environmental conservation.

The environment is not separate from the economy, and the economy cannot be detached from the environment. This should be obvious, but much economic management has operated as if the two were separate and distinct. The environment serves dual economic purposes. The contribution it makes to human welfare as a ‘consumption good' - such as the simple pleasure people derive from an unspoilt landscape - is one. But it also functions as a waste and carbon sink and, in addition, supplies the materials that are used in human production processes.

One reason why the environment's resources get ‘used up' as if they were costless is because there are few markets for ‘environmental goods' - and hence no prices. Environmental goods do not benefit from the usual market and price mechanisms. There is no signalling to consumers the cost of producing a good, nor do producers perceive the value placed on such goods by consumers.

It is mainly because environmental goods do not have prices that we have an environmental problem. Zero pricing means that the environment's resources are over-used, or used inefficiently. Without prices there is no means of valuing the environment, and no way of knowing how much consumption we need to surrender for environmental sustainability. This is why we need a method of environmental valuation.

The conventional methods of economic accounting let us down badly in this respect. The standard measures of economic growth - gross domestic product (GDP) at national level and gross value added (GVA) at local and regional levels - fail to capture the full costs and benefits. They understate improvements in wellbeing that may not result in additional output, such as more leisure time.

These measures exaggerate productive capacity by not valuing environmental assets and the costs of tackling pollution. Perversely, output that results from activities meant to defend from, or mitigate, the effects of environmental damage - such as preparing for, or repairing flood damage - can show up as an increase in GDP. If you turn up your air conditioning during a hot summer, your inflated electricity bills will appear in the value added of the energy industries as a positive item. You probably won't feel that you're getting any richer, however.

Local and regional physical planning has already been ‘greened' to some extent. The Planning and Compulsory Purchase Act 2004 requires planning authorities in England and Wales to undertake a sustainability appraisal of regional spatial strategies and local development frameworks. This is meant to take account of all relevant social, environmental, and economic considerations.

Strategic Environmental Assessment (SEA)

European Union (EU) directives on environmental assessments have also contributed to the ‘greening' of local and regional economies. The EU's 2004 Strategic Environmental Assessment (SEA) regulations apply to all UK jurisdictions. They require statutory plans and programmes that entail development to be subject to an SEA prior to adoption.

SEAs apply to land use and transport planning, waste and water management, and a range of other activities. SEAs are required to set out a baseline environmental assessment, plus an assessment of the likely effects of a plan on flora, landscape and heritage, water, and a number of other categories.

The Greening Regional Development Programmes project, supported by Interreg IIIc, has been successful in embedding SEAs in a range of development projects delivered by local partnerships across Europe.

However, because there is no requirement for an economic valuation to be taken of environmental impacts, these tools and procedures do not fully account for the costs and benefits of a proposed development.

Costing the environment is not easy. However, environmental valuation has become very fashionable since scientists starting warning about natural resource depletion and climate change. As environmental resources are not traded in markets, their monetary value has to be imputed from ‘shadow prices'. These represent the monetary value of what people are prepared to give up to conserve, enjoy or repair the environment.

Techniques involve adding, in various combinations, clean-up costs, travel to natural amenities in terms of direct travel costs and foregone time, and direct surveys. These ask people to say either how much they would be prepared to pay to conserve a natural amenity or endangered species or what compensation they would require for the loss of an environmental good.

All of this might seem pretty flimsy at first, but repeated iterations move us closer to an accurate assessment of the economic value of natural resources. Numerous studies carried out by economists point to positive valuations of environmental goods by consumers.

System of Integrated Environmental and Economic Accounting (SEEA)

SEEA examines the use of natural resources and the impacts of national policies on the environment. SEEA records the flows of raw materials such as water, minerals and wood from the environment to the economy. The exchanges of these materials within the economy, and the returns of wastes and pollutants to the environment are recorded. SEEA also records the prices and ‘shadow prices' for these materials and expenditure on environment protection.

Work in the UK

Defra has embarked on a project intended to integrate the economic value of environmental impacts into policy making. The aim of the project is to support the cross-government natural environment PSA ‘Secure a Healthy Natural Environment for Today and Future'. This explicitly calls for the value of the services provided by the natural environment to be reflected in decision-making. Work completed so far draws on the United Nations Millennium Ecosystem Assessment.

Regional development agencies (RDAs) and their local authority partners should use these studies when integrating environmental values into their economic and spatial strategies. It is possible that regional and local bodies will be required to adopt the framework currently being developed by Defra.

Environmental accounting is not an academic exercise. It is meant to be integrated into policy and project appraisal. Projects should go ahead where there is a demonstrable increase of benefits over costs. That is, where benefits minus costs minus environmental damage, divided by the discount rate, is greater than zero. The formula can be used to value and build into projects compensating actions where environmental damage is unavoidable.

The developing national framework

Councils need not wait for national and international frameworks to come into operation to begin the transition to sustainable economic development. Here are some of the national developments, including those still in the pipeline, that will increasingly influence actions at the local authority level.

Climate change is addressed in the Climate Change Act, which introduces a legally-binding target of 80 per cent carbon reduction in the UK, overseen by an independent Committee on Climate Change. Coming soon is the Carbon Reduction Commitment (CRC), a mandatory cap-and-trade scheme covering large organisations, including local authorities.

The CRC is scheduled for implementation in April 2010 but there is no need for local authorities to wait until then. The LGIU's Carbon Trading Councils Scheme aims to provide a platform for councils and their partners to increase their investment in carbon reduction.

In integrating environmental values into decision-making, the government estimated a ‘shadow price' for carbon in 2007. The estimation is based on the costs of the damage per tonne of carbon emitted. For CRC this will be set for the two years at £12 per tonne, but is expected to rise significantly in subsequent years..

Government departments will have to factor this carbon price into their assessments of policy and investment decisions. Local authorities could begin to factor in carbon prices as part of the strategy development process.

More relevant to local economic development is the work of Commission on Environmental Markets and Economic Performance (CEMEP).

CEMEP maps out the environmental sector and the framework the government needs to establish to encourage innovation in environmental products.

CEMEP reported in November 2007 and in response the government published the "Building a low carbon economy: unlocking innovation and skills". This sets out Government plans to develop and introduce low-carbon and resource-efficient products, processes, services and business models.

Useful links

Millennium Ecosystem Assessment website

Valuing ecosystem services guide (PDF, 68 pages, 436KB) - on the Defra website

How to value greenhouse emissions: revised guidance - on the Defra website

Planning and climate change - on the Communities and Local Government website

Greening Regional Development Programmes - on the Environment Agency website

Carbon trading councils in practice Scheme - on the Local Government Information Unit website

Birmingham Better Together website

Carbon trading councils can lead the way - on the Local Government Information Unit website

System of Integrated Environmental Accounting - on the United Nations Statistics Division

Carbon Reduction Commitment - on the Defra website

Commission on Environmental Markets and Economic Performance - on the Defra website

Building a low carbon economy: unlocking innovation and skills (PDF, 24 pages, 704KB) - on the Defra website

2 May 2012

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