Evidencing the Bioeconomy

Transcription

1 Evidencing the Bioeconomy An assessment of evidence on the contribution of, and growth opportunities in, the bioeconomy in the United Kingdom A report by Capital Economics, TBR and E4tech for the Biotechnology and Biological Sciences Research Council and the Department for Business, Innovation & Skills Ausilio Bauen E4tech Glyn Chambers Capital Economics Martin Houghton TBR Behrooz Mirmolavi TBR Sam Nair TBR Lucy Nattrass E4tech John Phelan Capital Economics Mark Pragnell Capital Economics 8 September 2016

2 Acknowledgements: We wish to acknowledge and thank those individuals and their associated companies, organisations and academical institutions that gave their time to help provide information used in this report and without which it would not have been possible. Disclaimer: This report has been commissioned by the clients; however the views expressed remain those of Capital Economics, TBR and E4tech and are not necessarily shared by the clients. The report is based on analysis by Capital Economics, TBR and E4tech of information available in the public domain, plus selected interviews with biotechnology experts from a range of backgrounds. Where interview data are employed, it is clearly stated in the report. While every effort has been made to ensure that the data quoted and used for the research behind this document are reliable, there is no guarantee that they are correct, and Capital Economics Limited and its subsidiaries, TBR and E4tech can accept no liability whatsoever in respect of any errors or omissions. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or investments. Capital Economics Limited,

3 CONTENTS Contents Introduction and summary Economic contribution Sustainability of the United Kingdom bioeconomy Investment International comparisons Growth and productivity Appendix Evidence gaps

4 1 INTRODUCTION AND SUMMARY The bioeconomy that part of British economic activity that is based on biological materials and processes is a vital part of the United Kingdom s economic activity. Capital Economics, E4tech and TBR have been commissioned to provide an evidence based review of the contribution of the bioeconomy to the United Kingdom and the prospects for growth and increased productivity. This report presents our findings around those objectives based on a comprehensive review of the literature and interviews with selected academic and industry experts in the bioeconomy of the United Kingdom. 1.1 What is the bioeconomy? The bioeconomy includes all economic activity derived from bio-based products and processes. These contribute to sustainable and resource-efficient solutions to the challenges we face in food, chemicals, materials, energy production, health and environmental protection. The bioeconomy comprises all economic activities that are either: (i) bio-transformative activities Those which add value through the inclusion of a physically or chemically transformative process that involves either as outputs or as processors, biological resources (the tissues, cells, genes or enzymes of living or formerly living things 1 ); (ii) bio-based upstream activities Those that add economic value as upstream suppliers of bio-transformative activities; (iii) bio-based downstream activities Those that add economic value as downstream users of the outputs of bio-transformative activities; or (iv) bio-based induced activities Those that add economic value through the spending of employees of the transformative bioeconomy. The bioeconomy is the production of biomass and the conversion of renewable biological resources into value-added products, such as food, bio-based products and bioenergy. As such, it is built around a set of activities that involve transformative processes using biological resources. These activities range all the way from traditional agriculture (which involves transformative processes in the growing of crops and rearing of livestock) through to the most advanced bio-based medical therapies. Table 1 shows the main transformational sectors of the bioeconomy, plus their attendant sub-sectors. 1 We do not include things that were once living but are now long dead i.e. the sector does not include fossil fuels and other minerals that may have been formed by living things that have been dead for thousands or even millions of years. 3

5 Table 1: Sectors and sub-sectors of the transformational bioeconomy Agriculture and fishing Crop production Animal production and hunting Fishing and aquaculture Forestry and logging Logging, silviculture and other forestry activities Paper production The recreational bioeconomy Industrial biotechnology and bioenergy Agri-chemicals Bio-chemicals Bio-electronics Bio-pharmaceuticals and bio-processed pharmaceuticals Bio-plastics Engineering, construction, design and technical support Health, personal care and household products Leather products Other Research and development Rubber products Manufacture of food products and beverages Manufacture of food Manufacture of alcoholic beverages Manufacture of other beverages Water and remediation activities Water collection, treatment and supply Sewerage Remediation and waste management Source: Capital Economics Around these bio-transformative activities exist large numbers of upstream and downstream activities that also form part of the bioeconomy. Upstream activities provide the transformative activities with their required inputs. These include the provision of bio-based feedstocks as well as other required inputs such as machinery, power and even financial services. Downstream activities utilise the products of the bioeconomy to make other products or deliver services. A significant portion of downstream bioeconomy activities are concerned with the preparation, packaging, transportation and ultimately retailing of food or drink products. However, there are other examples such as the use of pharmaceuticals in healthcare and wood in furniture and construction. Some downstream activities may not exist but for the bioeconomy, whilst others are only partly dependent on it. 4

6 Figure 1: The complete bioeconomy Upstream Transformative Bioeconomy Downstream Wages Recycling Upstream, e.g. Transformative, e.g. Downstream, e.g. Production machinery Agriculture and fishing Food and drink retailing Power / electricity Forestry and logging Publishing Financial services Industrial biotechnology Wholesaling Construction Food and beverage production Health services Bio feedstocks Water and remediation Accommodation Source: Capital Economics and the Office for National Statistics 1.2 Contribution of the bioeconomy Through the various types of bio-based activities, the bioeconomy makes a significant contribution to output and employment in the United Kingdom economy. The transformational bioeconomy comprising agriculture and fishing, forestry and logging, water and remediation activities, food products and beverages and industrial biotechnology and bioenergy accounts for 3.5 per cent of gross value added in the United Kingdom ( 56.0 billion in 2014), which is a little more than the wholesale trade and more than double the figure for the crude petroleum and natural gas extraction and mining industries. The whole bioeconomy, comprising transformative, upstream and downstream elements, is a significant sector for the overall British economy, generating approximately 220 billion in gross 5

7 value added and supporting 5.2 million jobs in This is 13.6 per cent of total national gross value added and is about the same as the construction and financial services industries combined. 2 Figure 2: Gross value added and employment from the bioeconomy in the United Kingdom, 2014 Upstream 35.5 billion value added 543,000 jobs Direct impacts 56.0 billion value added; 981,000 jobs Downstream billion value added 3.2 million jobs Induced 20.3 bn value added 482,000 jobs Source: Capital Economics and the Office for National Statistics The transformative bioeconomy contributes to investment in the United Kingdom approximately 17 billion in gross fixed capital formation in 2013, of which over 30 per cent is investment in research and development. Between 30 and 40 per cent of research and development spending comes from the public purse. Investment in the transformative bioeconomy grew at a slower rate than that for the economy overall in the decade leading up the financial crisis. More recently, it has performed better than the whole economy. The United Kingdom transformative bioeconomy is smaller, in terms of gross value added, than those in most of the other four large European countries. If, however, we strip out the contribution of agriculture, the bioeconomy in the United Kingdom is larger than those in Italy and Spain and similar to that of France. (See Figure 3.) 2 Albeit, this comparison does not include the upstream, downstream and induced activities supported by the construction and financial services industries. 6

8 Figure 3: Contribution of agriculture and the rest of the bioeconomy to gross value added of European bioeconomies gross value added in 2013, billions Sources: Capital Economics and Eurostat The United Kingdom is one of the leading countries in a number of key areas of research and innovation that underpin the bioeconomy. The United States ranks as the leading nation in the area, but the United Kingdom lies anywhere between 2nd and 7th, depending on the metric reviewed. In respect of field-weighted citation impact, a measure of the quality of research, the country is actually in first place globally. Measures of revealed technological advantage 3 show the United Kingdom is strong in bioeconomy-related fields such as organic chemistry, biotechnology and pharmaceuticals and medical technology and biological analysis and this is also manifest in the quality of research in clinical, biological and environmental sciences. (See Figure 4.) In terms of policy comparisons across countries: There is a dichotomy across countries between those that follow national bioeconomy strategies and those with a regional or more specific industry focus. It is too early to say whether one is more successful, but the former confers a greater degree of coordination. Countries do not necessarily have the same bioeconomy objectives, with some prioritising specific sectors, or goals such as energy security. Several of the most notable policies in other countries are not at the research and development end of the value chain, where there appears to be a good deal of similarity 3 Measures of revealed technology advantage provide an indication of the relative specialisation of a given country in selected technological domains. They use patent data (i.e. comparing a sector s share in patents for a particular country with that sector s share in global patents). 7

9 across countries, but in their measures to raise awareness of bio-based products versus others through bio-preferred procurement or bio-standards. The United Kingdom rates near first-in-class in terms of the general policy environment, human capital (including educational attainment and number of researchers), intellectual property protection, the regulatory environment, the existence of technology transfer networks and legal certainty, but falls down on the levels of research and development spending. Figure 4: Index of United Kingdom revealed technological advantage by sector, 2000 to 2010 (values greater than zero show sectors in which the country is more innovative than the world as a whole and vice-versa) Sources: Capital Economics and Department for Business, Innovation and Skills 1.3 Growth and challenges The transformative bioeconomy has been falling as a share of the economy over the last twenty years, due mainly to relative decline of agriculture and fishing and forestry and logging, falling from 4.9 to 3.3 per cent of whole economy gross value added in real terms between 1997 and In terms of productivity, water and remediation and upstream activities registered the highest increases in the 2004 to 2014 period. 8

10 We project that the real output of the United Kingdom bioeconomy could grow by thirteen per cent over the years ahead from 52 billion in 2013 to 58 billion in 2030 (in 2013 prices), or by 0.7 per cent per annum. (See Figure 5.) In general, feedstocks are currently in good supply (though often dependent on imports), but the United Kingdom may face increased competition from emerging markets for some agricultural commodities in the future, whilst others remain plentiful. With this, prices could rise. Feedstocks are demonstrating the increasing interconnectedness of the sectors across the bioeconomy involving, for example, the production of food, materials, chemicals and energy in single enterprises. There is a significant but limited supply of waste feedstocks, and significant potential for the production of energy crops. However, the realisation of these potentials is uncertain as it depends on future policy developments. Supply of forest-derived products is likely to stagnate as the growth of woodland areas slows. Figure 5: Real output of United Kingdom bioeconomy sectors, billions in 2013 prices Sources: Capital Economics and the Office for National Statistics The growth prospects in biotechnology innovation are mixed. Biofuels and bioenergy sectors have become established in the United Kingdom with the support of a policy framework, and the continued growth of these sectors is dependent on a continuation of policy support to 2020 and beyond. The bio-based chemicals and bio-plastics sub-sectors have largely emerged without the support of a policy framework, and continued growth will depend upon their competitiveness either directly on price or on the basis of improved properties and functionality. Moreover, individual sectors are often mutually dependent on each other for raw materials and energy, and recent developments may have increased the level of integration between biotechnology fields. 9

11 Recurring barriers to the realisation of bioeconomy growth opportunities that were frequently cited in our literature review (and, in most cases, also in the expert interviews) were in the areas of: Investment in translation 4 / scale-up 5 Public and investor awareness of opportunities and potential Policy clarity and coordination Innovative ideas that may be subject to market distortions Lack of sufficient cross-sectoral cooperation Achieving cost competitiveness and sustainability in feedstocks Overly burdensome regulations stifling both product launches and growth 4 Translating meaningful research findings into real life products or processes. 5 Moving for small scale or laboratory-based processes to full scale production. 10

12 2 ECONOMIC CONTRIBUTION In this section, we consider the contribution of the bioeconomy the transformative activities and the upstream and downstream sectors to the United Kingdom economy. We cover the value that they add, the jobs that they provide and their contribution to the balance of trade. We begin by assessing the economic contribution of the activities of the transformative bioeconomy in the United Kingdom. We use firm level data collected in TBR s TCR database a longitudinal database of three million live firms in this country, plus a further five million that have ceased trading, with data going back to the year This approach has the advantage of being able to attribute individual firms to the bioeconomy through keyword searches on their activities. This means that we can derive the share of industrial sectors in data from the Office for National Statistics that are part of the transformative bioeconomy. 6 It also allows us to identify the number of firms in bioeconomy sectors and the average firm size. This method is, however, less effective in identifying upstream and downstream effects as it does not provide an apportionment of inputs and outputs. As a result, we use input-output tables provided by the Office for National Statistics to assess the rest of the bioeconomy. This approach requires sectors to be defined discreetly by standard industrial classification codes. Using the TCR data, we have been able to apportion the share of each code that is accounted for by transformative bioeconomy activities. We are then able to use the input-output tables to calculate the totality of all dependent upstream and downstream activities, including multiplier effects. These are the cumulative effects that stem from an initial injection of income. The extra income generates more spending, which creates more income, and so on. The multiplier effect refers to the increase in final income arising from any new injection of spending. 2.1 Transformative bioeconomy We begin by examining the contribution of transformative activities. These divide into five obvious sectors based on industries (and indeed standard industrial classifications), which are: agriculture and fishing; forestry and logging; water and remediation activities; manufacture of food products and beverages; and industrial biotechnology and bioenergy Turnover Turnover is the broadest financial measure of the scale of an industry or sector. We estimate that the total turnover of the transformative bioeconomy was 119 billion in The South East is the region with the largest transformative bioeconomy turnover at 16.8 billion. The East of England is next, with a turnover of 14.3 billion. The region with the smallest turnover is the North East at just 2.4 billion, which is not surprising as it is one of the smallest regions in terms of population. 6 Data are from the Business Register and Employment Survey, Regional Gross Value Added (Income Approach) tables and the Annual Business Survey. 11

13 Turnover, whilst obviously a key metric in assessing the performance of individual firms, can be a misleading measure of the economic contribution of a sector or sectors because it reflects not only underlying output, but also the number of links in the supply chain Gross value added Gross value added measures the extent to which a given sector adds value over and above its inputs of goods and services from businesses upstream in the supply chain. The gross value added by the transformative bioeconomy totalled 56.0 billion in The benefits of the sector are geographically well dispersed throughout the country. The region that has the largest gross value added is Scotland, with 7.8 billion, followed by the South East with around 6.9 billion. The North West and the East of England account for 6.4 billion and 6.1 billion respectively. Figure 6: Gross value added and turnover from transformative activities of the bioeconomy in the United Kingdom, 2014 ( billions) Sources: Capital Economics, TBR and the Office for National Statistics Employment In terms of employment, the transformative bioeconomy accounted for around 981,000 jobs in Unlike some regionally concentrated industries, the transformative bioeconomy generates significant value across the whole country. It contributes the greatest share of employment in 12

14 Wales, accounting for 4.7 per cent of jobs followed by the South-West (4.5 per cent). It accounts for the smallest share of employment in London. (See Figure 7.) Figure 7: Percentage share of regional employment supported by transformative activities of the bioeconomy in the United Kingdom, 2014 > < 1.5 Scotland: 4.3 Northern Ireland: 3.3 North West: 3.2 North East: 2.5 Yorkshire and the Humber: 3.9 East Midlands: 4.3 Wales: 4.7 West Midlands: 3.1 East of England: 4.1 London: 1.3 South West: 4.5 South East: 2.9 Sources: Capital Economics, TBR and the Office for National Statistics Sectoral breakdown and summary of input-output results Figure 8 presents a summary of the results using the input-output methodology to assess the contribution of the transformative sectors of the bioeconomy. 7 7 The analysis is consistent with the numbers presented by Capital Economics in 2015, with the exceptions that the forestry and water sectors are larger due to the inclusion of paper manufacturing and some waste remediation activities in the transformative activities categories. There are some other small changes that make for changes around the edges, the most notable of which is probably that food manufacturing that is purely processing and preserving has become a downstream activity, thus slightly reducing the size of the food and drink manufacturing sector. 13

15 Figure 8: Summary of the economic contribution of the transformative activities of the bioeconomy in the United Kingdom, 2014 (persons) Sources: Capital Economics, TBR and the Office for National Statistics Animal production and hunting accounts for around a half of employment and over 60 per cent of gross value added in agriculture and fishing. Paper production is the largest component of the forestry and logging bioeconomy sector, with over 90 per cent of gross value added. Despite providing one third of jobs in forestry and logging, the recreational bioeconomy sub-sector supports just seven per cent of its gross value added. Meanwhile, engineering, construction and bio-chemicals together support more than half of industrial biotechnology and bioenergy gross value added. (See Table 2.) The transformative activities of the bioeconomy make an important contribution to the overall economy. They accounted for 3.3 per cent of employment in the United Kingdom in 2014, providing jobs for just under one million people, which is more than the arts, entertainment and recreation sector (0.7 million) and similar in scale to financial and insurance activities (1.0 million). The sector contributed 3.5 per cent of gross value added in United Kingdom ( 56.0 billion) in 2014, which is a little more than the wholesale trade and more than double the figure for the crude petroleum and natural gas extraction and mining industries. 14

16 Table 2: TCR estimates of employment, gross value added and turnover by sub-sector of the transformative bioeconomy in the United Kingdom, 2014 Bioeconomy sector and sub-sector Employment (thousands) Gross value added ( billions) Turnover ( billions) Agriculture and fishing Crop production Animal production and hunting Fishing and aquaculture Forestry and logging Logging, silviculture and other forestry activities Paper production The recreational bioeconomy Industrial biotechnology and bioenergy Agri-chemicals Bio-chemicals Bio-electronics Bio-pharmaceuticals and bio-processed pharmaceuticals Bio-plastics Engineering, construction, design and technical support Health, personal care and household products Leather products Other Research and development Rubber products Manufacture of food products and beverages Manufacture of food Manufacture of alcoholic beverages Manufacture of other beverages Water and remediation activities Water collection, treatment and supply Sewerage Remediation and waste management Transformative activities Source: TCR database. Note: Research and development is included in the industrial biotechnology and bioenergy sub-sector as it refers to data in the standard industrial classification code research and experimental development on biotechnology. Sampling suggests that firms in this code are all industrial biotechnology or bioenergy firms. Data for sub-sectors may not sum to sector totals due to rounding. 15

17 2.2 Upstream sectors Upstream impacts originate from transformative bioeconomy firms need to purchase a wide array of inputs to facilitate their activities. For example, activities conducted by bioeconomy firms, from farming to scientific research, demand a considerable amount of energy, thus supporting the power generation and supply industries. Feedstocks are required by many transformative bioeconomy segments, from agriculture to industrial biotechnology. The need for these feedstocks supports the industries that supply them. Even in relatively long-established bioeconomy activities such as forestry, modern machinery is often used, while in pharmaceutical research, specialised equipment is required. A wide array of other inputs are required by bioeconomy enterprises. These range from financial services, to transport, storage and communication services and construction. Figure 9: Employment supported from upstream activities of the bioeconomy in the United Kingdom by industry, 2014 (thousand persons) Sources: Capital Economics and the Office for National Statistics The bioeconomy stimulated around 35.5 billion of gross value added through the spending of firms within the sector on input goods and services in Over 26 per cent of this ( 9.5 billion) benefits the manufacturing and mining sectors. Other sectors which have a large upstream impact from the bioeconomy are professional, scientific and technical activities ( 4.9 billion) and financial, 16

18 insurance and real estate activities ( 4.4 billion). 8 In addition, upstream spending of the bioeconomy sector supported an additional 543,000 jobs in Over 121,000 of these jobs are in the manufacturing and mining industries, while 101,000 are in professional, scientific and technical activities and more than 86,000 are in distribution, transport, hotels and restaurants. (See Figure 9.) London, the South East and Scotland receive the largest benefit from upstream spending by the bioeconomy, in terms of both gross value added and employment. As a share of the regional economy though, the benefit is greatest in Scotland, the East Midlands and Wales, reflecting the greater importance of manufacturing and mining to these regional economies. 9 (See Figure 10.) Figure 10: Gross value added from upstream activities of the bioeconomy in the United Kingdom as a percentage share of regional gross value added, 2014 > < 1.5 Scotland: 3.3 Northern Ireland: 2.8 North West: 2.6 North East: 2.7 Yorkshire and the Humber: 2.7 East Midlands: 3.1 Wales: 3.0 West Midlands: 2.5 East of England: 2.2 London: 1.4 South West: 2.2 South East: 1.8 Sources: Capital Economics and the Office for National Statistics 8 We use the Office for National Statistics Input-Output tables to estimate the upstream impacts. We calculated that the relevant multiplier for these impacts was 1.63, meaning that, for each 1 of value added by the transformative bioeconomy, 63p was generated in supporting upstream activities. This multiplier is derived from our estimate of the upstream impacts. 9 Drivers of regional differences would need to be investigated in a subsequent study. 17

19 2.3 Downstream sectors Downstream impacts arise when bioeconomy products are used for other activities and span a wide range of industries. Bioeconomy outputs are essential for basic nutrition through to complex medicines. For example, food and drink retail and service industries are significantly reliant on products supplied to them by food and drink manufacturing and industrial biotechnology. Many retail businesses in the economy are heavily dependent on the provision of bioeconomy products to end-consumers from pharmacies to clothes and furniture stores. A large number of other economic activities are either wholly or partially dependent on the bioeconomy. These include chemicals and plastics, wood and paper, energy, medicines and many more. Accommodation and food service activities make up a significant proportion, 39.7 billion, of the added value of downstream industries that are directly reliant on the bioeconomy. (See Figure 11.) Figure 11: Gross value added from downstream activities of the bioeconomy in the United Kingdom, 2014 ( millions) Sources: Capital Economics and the Office for National Statistics. Note: production is mining and manufacturing industries and accommodation and food service activities include hotels and restaurants. All told, those portions of the outputs of downstream industries that are dependent on bioeconomy inputs contributed an additional billion in gross value added and added

20 million jobs in More than half of the latter (1.8 million) are in the accommodation and food service industries. London, the South East and the North West receive the largest benefit from downstream spending by the bioeconomy, in terms of both gross value added and employment. As a share of the regional economy though, the benefit is greatest in Wales, Northern Ireland and the North East. (See Figure 12.) Figure 12: Gross value added from downstream activities of the transformative bioeconomy in the United Kingdom as a percentage share of regional gross value added, 2014 > < 6.5 Scotland: 7.4 Northern Ireland: 8.6 North West: 7.5 North East: 8.2 Yorkshire and the Humber: 8.1 East Midlands: 7.7 Wales: 8.6 West Midlands: 7.0 East of England: 6.8 London: 5.3 South West: 7.3 South East: 6.2 Sources: Capital Economics and the Office for National Statistics 10 We calculated that the relevant multiplier for these impacts was 2.93, meaning that, for each 1 of value added by the transformative bioeconomy, 1.93 was generated in supporting downstream activities. This multiplier is derived from our estimate of the downstream impacts. 19

21 2.4 Induced effects Money that is spent on goods and services by employees of the transformative bioeconomy supports other economic activities and has multiplier effects (second round impacts). These are collectively known as induced effects and are an additional benefit of the transformative bioeconomy. The relevant multiplier for these impacts was 1.36, meaning that, for each 1 of value added by the transformative bioeconomy, 36p was generated in supporting induced activities. We calculate that, through induced effects, money spent by those employed by the transformative bioeconomy stimulated an additional 20.3 billion in gross value added for the economy in Around two-fifths of this additional gross value added ( 8.3 billion) is in the wholesale and retail trade sector. Other sectors that gain from large induced effects include production and construction ( 2.3 billion), transportation, accommodation and food service activities ( 2.0 billion) and financial, insurance and real estate industries ( 1.9 billion). 11 Figure 13: Employment supported from induced effects of the transformative bioeconomy in the United Kingdom by industry, 2014 (thousand persons) Sources: Capital Economics and the Office for National Statistics. Note: production is mining and manufacturing industries. 11 Accommodation and food service activities include hotels and restaurants. 20

22 The spending of those employed in the bioeconomy supports an additional 482,000 jobs. Over 46 per cent of these (around 224,000) are in wholesale and retail trade, reflecting the high induced gross value added in this sector. (See Figure 13.) Northern regions do comparatively better out of the induced effects. Induced spending accounts for the smallest share of overall gross value added in London, reflecting the lower share of the sectors that benefit the most from induced spending, wholesale and retail trade, in its economy. (See Figure 14.) Figure 14: Gross value added from induced activities of the transformative bioeconomy in the United Kingdom as a percentage share of regional gross value added, 2014 > < 0.75 Scotland: 1.48 Northern Ireland: 1.61 North West: 1.34 North East: 1.68 Yorkshire and the Humber: 1.61 East Midlands: 1.42 Wales: 1.52 West Midlands: 1.60 East of England: 1.27 London: 0.84 South West: 1.36 South East: 1.19 Sources: Capital Economics and the Office for National Statistics 2.5 Whole bioeconomy Aggregating all types of activities transformative, upstream, downstream and induced identifies the total economic impact of the whole bioeconomy. At a national level, this totalled to a gross value added of 220 billion and supported 5.2 million jobs in This was equivalent to 21

23 13.6 per cent of total national gross value added and 17.4 per cent of total employment. With respect to gross value added, it is approximately equal to the construction and financial services industries combined. 12 At the aggregate level, the bioeconomy contributes proportionately more to regional economies away from London and the South East. The contribution is highest in Scotland, at 18.5 per cent of total regional gross value added, but also close to, or more than, seventeen per cent in Northern Ireland, Wales, Yorkshire and the Humber and the East Midlands. 13 (See Figure 15.) Figure 15: Gross value added from the whole bioeconomy in the United Kingdom as a percentage share of regional gross value added, 2014 > < 12 Scotland: 18.5 Northern Ireland: 17.4 North West: 15.7 North East: 15.5 Yorkshire and the Humber: 16.9 East Midlands: 16.9 Wales: 17.5 West Midlands: 14.8 East of England: 14.6 London: 9.0 South West: 14.7 South East: 12.1 Sources: Capital Economics and the Office for National Statistics 12 Albeit, this comparison does not include the upstream, downstream and induced activities supported by the construction and financial services industries. 13 Drivers of regional differences would need to be investigated in a subsequent study. 22

24 Capital Economics conducted an initial quantification of the size of the bioeconomy of the United Kingdom in 2015, which estimated it to be billion for the year There are a number of reasons for the expanded size of this year s estimates, mainly related to the starting definition of the transformative bioeconomy, which has been much refined in the course of this assignment. Under the definition in this report, paper production is considered to be a transformative activity, as is sewerage treatment and the biological aspects of waste management. In addition, some aspects of industrial biotechnology that were, in the 2015 analysis, considered to be downstream are now included as transformative activities (such as the use of bio-based ingredients or processes to make bio-pharmaceuticals and personal care products). Finally, the year of analysis has, of course, been updated from 2012 to These changes result in an expansion of the transformative bioeconomy, which then feeds through directly into an increased size of the corresponding upstream, downstream and induced activities. 2.6 Firms and firm sizes The TCR database allows us to estimate the number of firms in each sub-sector of the bioeconomy. In addition, information on employment in the database permits us to derive the average firm size (measured as the number of employees per firm). This reveals quite a contrasting picture between the various sub-sectors. In agriculture and fishing, we have a pattern of a large number of very small firms, employing fewer than five people typically. On the other hand, food and drink manufacturing and industrial biotechnology are characterised by much smaller numbers of larger firms, though it is notable that even here the average firm size is quite small (under 50 employees). (See Table 3.) Table 3: Numbers of firms and firm size by bioeconomy sub-sector, 2014 Bioeconomy sub-sector Number of firms Average firm size (employees per firm) Agriculture and fishing 127, Forestry and logging 6, Industrial biotechnology and bioenergy Manufacture of food products and beverages 6, , Water and remediation activities 3, Transformative activities 151, Source: TCR database 14 Capital Economics, The British bioeconomy (Biotechnology and Biological Sciences Research Council, Swindon),

25 2.7 Exports and imports The United Kingdom s transformative bioeconomy sectors trade in the global economy. They sell some of their finished goods and services abroad and import some of their production inputs. Exports by transformative bioeconomy sectors totalled 30.5 billion in The largest exporting sector is manufacture of food products and beverages, representing over 58 per cent of total bioeconomy exports. Industrial biotechnology and bioenergy accounts for around 23 per cent, and agriculture and fishing and forestry and logging for just under ten per cent each. Imports by the United Kingdom transformative bioeconomy sectors totalled 52.8 billion in The largest importing sector of the bioeconomy is manufacture of food products and beverages, which accounts for 51 per cent of imports. The next largest importing sector is agriculture and fishing, with eighteen per cent of imports. (See Figure 16.) Sub-sectors with a positive balance of trade include fishing and aquaculture, engineering, construction, design and technical support, research and development and remediation and waste management. 15 (See Table 4.) Figure 16: Exports and imports by the bioeconomy in the United Kingdom by industry, 2014 ( millions) Sources: Capital Economics and the Office for National Statistics. Note: imports are negative to show that they are a leakage from the economy. 15 The reasons for this would have to be investigated in a subsequent study. 24

26 Table 4: Capital Economics estimates of imports and exports by bioeconomy sectors and sub-sectors, 2014 Bioeconomy sector and sub-sector Imports ( millions) Exports ( millions) Balance of trade ( millions) Agriculture and fishing 9,554 2,724-6,830 Crop production, animal production and hunting 9,037 1,811-7,227 Fishing and aquaculture Forestry and logging 7,965 2,979-4,986 Logging, silviculture and other forestry activities Paper production 7,113 2,714-4,398 The recreational bioeconomy Industrial biotechnology and bioenergy 8,329 6,987-1,342 Agri-chemicals 1,666 1, Bio-chemicals 2,018 1, Bio-electronics 1, Bio-pharmaceuticals and bio-processed pharmaceuticals Bio-plastics and rubber products Engineering, construction, design and technical support Health, personal care and household products Leather products 1, Other Research and development Manufacture of food products and beverages 26,840 17,645-9,196 Manufacture of food 16,307 9,154-7,153 Manufacture of alcoholic beverages 9,392 7,827-1,565 Manufacture of other beverages 1, Water and remediation activities Water collection, treatment and supply Sewerage Remediation and waste management Transformative activities 52,801 30,460-22,341 Sources: Capital Economics and the Office for National Statistics. Note: Research and development is included in the industrial biotechnology and bioenergy sub-sector as it refers to data in the standard industrial classification code research and experimental development on biotechnology. Sampling suggests that firms in this code are all industrial biotechnology or bioenergy firms. 25

27 Highlights of section two The transformational bioeconomy, comprising agriculture and fishing, forestry and logging, water and remediation activities, food products and beverages, accounted for 3.5 per cent of gross value added in the United Kingdom in 2014 ( 56.0 billion), which was a little more than the wholesale trade and more than double the figure for the crude petroleum and natural gas extraction and mining industries. The whole bioeconomy, comprising transformative, upstream and downstream elements and induced effects, is a significant sector for the overall United Kingdom economy, generating approximately 220 billion in gross value added and supporting 5.2 million jobs in This was 13.6 per cent of total national gross value added and approximately equal to the construction and financial services industries combined. 26

28 3 SUSTAINABILITY OF THE UNITED KINGDOM BIOECONOMY The sustainability of the bioeconomy could be widely interpreted to cover a range of issues, including sustainability due to the financial environment, the policy context, the price and availability of bio-based inputs and the situation vis-à-vis non-bio-based inputs. We cover the financial and policy contexts extensively later in this report when we report on the situation regarding investment in the bioeconomy in section four and then on policies in sections five and six. Non-bio-based inputs cover a vast array of products and services and are therefore best assessed in macroeconomic reviews of the whole economy. In this section, therefore, we focus on sustainability of bio-based inputs feedstocks. The bioeconomy includes all economic activities derived from either bio-based products or processes. As such, bioeconomy activities include the use of bio-based feedstocks, and the use of biotechnology for the transformation of non-bio-based feedstocks. The transformation of biological and non-biological wastes and residues can achieve economic and environmental benefits, increasing resource efficiency and contributing towards circular economy goals. For example, companies such as Lanzatech convert waste carbon-containing gases (which are of fossil origin) to ethanol via a fermentation process, so producing low carbon fuels or chemicals. As demand for bio-based resources increases, there are a number of concerns regarding feedstock sustainability, including the direct and indirect impacts of changes in land use, soil quality and carbon stocks. However, there are also opportunities to increase resource efficiency by using residues from agriculture, forestry, and industry or by maximising the efficiency of the use of the resources available. Policy driven markets, such as bioenergy and forestry, are influenced by carbon and sustainability criteria that are defined by the relevant legislation, and the producers of some consumer goods seek to meet similar sustainability standards with their products. There are a wide number of voluntary sustainability standards operating internationally which enable users to demonstrate that their operations, and those of their supply chains, meet certain minimum thresholds in terms of key environmental and social sustainability criteria. The land area used for agriculture in the United Kingdom has been steadily declining for the last half century or more. Concerns relating to direct and indirect land use change impacts are expected to lead to an increase in the use of feedstocks that do not impact food or feed markets, including those feedstocks that require less land for their cultivation and/or can utilise land not suitable for food and feed production. These non-traditional feedstocks include agricultural residues, biomass crops, forestry residues, macro algae, micro algae and municipal solid waste. In the following sections each feedstock is considered in turn, and estimates for their current use and potential availability are given. We have given background on the origin of the data and methods used to calculate the values, and, where there are a range of values available in the literature, we have attempted to assess the quality of the data and reasons for such a range. We review primary agricultural products, agricultural residues, the forestry industry overall and forestry residues. 27

29 Within the literature on resource potentials, there are wide ranges of quantitative estimates. This is in part due to differences in the methodologies used and the way in which potential availability is defined. In many cases, the use of biomass feedstocks will be constrained by certain sustainability limits (for example the maintenance of soil quality), and/or economic constraints Primary agricultural products The markets for many agricultural products are regional or global in nature. Many agricultural staples, such as corn, wheat and oats, have recently experienced a period of low prices caused by excess supply and comparatively weak demand in emerging markets. Our expectations, based on Capital Economics analysis of demand and supply drivers, are for this to be reversed over the years ahead; boosted by buoyant demand in many emerging markets and cost-push drivers from recovering oil prices. Figure 17: Index of global prices, production and consumption for corn, wheat and oats Price (2000 = 100) Production and consumption (2000 = 100) Production (right-hand-side) Production forecast (right-hand-side) Consumption (right-hand-side) Consumption forecast (right-hand-side) Price (left-hand-side) Price forecast (left-hand-side) Sources: Capital Economics, Bloomberg and United States Department of Agriculture This indicates that the United Kingdom will likely face tightening global markets for many crops over the years ahead supplies will likely be somewhat more expensive and a little more difficult to source than has been the case recently, which could prove challenging if the country wishes to expand imports for both food and energy crop applications. Nevertheless, the expectation is still that prices will not reach unprecedented levels a reflection of the low starting point for prices, the moderate expected recovery in oil prices, forecast rates of global economic growth and marketspecific supply drivers. 28

30 World sugar number 11 price, US cents per pound World sugar production and consumption, million tonnes per year Figure 18: Index of global prices, production and consumption for palm oil and soybean oil Price (2000 = 100) Production and consumption (2000 = 100) Production (right-hand-side) Production forecast (right-hand-side) Consumption (right-hand-side) Consumption forecast (right-hand-side) Price (left-hand-side) Price forecast (left-hand-side) Sources: Capital Economics, Bloomberg and United States Department of Agriculture The same also applies to the price of sugar, used as a foodstuff, a feedstock for biofuels and for some synthetic biology processes. Deregulation of European Union prices, due to occur next year, will likely result in lower prices and plentiful supply over the years ahead. Figure 19: Raw global sugar prices (United States cents per pound), production and consumption (million metric tonnes per year) Production (right-hand-side) Consumption (right-hand-side) Price (left-hand-side) Production forecast (right-hand-side) Consumption forecast (right-hand-side) Price forecast (left-hand-side) Sources: Capital Economics, Bloomberg and United States Department of Agriculture 29

31 3.1.2 Agricultural residues Agricultural residues includes dry residues, such as straw, corn stover and poultry litter, and wet residues such as animal slurry, manure and grass silage. Many of these agricultural residues are currently used either on-farm, for example on the fields to improve soil quality, or in alternative markets such as animal bedding, energy or horticulture. Total United Kingdom straw production is estimated at between 11.5 and 18.5 million tonnes per year. 16,17 The amount of straw that could be sustainably collected is estimated at million tonnes per year, assuming between 40 per cent and 60 per cent of straw must be left in the field to maintain soil quality. Approximately three million tonnes per year are currently used for livestock bedding and other minor uses such as horticulture, mushroom cultivation and industrial uses. There therefore remains significant potential to increase utilisation of this resource. Future production of straw is linked to agricultural productivity, and is anticipated to stay broadly the same to Other dry residues such as prunings and grass cuttings are anticipated to be small in the United Kingdom. 18 Animal manure includes liquid manure and slurry as well as solid dung, produced from cows, horses, pigs, chickens, sheep and other animals. United Kingdom production is estimated at 68 million tonnes per year (at approximately 90 per cent water content), which is expected to remain approximately constant until Animal manure is typically spread to land where it has value as a source of nutrients, and a small fraction is treated by anaerobic digestion prior to application of digestate to land (300,000 tonnes per year) and some chicken litter is used for power generation (670,000 tonnes per year). There is opportunity for more animal manure to be treated by anaerobic digestion, with the added benefit that nutrients are more available in digestate than raw manure Biomass crops Biomass crops can achieve high output per hectare with low inputs, and can often grow on poorquality soil where they will not compete with food crops. Whilst biomass crops are often seen as a preferable bioenergy feedstock compared to food crops, it is important to consider the specific land use change impacts on a case by case basis, which may include beneficial impacts such as increased soil carbon. In the United Kingdom, the most common biomass crops can be classified as either short rotation coppice (such as poplar and willow), grassy perennial crops (such as miscanthus), or short rotation forestry (such as Scot s pine and poplar). Models suggest significant potential for biomass crops to contribute to the United Kingdom s future energy needs, but current production is still extremely small. Defra estimate that 77,500 tonnes of miscanthus were produced in the United Kingdom in 2015 and 37,600 tonnes of short rotation coppice. 19 Government statistics demonstrate that short 16 E4tech estimates based on Eurostat agricultural production figures 17 E4tech, Advanced Biofuel Feedstocks An Assessment of Sustainability 18 Atlas of EU biomass potentials, Deliverable 3.3: Spatially detailed and quantified overview of EU biomass potential taking into account the main criteria determining biomass availability from different sources, Biomass Futures project 19 Department for Environment, Food and Rural Affairs and Government Statistical Service, Area of Crops Grown For Bioenergy in England and the UK:

32 rotation coppice production has remained relatively stable over the last five years, whilst miscanthus production has reduced as crop establishment support programmes have been closed, and the rate of crop removal is higher than crop planting. As most biomass crops have establishment times of several years and crop planting rates are currently low, production is not anticipated to increase significantly in the short term. Long term models of the potential role of biomass in the European energy system indicate that the United Kingdom has the potential to produce 10.7 million tonnes per year of biomass crops (taking into account land required for food production), although this does not take into account the developments in policy and infrastructure required to achieve this level of production. 20 ETI state that domestically produced biomass feedstocks could realistically become the dominant source of biomass for bioenergy by 2040, highlighting benefits such as increased energy security by complementing biomass imports and economic value to the United Kingdom. 21 However there remains very large uncertainty regarding how quickly the industry will develop, if at all, and how production will ramp-up in the United Kingdom Forestry products The 20th century saw a significant turnaround in the proportion of land that was woodland in the United Kingdom. Having been in decline for centuries that proportion reached a low point of around five per cent around 100 years ago. It has since risen rapidly, reaching thirteen per cent in However, even that is very low compared to most other European Union countries, in which the average proportion of woodland area is 37 per cent. 22 Although there was rapid growth in forested areas in the United Kingdom during the last century, the rate of increase is now likely to slow considerably as the rates of fresh planting have declined and many mature trees are now being harvested. Nevertheless, we expect that there will be some increases in wooded area over the next few decades. In 2013, the government set out a goal for the woodland cover in England to rise from ten per cent to twelve per cent by 2060, with a longer term objective of fifteen per cent. Twelve per cent was last seen in the 13th century Atlas of EU biomass potentials, Deliverable 3.3: Spatially detailed and quantified overview of EU biomass potential taking into account the main criteria determining biomass availability from different sources, Biomass Futures project 21 Energy Technologies Institute, Bioenergy: Insights into the future UK Bioenergy Sector, gained using the ETI s Bioenergy Value Chain Model (BVCM) 22 Sian Atkinson and Mike Townsend, The state of the UK s forests, woods and trees (Woodland Trust, Grantham, Lincolnshire), Department for Environment, Food and Rural Affairs, Government forestry and woodlands policy statement (London),

33 3.1.5 Forestry residues It is estimated that the current supply of primary forestry residues (including bark, branches and leaves from both forest biomass and woody biomass on non-forest land) is between 1.6 and 3.4 million tonnes per year. 24, 25 This is not anticipated to increase to 2020 or beyond Micro algae Micro algae are characterised by rapid growth rates and high yields per hectare, and some species may grow in poor-quality water and saltwater. Globally micro algae are used for the commercial production of high value products at small scale including pharmaceutical, nutraceuticals, and speciality chemicals, but significant cost reductions are required before micro algae can be used in high-volume, low-cost applications such as energy and fuels. Current production of autotrophic micro algae in the United Kingdom is estimated at only one to five dry tonnes per year. 26 Given its current early stage of development, micro algae production is not expected to increase significantly in the short to medium term Macro algae Macro algae has been harvested in Europe for hundreds of years, and today the United Kingdom possesses some of the most extensive seaweed resources in Europe. An estimated ten million tonnes of wild seaweed is found in the United Kingdom, mostly in Scotland. 28 These are utilised by a handful of companies: the Hebridean Seaweed Company Ltd., Orkney Seaweed Company Ltd, Böd Ayre products Ltd, Seaveg, Irish Seaweed, Loch Duart Ltd., Neo Argo Ltd. End-uses include nutraceuticals, animal feed supplements, and as a soil improver in horticulture and agriculture application, and also in the production of alginate used in a wide range of applications such as the manufacture of paper, textiles, medicines and personal care products. Reliable data on the utilisation of macro algae is not available, the best estimates from Innovate UK suggest current utilisation is between 13,000 and 20,000 tonnes per year. 29 It is estimated that around 130,000 to 180,000 tonnes per year of macro algae could be sustainably harvested, with this potentially much higher if the macro algae was cultivated 30. Further exploitation of this resource is dependent on the development of sustainable harvesting and cultivation techniques and having the necessary infrastructure in place. 24 Atlas of EU biomass potentials, Deliverable 3.3: Spatially detailed and quantified overview of EU biomass potential taking into account the main criteria determining biomass availability from different sources, Biomass Futures project 25 E4tech, Advanced Biofuel Feedstocks An Assessment of Sustainability 26 Innovate UK, A UK roadmap for algal technologies 27 E4tech, Advanced Biofuel Feedstocks An Assessment of Sustainability 28 United Kingdom government, Biofuels from Algae, Houses of Parliament 29 Innovate UK, A UK roadmap for algal technologies 30 United Kingdom government, Biofuels from Algae, Houses of Parliament 32

34 3.1.8 Municipal solid waste The International Energy Agency estimate that 47 million tonnes of municipal solid waste was produced in the United Kingdom in 2012, of which approximately 50 per cent was recycled, and 42 per cent sent to landfill, with the remainder treated within energy from waste schemes. 31 The biogenic fraction of United Kingdom municipal solid waste has been estimated at 22 million tonnes per year, some of which is recycled, sent for energy recovery or disposal. 32 Municipal solid waste production is anticipated to remain the same to 2020, and perhaps even decrease to Some sources suggest that household waste prevention measures could lead to a reduction of up to 25 per cent in 2030, dependent on future policy and social developments. 33 However, as the United Kingdom aims to decrease the amount of waste sent to landfill in line with European Union objectives, 34 there may be opportunities to increase the proportion of waste that is utilised for higher value activities such as re-use and recycling or, if this is not possible, then for electricity and fuel production Imported biomass Wood and related products are an example of a biomass product that is extensively imported into the United Kingdom. The majority of wood currently imported into the United Kingdom is in the form of sawn or prepared timber, for a number of end-uses. Annual imports of sawnwood and woodbased panels have been reasonably constant since 2009 at 8.5 million cubic metres. Wood imported into the United Kingdom for electricity generation is all currently in the form of wood pellets, and these total around 1.5 million tonnes per annum almost all of which come from Canada and the United States. The Forestry Commission references official international trade data to estimate the imported volumes of wood (Table 5). Very small quantities of woodchips are imported from Ireland and the Netherlands (68,000 tonnes and 23,000 tonnes respectively), around 8,400 tonnes of firewood was shipped from Latvia and the Netherlands and around 9,000 tonnes of wood waste, scrap wood and sawdust were imported, primarily from the European Union International Energy Agency, The Municipal Solid Waste Resource in England 32 E4tech, Advanced Biofuel Feedstocks An Assessment of Sustainability 33 Atlas of EU biomass potentials, Deliverable 3.3: Spatially detailed and quantified overview of EU biomass potential taking into account the main criteria determining biomass availability from different sources, Biomass Futures project 34 European Commission, Closing the loop an EU action plan for the Circular Economy 35 Forestry Commission, UK Wood Production and Trade: 2013 provisional figures 33

35 Table 5: Wood imports to the United Kingdom Year Sawnwood Wood (thousand cubic metres) Woodbased panels Wood pellets Other wood Paper Pulp and paper (thousand tonnes) Pulp Recovered paper Total pulp and paper ,240 2, , , ,699 2, ,071 7,254 1, , ,936 2,827 1, ,887 1, , ,179 2,650 2, ,119 1, , ,500 2,962 5,015 1,234 5,921 1, ,205 Source: Forestry Commission, 2014 Although the total woodland area of the United Kingdom is expected to rise in the years ahead in line with government plans, it is unlikely to keep pace with the rising population and economic growth. In consequence, imports of wood are expected to increase and this could be replicated for several agricultural crops. Biomass imports are currently vital to the United Kingdom bioenergy sector, as the United Kingdom biomass supply chain is not well established, and feedstock production is insufficient to meet demand. Use of biomass imports in the short-term could support the development of the United Kingdom biomass supply chain, including logistics, handling and designing and operating conversion technologies, so that domestically produced biomass could play a greater role in the bioenergy sector in the future Summary There is the opportunity to sustainably increase the economic utilisation of many biomass feedstocks, but there remain many barriers to growth, as summarised in Table 6. Analysis of feedstocks also demonstrates the opportunities for cross-sectoral enterprises, as highlight by the case study in Box Energy Technologies Institute, Bioenergy: Enabling UK biomass 34

36 Table 6: Current and future potential feedstock supplies in wet as received tonnes - before any competing uses for the feedstocks are considered (source: E4tech) Feedstock Agricultural residues - straw Agricultural residues animal manure Energy crops miscanthus Energy crops short rotation coppice Energy crops short rotation forestry Current feedstock supply (wet Mt/yr) 2020 feedstock supply (wet Mt/yr) Expansion post 2020? Data quality High Medium Medium Medium 0 0 High Potential sustainability issues Barriers to further exploitation Examples of uses Some crop residues are required on the field to maintain soil organic matter content and soil health. Animal manure is currently used as fertiliser on fields, subject to limitations such as those imposed by the Nitrate Directive. Potential for land use change effects if growing energy crops causes cultivation of additional land. However growing energy crops on degraded land can increase the carbon stock. Cost of collection. Technologies for the conversion of straw to higher value products require further development. High water content. Dependent on market conditions favouring this crop, farmers choosing to plant, and appropriate infrastructure being in place. Technologies for the conversion of biomass to higher value products require further development. Soil nutrient, animal bedding, horticulture, energy Soil nutrient, energy Energy, animal bedding Energy, wood products Energy, wood products Municipal solid waste (biofraction) Medium Almost half of all municipal solid waste is currently recycled in the United Kingdom, and the policy framework seeks to increase the reuse, recycling and energy recovery. Technical challenges using heterogeneous waste feedstock to produce higher value products. New processes must consider their cost competitiveness with existing waste treatment processes. Energy 35

37 Forestry residues bark, branches and leaves Medium Some forestry residues must remain in the forest to retain soil health and carbon levels. May not be economic to collect widely-dispersed residues Technologies for the conversion of straw to higher value products require further development. Particle board, energy Micro-algae High Cultivation of micro algae can have very high energy inputs and land area requirements, although often poor quality land can be used preventing competition with agriculture. Technology currently has very niche use only more widespread uses are only at research and development stage Nutraceuticals, cosmetics, energy Macro-algae High Potential exists to sustainably increase harvesting from the sea. Scale-up would require huge infrastructure investment. Food, energy Imported biomass Low Important to ensure high standards of biomass sustainability in country of origin. Risk of diverting biomass from a low-carbon use in country of origin. Wide range of possible values, depends on biomass markets in other countries. Dependent on nature of biomass Source: E4tech 36

38 Box 1: British Sugar, Wissington case study British Sugar, a leading supplier of sugar to the United Kingdom market, operates a sugar factory in Wissington, Norfolk. They use United Kingdom grown sugar beet to produce a range of products, taking an integrated approach to manufacturing to transform all their raw materials into sustainable products. Activities at this plant contribute to, and are components of, several sub-sectors of the bioeconomy. The plant processes over three million tonnes of sugar beet per year to supply 420,000 tonnes of sugar to food and drink manufacturers across the United Kingdom and Europe. In addition, each year, over 140,000 tonnes of animal feed are produced from sugar beet pulp (a by-product of the sugar producing process), 120,000 tonnes of lime for soil conditioning, 150,000 tonnes of soil for landscaping, and 5,000 tonnes per year of stones are recycled for building. 37 Since 2007, a fraction of the sugar syrup produced in the factory has been fermented to produce ethanol, with the carbon dioxide from this process captured and liquefied on-site. This was the United Kingdom s first bioethanol plant, and can produce up to 55,000 tonnes of ethanol per year. The wastes from the sugar and ethanol production processes are put into an anaerobic digester to produce biogas. This biogas, along with some natural gas, is used in a 93 megawatts electric on-site combined heat and power plant. 38 The electricity produced by the plant can either be used on-site or exported, the steam is used in the sugar production process, and the carbon dioxide is used to fertilise tomatoes grown nearby in eighteen hectares of greenhouses. Producing a wide range of products in an integrated process allows British Sugar to minimise the environmental impact of each product by re-using wastes from one process as inputs to the next, therefore minimising emissions to the environment and the need to use additional resources. It also offers them the opportunity to add value to these waste products and therefore gain an additional revenue stream. Running a highly resourceefficient and integrated factory therefore provides both environmental and economic benefits to British Sugar. 37 British Sugar, About Wissington factory (British Sugar, Peterborough) 38 Approximately 50 megawatts of this are exported. 37

39 Highlights of section three In general, feedstocks are currently in good supply (this was reflected both in analysis and in interviews), but the United Kingdom is heavily dependent on imports for some feedstocks. Moreover, the country may face increased competition for supplies of some traditional agricultural commodities such as corn, wheat and oats from emerging markets in the future, whilst others remain plentiful. With this, prices of these commodities could rise. There is a significant but limited supply of waste feedstocks, and significant potential for the production of energy crops. However, the realisation of these potentials is uncertain as it depends on future policy developments. Supply of forest-derived products is likely to stagnate as the growth of woodland areas slows. Feedstocks that have traditionally had limited use or been confined to specific industries are increasingly being viewed as part of the bioeconomy as a whole, with the potential to be used across a range of sectors such as food, materials, chemicals and energy. This may lead to more efficient use of biomass resources, but could also increase competition for those with limited supply. Feedstocks are demonstrating the increasing interconnectedness of the sectors across the bioeconomy involving, for example, the production of food, materials, chemicals and energy in single enterprises. 38

40 4 INVESTMENT In this section, we examine the level of investment in the bioeconomy of the United Kingdom. First, we look at historical trends. Second, we examine the split between capital and research and development investment. Third, we look at the public and private investment split. Finally, we consider sectors that are experiencing difficulties in attracting investment. 4.1 Trends in overall investment We define overall investment as gross fixed capital formation. Gross fixed capital formation is probably the most regularly cited measure of investment from national accounts. It refers to the net increase (i.e. investment minus disposals) in physical (i.e. non-financial) assets within the measurement period. It does not account for the consumption (depreciation) of fixed capital, and also does not include land purchases. 39 Figure 20: Real gross fixed capital formation in bioeconomy sectors, billions (2013 prices) Sources: Capital Economics and the Office for National Statistics Industrial biotechnology and bioenergy Manufacture of food products and beverages Water and remediation activities Forestry and logging Agriculture and fishing Whole economy gross fixed capital formation (right-hand-side) 0 Using Office for National Statistics data, we can see that investment spending in the transformative bioeconomy sectors experienced modest declines in real terms around the turn of the century, bottoming out in It then experienced rapid growth of 37 per cent in the years 39 FT lexicon, Definition of gross fixed capital formation, Financial Times,

41 from 2004 to 2008, when the main drivers were a near doubling of investment in water and remediation activities and a 22 per cent increase in agriculture and fishing investment. This was halted by the recession of There has then been renewed increase since 2010, above the trend in the whole economy average, though the level of gross fixed capital formation in these sectors has yet to regain its pre-crash peak in real terms. (See Figure 20.) Figure 21 shows capital investment in agriculture and fishing. Overall gross fixed capital formation in the sector experienced a strong spurt in growth from 2000 to The financial crash led to a fall in investment spending, but it had surpassed its previous peak by Figure 21: Real gross fixed capital formation in agriculture and fishing, billions (2013 prices) Sources: Capital Economics and the Office for National Statistics Figure 22 shows that forestry has been experiencing a long term decline in investment, mainly due to a decline in investment in the paper industry up to Since then, the trend has been reversed and there has also been an increase in investment in forests themselves. 40 Investment across the whole economy began to fall in 2008, when bioeconomy investment was still growing. The probable reason is that the initial shocks to the economy were emanating from nonbioeconomy sectors, such as banking, housing and financial services. The downturn was then transmitted to bioeconomy firms and, as a result, bioeconomy investment contracted sharply in

42 Figure 22: Real gross fixed capital formation in forestry and logging, billions (2013 prices) Sources: Capital Economics and the Office for National Statistics. Note: values for accommodation and libraries, archives, museums and other cultural activities are all less than 0.1 billion. Figure 23 shows investment activity in water and remediation activities. Investment here is dominated by water collection, treatment and supply. There was a notable peak in 2008/9. The reasons for this are not completely clear, but company reports indicate record investment in Scottish and Welsh water at the time. 41,42 Figure 24 shows investment in the production of food and beverages. In general, there appears to be a downward trend, though the most recent observation from 2013 was the highest since The investment share of drinks seems to have slightly increased over time. Investment in industrial biotechnology and bioenergy declined around the turn of the century, mainly due to a reduction in biopharmaceutical and biochemical investment. Since 2003, investment has more or less flatlined, albeit with a temporary peak in just before the financial crisis hit. (See Figure 25.) 41 Scottish Water, Record investment and performance across Scotland for our customers, Annual report and accounts 2008/09 42 Welsh Water, Record investment as Welsh Water helps customers cope with recession, June

43 Figure 23: Real gross fixed capital formation in water and remediation activities, billions (2013 prices) Remediation activities and other waste management services Waste collection, treatment and disposal activities; materials recovery Sewerage Water collection, treatment and supply Sources: Capital Economics and the Office for National Statistics. Note: values for waste collection, treatment and disposal activities and materials recovery are 0.1 billion from 1997 to 2007 and less than 0.1 billion from 2008 to Values for remediation activities and other waste management services fluctuate between 0.1 and 0.2 billion. Figure 24: Real gross fixed capital formation in manufacture of food products and beverages, billions (2013 prices) Manufacture of food products Manufacture of beverages Sources: Capital Economics and the Office for National Statistics 42

44 Figure 25: Real gross fixed capital formation in the industrial biotechnology and bioenergy sector, billions (2013 prices) Manufacture of leather Electrical equipment Science and research Biochemicals, biopharmaceuticals and bioplastics Construction and architecture Other services Sources: Capital Economics and the Office for National Statistics. Note: Gross fixed capital formation in the manufacture of leather is less than 0.1 billion for each year from 1997 to Capital / research and development split As Figure 26 shows, the share of capital expenditure which goes on research and development has averaged just over 30 per cent for many years. 43

45 Figure 26: Bioeconomy research and development spending as a share of bioeconomy gross fixed capital formation, per cent Sources: Capital Economics and the Office for National Statistics 4.3 Public / private investment The majority of the public sector s contribution to investment in the bioeconomy is found in research and innovation spending (though some also goes on capital expenditure such as buildings or equipment). In 2011, total research and development spending on the bioeconomy in the United Kingdom totalled 1.9 billion, of which 38 per cent or million was in public funding. 43 Another estimate has the figure of public funding for bioeconomy research as 610 million in This discrepancy can be partially accounted for by the latter figure s exclusion of international collaborations and capital investment. However, even if the latter figures are used, the public proportion is still 32 per cent, so the true figure is likely between 30 and 40 per cent. Health ( 265 million) and food ( 162 million) were the themes with the largest associated underpinning public sector bioeconomy research, together accounting for 70 per cent of all investment. Of public research investment in the bioeconomy, 84 per cent ( 512 million) was allocated by the United Kingdom s seven Research Councils and Innovate UK. Leading the way were the Medical Research Council ( 203 million) and the BBSRC ( 194 million). (See Figure 27.) The 610 million of 2013 research and development funding identified in the review was split between seven bioeconomy themes (See Figure 28). 43 European Commission Bioeconomy Observatory 44 Biotechnology and Biological Sciences Research Council on behalf of the Chairs of the Agri-tech, Industrial Biotechnology and Synthetic Biology Leadership Councils, UK public research investment underpinning the Bioeconomy 2012/2013 (Biotechnology and Biological Sciences Research Council),

46 Figure 27: Total investment by public funders in research underpinning the bioeconomy, 2013 (per cent) Source: Biotechnology and Biological Sciences Research Council. Note: The Department of Agriculture and Rural Development in Northern Ireland is now encompassed in the Department of Agriculture, Environment and Rural Affairs. Figure 28: Sector shares of publicly funded bioeconomy research and development spending, 2013 (per cent) Source: Biotechnology and Biological Sciences Research Council 4.4 Sectors experiencing investment shortages This sub-section considers whether the levels and composition of current investment spending are appropriate to support current bioeconomy innovation opportunities. We review recent reports 45

47 that have commented on the subject and discuss the responses from our expert interviewees with respect to this question. In 2011, NESTA, an innovation charity, conducted an investigation into financing industrial biotechnology in the United Kingdom. It identified three obstacles to unlocking investment in the sector in this country: There is a lack of investment by large industrial biotechnology firms in industrial biotechnology in the United Kingdom. In part, this is due to a lack of large firms in some areas of the sector (chemicals and materials manufacturing). In other sectors, British firms are characterised by an inability or unwillingness to collaborate and nurture start-up firms. The venture capitalist industrial biotech firm relationship is both much less established and (as a result) much less beneficial for biotech companies in the United Kingdom than it is in the United States. There are a number of reasons for this. The up-front costs tend to be larger than for other industries and the time to return on investment is longer. Venture capitalists tend to be much less familiar with the business model than may be the case with, say, pharmaceuticals. Venture capitalists in the United States have tended to be more adept at exiting poorly performing projects and this has made them less conservative about investing in the new projects. (The failure to be as adept in the United Kingdom has meant that less funds tend to be made available by venture capitalists in the first place, which acts to restrict the scope for project success and means that venture capitalists then continue to be sceptical of the sector a chicken and egg problem.) More specifically for the waste-related sectors, generators of waste expect a company to have secured funding before awarding it a treatment contract but its financers expect to see signed contracts before investing. 45 As a result, the NESTA report stated that: Industrial biotechnology exemplifies the problems that companies who develop novel technology face those with long and expensive development timelines, and who are dependent on large companies to put their products into action (as customers, acquirers, or by growing themselves). These companies need funding to develop and test the technology they have come up with. They need demonstrations to convince investors and large companies that the technology will work. They need to scale-up processes from the laboratory to the plant, usually in several stages. The high degree of uncertainty and technical risk for these companies means they struggle for investment in a shrinking early-stage venture capital market. 46 Similar views were found in our expert interviews, where the main investment deficiency was believed to be at the development or translation phase taking an early stage idea into a full-scale, fully-tested proposition. 45 NESTA, Financing industrial biotechnology in the UK: Report prepared for NESTA by Technology Greenhouse Ltd (NESTA, London), October NESTA, Financing industrial biotechnology in the UK: Report prepared for NESTA by Technology Greenhouse Ltd (NESTA, London), October

48 Prior to production, there is evidence from our quantitative assessment, qualitative overviews of the state of innovation in the United Kingdom and interviews with experts, that initial level research and development (i.e. the research part) is for the most part adequately funded. However, there are concerns relating to the development part. In the case of many bioeconomy products, large investments (both in terms of finance and physical scale) are required to reach the first stage of prototype production. This can be the stage that is neglected in the product lifecycle process. It is not one where venture capital companies are willing to lend large sums of money, as the risks are perceived as too high. Of course, five years have passed since the NESTA report, and the NNFCC has recently reported that some measures have been taken to address these issues. Nevertheless, the balance sheet is mixed. Since the NESTA report, the IB Catalyst scheme and a number of VC funds were set up by public bodies including the Green Investment Bank, CO2 Sense and Rainbow Seed Fund However, there are still no world-leading IB or innovative bioeconomy companies in the UK except for multinationals conducting bioeconomy R&D in the UK to lower environmental footprints with biobased alternatives, such as Unilever, Invista, and BP. In addition, GIB are privatising so there will be no guarantee of future investment priorities. 47 An example of this is provided by the biotech company Calysta, which sought venture capital and catapult funding to assist with developing a new way of manufacturing fish food from biomass. Altough a conditional award of 2.8 million was eventually forthcoming from the Exceptional Regional Growth Fund 48, this was only a small proportion of the 30 million required for product research and development, market introduction, commercial manufacturing and continued advances in its proprietary state-of-the-art gas fermentation platform. Fortunately, the scheme eventually went ahead due to $30 million funding from the large American firm Cargill. 49 This may ultimately be a success story, but for a time the scheme was in jeopardy. In our interviews with industry experts, we sought views on whether current levels of investment are adequate and whether the public / private balance is about right to meet the opportunities and growth potential. The views were mixed, with some sectors identifying investment shortages and others not. In the bioenergy sphere, price volatility can act to undermine investment. In particular, as the industry has oil and oil-based products as a competitor, it is subject to the same investment volatility in investment that results from oil price swings. However, in this sector and particularly with respect to energy crops, a lack of clear policy and regulation were also felt to reduce investment. In our expert interviews, there was a perception in the food industry that they received low levels of investment. Much of their innovation concerns incremental improvements in existing products, which may not be considered sufficiently novel. An example of incremental innovation is in the area of snack foods, where companies have been seeking to launch product lines that are more nutritious than in the past. In our interviews, Walkers Sunbites crisps were mentioned as such a 47 NNFCC and the University of Aberystwyth, Bio-based UK: A review of barriers and interventions needed to stimulate growth of the bio-based economy and improve UK competitiveness (NNFCC, York), March Intrafish news, Calysta opens UK aquaculture feed ingredient facility, January Fish farming expert, Cargill backs microbial protein production, February

49 product they are a wholegrain crisp, containing high amounts of fibre and lower levels of fat, and are also free of added flavourings. Yet, in spite of industry perceptions, as our statistics show in Figure 28, a sizeable portion (27 per cent) of public bioeconomy research and development funding is in the food sector. A possible explanation for the disconnect between statistics and perceptions is that public funding is on precompetitive research aimed at addressing scientific questions and increasing scientific understanding, whilst incremental improvements of existing products are driven by commercial gains (albeit companies certainly believe their innovations to be welfareenhancing as well as profitable). Box 2: Investment case study Precision agriculture is changing the way farmers and agribusinesses view and utilise their land. By combining global positioning systems and geographic information systems, farmers can efficiently manipulate and analyse large amounts of geospatial data. This helps them with farm planning, field mapping, soil sampling, tractor guidance, variable rate applications and yield mapping, to name a few. The National Centre for Precision Farming is an initiative set up by Harper Adams University, which aims to provide information and a range of support to farmers to help them meet the political, economic and environment needs by using smarter systems. They have created a robotic orchard tractor with built-in sensors which gathers data and analyses and presents information to the farmer prior to irrigation and harvesting during the growth season. Precision agriculture can significantly reduce the amount of nutrient and other crop inputs used while boosting yields, which helps farmers obtain higher returns on their investments by saving on fertilizer and other costs. The precise technology also allows the ideal amount of inputs to be used in the right place, thus benefiting the entire crop cycle. As a result, precision agriculture could become a cornerstone of sustainable agriculture. Source: Harper Adams University However, a challenge exists in securing support from companies already engaged in other types of products to support agriculture (such as chemicals). Simon Blackmore of Harper Adams University told The Engineer (2012): It s a paradigm shift and therefore everybody is a little bit nervous. The trouble is that it s a very disruptive technology for them. 48

50 Highlights of section four The transformational bioeconomy has a mixed record with respect to investment. In general, rates of investment growth were below those for the economy as a whole in the years leading up to the financial crisis of Since then, it has performed better. Agriculture and water account for the lion s share of capital expenditure. Around 30 per cent of bioeconomy investment is accounted for by research and development spending, of which somewhere between 30 and 40 per cent is publicly funded. The evidence from reports and recent interviews suggest that there is still a shortage with respect to investment in translational research and scale-up. Many sectors of the bioeconomy report a sub-optimal level of investment, but the extent of the problem varies, according to expert interviews. 49

51 5 INTERNATIONAL COMPARISONS In this section, we assess the United Kingdom s relative position in the global biotechnology and bioenergy market place and discuss its significance in the worldwide setting. We also examine the bioeconomy policy approaches adopted in other countries and compare them with the United Kingdom, drawing out some of the most interesting initiatives enacted internationally. 5.1 Gross value added comparisons Recent studies have estimated the overall size of the European bioeconomy. Analysis by the Nova Institute for Ecology and Innovation has found that the turnover of the European Union bioeconomy was 2.1 trillion ( 1.8 trillion) in 2013, 50 while an alternative study by the Intesa San Paolo Research Department also estimates annual turnover at 2.1 trillion, but for The Intesa San Paolo study provides a further breakdown of Europe s bioeconomy by country. They estimate that the sector s total production for the big five European countries was 1.2 trillion in They assess that the United Kingdom s bio-based output is the lowest of this group at 155 billion, after Germany ( 330 billion), France ( 295 billion), Italy ( 241 billion) and Spain ( 187 billion). The largest sector in the transformative activities of the UK bioeconomy is the manufacture of food and drink products. This sector tends to dominate in France and Germany as well, with 30 to 40 per cent of total bioeconomy gross value added in these three economies. In Spain and Italy, agriculture is larger, with a greater than 40 per cent share. (See Figure 29.) The contribution of agriculture means that Spain has a similar sized bioeconomy to that of the United Kingdom, Italy s is larger and France s is materially so. If, however, we strip out the contribution of agriculture, the bioeconomy in the United Kingdom is larger than those in Italy and Spain and similar to that of France. (See Figure 30.) 50 Dirk Carrez, Michael Carus and Stephan Piotrowski, European Bioeconomy in Figures (Nova Institute for Ecology and Innovation, Hurth), March Serena Fumagalli, Stefania Trenti, Fabrizio Sibilla, A first attempt to measure the bio-based economy (Intesa San Paolo, Turin), October

52 Figure 29: Sector shares of European bioeconomies gross value added at basic prices, per cent, 2013 Sources: Capital Economics and Eurostat Figure 30: Contribution of agriculture and the rest of the bioeconomy to gross value added of European bioeconomies gross value added in 2013, billions Sources: Capital Economics and Eurostat 51

53 5.2 Employment Recent studies have estimated that more than eighteen million people were employed in the European bioeconomy in 2011 and ,53 In 2014, the transformative bioeconomy sectors we have identified employed 0.9 million people in the United Kingdom. According to Eurostat data, this was the lowest figure for the big five major European economies, with other countries ranging from 1.2 million (Spain) to 1.6 million (Germany). The United Kingdom has a large labour force compared with many countries in Europe. As a result, these numbers correspond to an even lower share of total employment in these sectors. (See Figure 31.) Figure 31: Share of total employment in the European Union s big five economies accounted for by the transformative bioeconomy, per cent Sources: Capital Economics and Eurostat Employment in the bioeconomies of France, Italy and Spain is heavily dominated by agriculture, with it accounting for 49, 51 and 56 per cent of each country s bioeconomy employment respectively. The profile of bioeconomy employment in the United Kingdom is much closer to that of Germany and it is spread more evenly between all sectors, though still with agriculture and food and beverage manufacturing dominant. This might make Germany the most relevant 52 Dirk Carrez, Michael Carus and Stephan Piotrowski, European Bioeconomy in Figures (Nova Institute for Ecology and Innovation, Hurth), March Serena Fumagalli, Stefania Trenti, Fabrizio Sibilla, A first attempt to measure the bio-based economy (Intesa San Paolo, Turin), October

54 comparator when considering the opportunities, growth prospects and appropriate policies for the development of the bioeconomy in this country. (See Figure 32.) Figure 32: Percentage share of bioeconomy employment by sub-sector, 2014 Sources: Capital Economics and Eurostat 5.3 Exports and imports One 2014 report on the European bioeconomy estimated that bio-based products accounted for nearly fifteen per cent of the European Union s total exports in Spain was the country with the biggest share of its exports coming from bio-based sectors, at 20.3 per cent, followed by France (18.9 per cent), Italy (11.8 per cent), Germany (10.7 per cent) and the United Kingdom (9.3 per cent). The United Kingdom fares slightly better on the propensity to export, the share of production actually exported. Here Germany leads the way with the United Kingdom ahead of Italy, the bottom nation among the big five. (See Figure 33.) Of the big five, only Spain and France have a positive balance on their international bioeconomy trade (driven by surpluses in agriculture and food in both cases and, in the case of France, by biochemicals too). France had the biggest surplus among the group, like Spain, driven by its positive balance in food and agriculture and forestry. Germany recorded a heavy surplus in all the categories except for agriculture, forestry and fishery where the deficit was so great as to more than cancel this out. Both Italy and the United Kingdom, which had the group s largest deficit, recoded negative balances in all categories. (See Figure 34.) 54 Serena Fumagalli, Stefania Trenti, Fabrizio Sibilla, A first attempt to measure the bio-based economy (Intesa San Paolo, Turin), October

55 Figure 33: Exports as a share of domestic production in 2011, per cent Sources: Capital Economics and Intesa San Paolo Figure 34: Bioeconomy trade balance in 2011, billions Sources: Capital Economics and Intesa San Paolo 54

56 5.3.1 Level of investment in bioeconomy (public and private) The European Commission publishes data on bioeconomy research and development spending through its National Bioeconomy Profile factsheets. (See Table 7.) According to this, Germany is the exception to the rule in seeing most bioeconomy research and development expenditure conducted by the public sector. France and the United Kingdom are rather similar with 32 and 39 per cent of investment respectively coming from public sector sources. However, there are obvious gaps in this data for example, it appears to have poor coverage with respect to public investments in Spain and Italy and other differences could be being caused by more comprehensive data collection in some countries such as Germany. As a result, these numbers should probably be used for tentative conclusions only. Table 7: Bioeconomy research and development spending, 2011 millions Total public research and development investment Total private research and development investment Total Public proportion (per cent) France 1,631 3,404 5, Germany 10,086 8,911 18, Italy 6 1,673 1, Spain No data 1,290 1,290 No data United Kingdom 946 1,505 2, Sources: Capital Economics and European Commission Bioeconomy Observatory 5.4 United Kingdom comparative advantage The United Kingdom is particularly strong in the pure research and innovation aspect of the bioeconomy. It ranks second after Switzerland on the 2015 Global Innovation Index, which is a measure of the national climate for innovation based on 79 indicators, including political and business environment, levels of education and research and development, general infrastructure, market sophistication, business sophistication, knowledge diffusion, and creative outputs. 55 It comes fourth out of 100 in Nature magazine s index tables which tracks affiliations in research publications in a select group of scientific journals, providing an indicator of high-quality research contributions from institutions, countries, regions and disciplines. 56 (See Table 8.) The United Kingdom s research base is highly competitive in international terms. Field-weighted citation impact is an indicator of the mean citation impact of academic research articles, and compares the actual number of citations received by an article with the expected number of 55 Cornell University, Institut Européen d'administration des Affaires and World Intellectual Property Organization, The Global Innovation Index 2015: Effective Innovation Policies for Development (The World Intellectual Property Organization, Geneva), September Nature Publishing Group, Nature Index 2015 Global, Nature, Vol. 522, pp S34-S44 55

57 citations for articles of the same document type (article, review or conference proceeding paper), publication year and subject field. On this measure, according to Scopus (the largest abstract and citation database of peer-reviewed literature) data, the quality of research in the United Kingdom is the highest of any country in the world and has opened up a significant lead over other countries in recent years. 57 (See Figure 35.) Table 8: Nature index of volume of research articles 2014 ranking Country Weighted fractional count (proportionate contribution) Article count (raw number of author citations) 1 United States 17,937 26,638 2 China 6,037 8,641 3 Germany 4,019 8,582 4 United Kingdom 3,250 7,592 5 Japan 3,200 4,976 6 France 2,222 5,243 7 Canada 1,489 3,226 8 Switzerland 1,294 2,715 9 South Korea 1,168 1, Spain 1,091 2,897 Sources: Capital Economics and Nature Figure 35: Field-weighted citation impact for the United Kingdom and comparator countries, Sources: Capital Economics and Elsevier, using Scapus data 57 Elsevier, International comparative performance of the UK research base 2013 (Department for Business, Innovation and Skills, London),

58 The United Kingdom has an extensive research and development infrastructure. It has some of the world s top life sciences universities; Cambridge is ranked third globally and Oxford fourth. It has a total of 45 universities in the Times Higher Education rankings of the world s top 500. The United Kingdom has seventeen institutions ranked in the top 100 worldwide for life sciences. The country had 27,478 life sciences graduates in 2012, compared to the average for Organisation for Economic Cooperation and Development member nations of 9,028. In addition, the United Kingdom is the fourth largest contributor to research and development even when only considering the expenditure on industrial biotechnology and bioenergy. (See Figure 36.) Figure 36: Biotechnology research and development expenditures in the business sector, 2013 or latest available year, billion Truncated axis; United States = 16 billion United Kingdom figure relates only to industrial biotechnology and bioenergy United States France Switzerland United Kingdom Japan Korea Germany Denmark Spain Belgium Sweden Netherlands Israel Italy Ireland Canada Austria Norway Czech Republic Russian Federation Australia Finland Mexico Poland South Africa Slovenia Portugal Estonia Slovak Republic Sources: Organisation for Economic Cooperation and Development for all countries except United Kingdom. United Kingdom figure comes from Capital Economics survey. This strong research and development base produces a high level of innovation. In biopharmaceuticals in particular, research and development spending makes up over 25 per cent of all such spending by the private sector. The United Kingdom conducts many clinical trials both in absolute numbers and relative to the size of its population. Furthermore, a large share of trials registered since 2013 have been in early phase research. Of the 694 trials registered in 2013, 187 were Phase I and 202 Phase II trials. 58 A large amount of patenting takes place in the United Kingdom as a result of its intensive and extensive research and development environment. The country s share of the world s high-quality patents filed under triadic patenting was 3.13 per cent in 2012, well above that of other larger countries. 59 In biotechnology specifically (which, of course, does not include the whole bioeconomy), residents of the United Kingdom filed 404 patents under the Patent Cooperation Treaty in Figure 37 shows the proportions of such applications by 58 Pugatch Consilium, Building the bioeconomy 2015 Annex (Pugatch Consilium, London), p Pugatch Consilium, Building the bioeconomy 2015 Annex (Pugatch Consilium, London), p.32. Triadic patents are a series of corresponding patents filed at the European Patent Office, the United States Patent and Trademark Office and the Japan Patent Office, for the same invention, by the same applicant or inventor. Triadic patents form a special type of patent family. 60 ibid 57

59 country for the years 2010 to The United Kingdom is in seventh place, with almost four per cent. Figure 37: Leading countries shares of total biotechnology patent applications filed under the Patent Cooperation Treaty, latest available year (per cent) Truncated axis; United States = Sources: Capital Economics and Organisation for Economic Cooperation and Development Figure 38: United Kingdom symmetric revealed comparative advantage relative to Group of Seven countries, 2010 Sources: Capital Economics and Department for Business, Innovation and Skills 58

60 All of these facts contribute to the United Kingdom s revealed comparative advantage and revealed technology advantage. The former determines each sector s share of a country s exports relative to the same sector s share of global exports. Hence, a positive value means that, compared to the rest of the world, a sector represents a disproportionately large share of a country s overall exports. Conversely, a negative value implies that a sector represents an unusually small proportion of a country s exports. On this measure, relative to Group of Seven countries, the United Kingdom performs well in pharmaceuticals. However, the country is only comparable to, or behind, its peers when it comes to other sectors with a material bioeconomy component, such as wood products and plastics or rubber products. (See Figure 38.) This does not give the complete picture though, as many bioeconomy sub-sectors are not included in Figure 38. Measures of revealed technology advantage provide an indication of the relative specialisation of a given country in selected technological domains and do cover more bioeconomy sub-sectors. The calculations replicate those for revealed comparative advantage, but use patent data, rather than export data (i.e. comparing a sector s share in patents for a particular country with that sector s share in global patents). These suggest that biotechnology accounts for a somewhat greater proportion of total technological innovation in the United Kingdom than it does in other leading economies. Several bioeconomy-related sub-sectors perform strongly in analysis of United Kingdom revealed technology advantage organic chemistry, biotechnology and pharmaceuticals and medical technology and biotechnology analysis. (See Figure 39.) Figure 40 presents an index of revealed technological advantage in biotechnologies, calculated as the share of the country in biotechnology patents relative to the share of the country in total patents (filed under the Patent Cooperation Treaty), for the G7 economies. The United Kingdom is third behind only the United States and Canada, indicating that biotechnology activities are relatively more important to the British economy than to most other G7 countries. Field-weighted citation impact, assessing the mean citation impact of academic research articles to determine the quality of research, can also be used to identify in which sectors the United Kingdom is performing particularly well. These show a notable shift over the last decade, with the country improving its standing in many scientific disciplines. Clinical, biological and environmental sciences are now the sectors where the United Kingdom s quality of research has the strongest relative technological advantage where it most exceeds the global average. (See Figure 41.) 61 Overall, these metrics suggest that the United Kingdom is one of the leading countries in a number of key areas of research and innovation that underpin the bioeconomy. The United States ranks as the leading nation in the area, but the United Kingdom lies anywhere between second and seventh, depending on the metric reviewed. The United Kingdom is in a good position to maintain its top tier place within the global industrial biotechnology and bioenergy market it has both the manufacturing and research and development capabilities, supported by a skilled workforce and a strong link with world-class academic institutions. There is significant potential for growth if the 61 Elsevier, International comparative performance of the UK research base 2013 (Department for Business, Innovation and Skills, London),

61 industry receives the required levels of research and development spending and continues to be supported through policy. Figure 39: Index of United Kingdom revealed technological advantage by sector, 2000 to 2010 (values greater than zero show sectors in which the country is more innovative than the world as a whole and vice-versa) Organic chemistry Biotechnology and pharmaceuticals Civil engineering Medical technology and biological analysis Consumer goods Measurement and control Basic materials chemistry and metallurgy Chemical engineering, macromolecular and polymers Handling and machine tools Food and environmental technology Thermal processes, apparaturs and mechanical Engines and transport Specialist machines Communications Information technology Surface, micro-structural and nano technology Electronics Optics Sources: Capital Economics and Department for Business, Innovation and Skills Figure 40: Index of revealed technological advantage in biotechnologies, G7 countries, latest available year (share of the country in biotechnology patents relative to the share of the country in total patents) United States Canada United Kingdom France Italy Germany Japan Sources: Capital Economics and Organisation for Economic Cooperation and Development 60

62 Figure 41: Field-weighted citation impact for specific research fields for the United Kingdom and the world average Sources: Capital Economics and Elsevier, using Scapus data 5.5 United Kingdom policy overview The United Kingdom has no specific strategy for the bioeconomy at the national level, but there have been a number of separate initiatives across different bioeconomic sectors. The previous Labour government published a number of studies on how to improve British innovation and increased public funding in basic science and technology research. It also built clusters, launched Research & Development tax credits, increased higher education funding and encouraged technology transfer. The Coalition government maintained this commitment to encouraging innovation after its election in 2010, but altered policy to make more use of market incentives. In 2010, the Department for Business, Innovation and Skills published its Blueprint for Technology. This set out how the then government would help to create an environment in which technology companies flourish and continue to expand. The main policy initiatives were a reduction of the main rate of corporation tax from 28 per cent to 24 per cent over a five-year period, maintenance of public funding levels for the sciences, and reduction in regulation and a review of the United Kingdom s Intellectual Property framework (including patents). This blueprint was a key part of the government s attempt to erect a system of incentives for the private sector to take the lead in innovation. Much of it has subsequently been enacted and corporation tax has now been further lowered to twenty per cent. The United Kingdom offers research and development tax incentives to both small and large companies. Small and medium-sized enterprises can qualify for a deduction on qualifying activities of 225 per cent this means that these firms can reduce their taxable income by 225 per cent of their qualifying research and development spending. Those that post an annual loss can 61

63 also qualify for cash back on related spending of up to 32.6 per cent. 62 Large companies can apply for a deduction on research and development activities of 130 per cent or receive a ten per cent tax credit through the Research and Development Expenditure Credit programme Industrial biotechnology Industrial biotechnology has been an area government has acted to support. The Industrial Biotechnology Catalyst programme operated in 2014 and Over 75 million was allocated, in four rounds, to companies and academic research organisations to accelerate commercialisation of industrial biotechnology-derived products and processes. 64 Small enterprises could have up to 70 per cent of their industrial research and 45 per cent of their experimental development costs covered by the scheme. 65 In addition, from 2010, and in recognition of the problems previously identified regarding bridging the developmental gap between research and production, the government established a set of catapult organisations to provide part-public support for the scale-up of bioeconomy technologies. For example, there is a high value manufacturing catapult, another for cell and gene therapy and another for industrial biotechnology and biorefining. Nevertheless, there remains the impression amongst those working the field that significantly more resources are devoted to laboratory research than into the resources needed to bring the innovations to commercialisation. This contrasts with the Fraunhofer system in Germany, which is a long-established set of 67 scientific development institutes that have been designed to bring the academia / industry gap Biopharmaceuticals As a major component of the bioeconomy and the British economy more generally, biopharmaceuticals have received extensive policy support. In early 2014, the United Kingdom was the leading destination in Europe for early stage life science investment, attracting 738 million between January and June. This high level of funding has been put down to government s attempts to support the biopharmaceutical sector, specifically the creation of a patent box tax break. 66 This incentivises British companies to commercialise their intellectual property by only charging a tax rate of ten per cent on any income resulting from that intellectual property. 67 This incentive is particularly enticing to the biopharmaceutical sector owing to the significant investments required for research and development and product development. As well as stimulating early stage investing, this incentive has also encouraged biopharma companies to establish manufacturing facilities in the United Kingdom. Just after the incentive was announced, 62 PWC, Research and development (R&D) tax credits 63 Deloitte, 2014 Global survey of R&D tax incentives, (Deloitte Touche Tohmatsu Limited), March Biotechnology and Biological Sciences Research Council, 17M announced to support industrial biotechnology, May Deloitte, Grants & incentives program updates: The latest legislative developments from around the world, (Deloitte Touche Tohmatsu Limited), January Reuters, Britain leads Europe in biotech fundraising, July Financial Times, UK agrees deal on patent box tax break, February

64 Glaxo Smith Kline announced the construction of a 350 million manufacturing facility in the United Kingdom, with a possible investment of a further 700 million later. The company specifically credited the innovation policy environment in their announcement Agri-tech Agriculture is covered by the Natural Environment White Paper of Out of this grew the green food project, which aims to increase the sustainability of agriculture and the food chain in general. In 2014, the Science and Innovation Strategy for Forestry in Great Britain was published, the aim of which was to reinforce ecosystems, the resilience of the forests and help to develop a low carbon, sustainable timber industry. The Marine Sciences Strategy sets out similar aims for research in that field. The biomass strategy of 2007 was followed by the bioenergy strategy in 2012, which highlighted the need for the use of waste materials and perennial energy crops. The Agri- Tech industrial strategy was announced in 2013, and sought to facilitate the transfer of technology and the commercialisation of research to improve the agriculture sector. As a result, the British government has initiated a long-term project to discover and apply innovative technologies to the agricultural sector. 69 It seeks to support agricultural innovation with a series of grants and the establishment of centres of innovation. 70 The Agri-Tech Catalyst Fund was provided with 70 million to help businesses and researchers commercialise their research and develop innovative solutions to global challenges in the agriculture sector. A further 90 million was set aside to fund Centres for Agricultural Innovation. 71 Genetically modified foods are viewed more favourably in British policymaking circles than in most other European Union countries 72, but it remains the case that the country is still much less well disposed to either the trial, widespread planting or consumption of genetically modified products than many countries outside Europe. As a result, the country is unlikely to become a leader in this area in the near future. The current list of genetically modified seeds approved for planting by the European Union is unsuited to the United Kingdom s growing conditions. Genetically modified foods was the one area of European Union regulations cited by expert interviewees as hindering industry growth Biofuels The British government has also used policy to boost biofuel production. Under the Renewable Transport Fuels Obligation, fuel suppliers are required to source a percentage of their fuels from renewable sources. 73 This represents the implementation of the European Union s Renewable 68 IHS, Business environment for big pharma improving?, IHS Blog, March Department for Business, Innovation & Skills, Department for Environment, Food & Rural Affairs and Department for International Development, UK agricultural technologies strategy, AgriTech Blog, About the Agri-Tech Strategy 71 Department for Business Innovation and Skills, Department for Environment Food and Rural Affairs, Department for International Development, Strategy for Agricultural Technologies Summary, December BBC News, MPs call for reform of EU's 'flawed' rules on GM crops, February Department for Transport, Renewable Transport Fuels Obligation, November

65 Energy Directive and Fuel Quality Directive. It also plays an important role in stimulating biofuel production in the United Kingdom. Table 9: United Kingdom policy strengths and weaknesses, biotechnology sector by sector and key enabling factors Biopharmaceutical Agricultural biotechnology Industrial biotechnology Human capital and infrastructure for research and development Top life sciences universities in the world; Cambridge and Oxford ranked third and fourth High levels of clinical trials - per capita and total Biopharmaceutical research and development accounted for almost 25 per cent of total private sector research and development spending Agricultural technologies strategy launched in 2013 Strong academic base Industrial Biotechnology Catalyst programme launched in 2015 (temporarily postponed pending outcome of government Spending Review) Intellectual property protection Strong intellectual property environment Plant variety protection in place Strong trade secret protection Regulatory data protection available Patent term extension available Member of the International Union for the Protection of New Varieties of Plants The regulatory environment and technology transfer frameworks Strong and highly regarded biopharmaceutical environment High levels of technology transfer and commercialization European Union regulations on agricultural biotechnology not conducive to wide-spread commercialization and use of agricultural biotechnology products Biofuels supported through fuel mandates United Kingdom research and development in place through agricultural technologies strategy Market and commercial incentives Indirect pricing and reimbursement policies for biopharmaceuticals through the pharmaceutical price regulation scheme Less strict price controls than other European Union countries Generous general research and development tax credits available Size of deductions depend on size of company - larger deductions available for small and medium-sized enterprises Generous general research and development tax credits available Size of deductions depend on size of company - larger deductions available for small and medium-sized enterprises Source: Pugatch Consilium 64

66 5.6 International government policy positions Many governments around the world (and several transnational bodies such as the European Union and the Organisation for Economic Cooperation and Development) have developed specific strategies which support the bio-based industries. In general, strategies state the intention of the government to support the bioeconomy (or sometimes a sub-section such as the biotechnology sector) but do not enact specific laws, taxes, subsidies or regulations that would specifically support the sector. Some strategies apply to the bioeconomy as a whole. Examples of these include the 2012 United States National Bioeconomy Blueprint and Finland s 2014 Finnish Bioeconomy Strategy. Meanwhile other strategies relate to specific aspects of the bio-economy only, such as Japan s 2012 Biomass Industrialisation Strategy and Brazil s 2007 Biotechnology Strategy. According to a report by the German Bioeconomy Council, 45 countries have issued policy strategies related to the bioeconomy and eight of these have been comprehensive dedicated national strategies. (See Figure 42.) Figure 42: Countries around the world which have bioeconomy strategies and/or policies in place (based on government strategies in the period ) Sources: Capital Economics and German Bioeconomy Council 65

67 5.6.1 National vs regional / industry approaches Strategies and policies for the bioeconomy have been developed differently across countries. One of the key distinctions between countries is whether or not there is a comprehensive national strategy. Germany, the United States and Japan are three of the largest countries to have a national strategy in place for the bioeconomy. Some of those countries that have not adopted the national strategy approach have not done so because they have significant degrees of regional devolution and strategies have been adopted by the regions. Canada is the most obvious example of this approach. Meanwhile, in countries like France and Italy, bioeconomy initiatives and policy are formed around certain industries and specific areas of interest. This is not to suggest that the bioeconomy is a mere afterthought in such countries or that bold endeavours to advance the bioeconomy are not taken. The United Kingdom is one of those countries that has, at least hitherto, not followed the centralised approach and appears to be closer to the industry-based or bottom-up approach employed in France and Italy. This is particularly so when one considers the importance of the pharmaceutical sector in the United Kingdom, which, for example, has its own government strategy. 74 Nevertheless, there is considerable interest in the bioeconomy, as evidenced by a number of government inquiries into its potential and optimal policy regarding it. In those countries in which they exist, high level government strategies set out the policy framework for the bioeconomy or bioeconomy related sectors, and are underpinned by a wide range of government bodies, private institutions and industry networks that deliver actions in line with the policy framework. Germany is a good example of this. The government is advised by the Bioeconomy Council, an independent body made up of experts from research and industry. There are also a number of technology commercialisation centres, which help to bridge the gap between research and commercialisation, and several industry networks, which facilitate knowledge exchange. Although it is true that countries with national bioeconomy strategies also have (on average) the more innovative bioeconomies, it seems the latter predates the former. Thus, it is difficult to assert that a bioeconomy strategy definitively assists in the development of the bioeconomy, but it may facilitate policy and departmental coordination Policy objectives The overarching aims of most bioeconomy or bioeconomy related strategies are to develop the bioeconomy in order to address: economic objectives such as economic growth, job creation or rural revitalisation societal challenges such as climate change, food security and sustainable resource management 74 Department for Business, Innovation and Skills, Strategy for UK Life Sciences (Department for Business, Innovation and Skills, London), December

68 The specific aims and objectives in each country are dependent on factors such as natural resource endowment, industrial specialisation and stage of development. Countries can be grouped into three broad categories, although there is clearly overlap between them, and this doesn t imply that the focus of countries listed is exclusive to one area. (See Table 10.) Table 10: Key bioeconomy policy focus by country Economic focus Countries rich in biomass focussed on adding value in primary industries High prominence of energy and security issues with aim of becoming more self-sufficient Focus on development of high tech industries and supporting emerging technology Exemplar countries Brazil, Malaysia, Argentina, Finland, Mauritius, Norway, Thailand, Indonesia, New Zealand Paraguay, Uganda, Kenya, Tanzania, Mozambique Netherlands, China, India, Australia, France, Germany, United Kingdom, South Korea Source: Capital Economics analysis of German Bioeconomy Council Notable policies Whilst many countries do not have a comprehensive national bioeconomy strategy like Germany, most developed counties do have a number of separate initiatives covering various strands of the bioeconomy. Table 11 provides a summary of bioeconomy policies in the G7 and the European Union. 75 The depth and range of bioeconomy policy initiatives around the world mean that it is difficult to summarise them all. Instead, we have identified a number of interesting initiatives that have been deployed in a selection of countries to provide an idea of the type of approaches that are being taken. Canada, like the United Kingdom, does not have a specific strategy for the bioeconomy at the national level. The federal government is focusing on the coordination of goals, but refraining from defining its own strategy. An example of one of its policies is the agricultural strategy, Growing Forward, covering 2013 to 2018, which dedicates C$3 billion in co-funding for innovation, competitiveness and marketing. 76 Bioenergy is an area of particular focus. 77 Canada is a country with a high degree of decentralisation in government so there is scope for provincial governments to pursue bioeconomy policies and strategies. British Columbia, for example, set up an advisory 75 Patrick Dieckhoff, Beate El-Cichakli and Christian Paterman, Bioeconomy Policy: Synopsis and Analysis of Strategies in the G7 (German Bioeconomy Council, Berlin), January Agriculture and Agri-Food Canada, Growing Forward 2 (Agriculture and Agri-Food Canada, Ottawa), April Natural Resources Canada, Evaluation of the Sustainable Bioenergy Strategic Priority (Natural Resources Canada, Ottawa), November

69 Bioeconomy Committee in July One of its actions has been to invest C$700,000 in helping forest companies create jobs by turning their waste wood into high value bio-products. 79 Table 11: Summary of bioeconomy policies in the Group of Seven Member Name of strategy Main actors Key funding areas Canada Growing Forward Ministry of Agriculture Research and development on renewable resources, biobased materials and bioenergy European Union France Germany Great Britain Italy Japan United States Innovating for Sustainable Growth Bundle of bioeconomy relevant policies 1 - Research Strategy for the Bioeconomy 2 - Policy Strategy for the Bioeconomy Bundle of bioeconomy relevant policies No specific bioeconomy policy Biomass Utilisation and Industrial Strategies 1 - Bioeconomy Blueprint 2 - Farm Bill Directorate General of Science, Research, Innovation 1 - Ministry for Ecology 2 - Ministry for Research 1 - Ministry for Research 2 - Ministry for Agriculture 1 - Parliament 2 - Department of Energy and Climate Change 3 - Department for Environment, Food and Rural Affairs 4 - Department for Transport 5 - Department for Business, Innovation and Skills Cabinet 2 - National Biomass Policy Council 1 - White House 2 - United States Department of Agriculture Sources: Capital Economics and German Bioeconomy Council Research and innovation plus public private partnerships Bioenergy, green chemicals, clusters and the circular economy Research and development on food security, sustainable agriculture, healthy nutrition, industrial processes and bioenergy Bioenergy, agri-science and technology Participation in European Union programmes Research and innovation, the circular economy and regional development Life sciences (biomedicine) and agriculture (multiple areas) The French government has taken direct measures to pursue its bioeconomy policies. It has established an Investments for the Future programme to promote leading-edge technologies. 80 Under the Health and Biotechnologies Programme, 1.5 billion will be spent over ten years on infrastructure, research and training in the area of biotechnology, agricultural science, bioinformatics and nanobiotechnology. Under the Energy and Life-Cycle Management 78 British Columbia Committee on Bioeconomy, British Columbia Bioeconomy (British Columbia Committee on Bioeconomy, Victoria), Ministry of Jobs, Tourism and Innovation, $700K research investment to boost B.C. s bio-economy, British Columbia Government News, Ambassade de France à Londres, Investments for the Future Programme (Ambassade de France à Londres, London), September

70 programme, 1.35 billion is being spent on demonstration and test facilities for green chemistry and bioenergy. A further 1 billion is being made available to fund centres of excellence for nonfossil energy. 81 Since 2005, research and industry collaborations have been organised on a regional basis. These include the bioeconomy collaborations, such as the Union des pôles de la chimie verte du vegetal and France Green Plastics. A plan has been developed for promoting green chemistry and biofuels as part of the industrial regeneration policy measures ( The new face of industry ). Beyond financial support, government policy is assisting existing industry projects in this area by improving conditions, for example, barriers to investment will be identified and eliminated. Such industrial regeneration plans have also been developed for other bioeconomy related sectors, such as food innovations, recycling and green materials as well as the wood construction industry. The government has also adopted a new plan for sustainable public procurement in order to promote the use of ecological products. In addition, France uses new approaches regarding standards and labels for market development. There is a label for bio-based buildings, the batiment biosourcé, and a standard for sustainable investment funds for generating more private venture capital. Italy does not have a specific strategy for the bioeconomy at the national level, but it has not been devoid of specific bioeconomy policies. In 2011, Italy became the first European Union country to ban the distribution of conventional single use plastic bags, an action which supported the market for biodegradable bags. The Novamont biodegradable plastic bag introduced as a result of regulation now results in fewer imports of non-sustainable plastic bags from the Far East and higher levels of national production and employment. Then, in October 2014, the Italian Government announced an advanced biofuel blending mandate which will require fuel suppliers to blend 0.6 per cent of advanced biofuels from 2018, increasing to one per cent by That was also the first such policy by a European Union state. Germany, by contrast to the above, does have specific strategies for the bioeconomy at the national level. The national research strategy, the Forschungsstrategie BioÖkonomie 2030, was published by the Federal Ministry for Education and Research as early as The National Policy Strategy on Bioeconomy, which was published in 2013, was a collaboration between the Federal Ministry for Food and Agriculture, the Ministry for Education and Research, the Federal Ministry of Economics and Energy, the Federal Ministry for Economic Cooperation and Development, the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, the Federal Ministry of the Interior and the Foreign Office. 83 Furthermore, since 2009 the German Bioeconomy Council has been advising the Federal Government. Alongside these strategies are action plans relating to the use of renewable resources for material and energy production, renewable energies and forestry. The national research strategy was awarded 2.4 billion and is primarily intended to reinforce the innovation ability of research organisations and businesses. The strategy funds various 81 L Agence nationale de la recherché, Appel à projets "Instituts d'excellence dans le domaine des énergies décarbonées" (IEED) 2011, L Agence nationale de la recherche et les Investissements d Avenir, Bundesministerium für Bildung und Forschung, Nationale Forschungsstrategie BioÖkonomie 2030 (Bundesministerium für Bildung und Forschung, Berlin), Federal Ministry of Food and Agriculture, National Policy Strategy on Bioeconomy (Federal Ministry of Food and Agriculture, Berlin),

71 programmes including the renewable resources funding programme, BonaRes, 84 GlobE, 85 Innovative Plant Breeding in Cropping Systems, Deutschen Pflanzen Phänotypisierungsnetzwerks, 86 Animal Health and Welfare and basic research for biotechnology and bioenergy. There are measures to encourage the formation of links between the scientific community, small businesses and larger industrial enterprises from different sectors with the aim of establishing new bioeconomic value chains. The lignocellulose refinery of the bioeconomy cluster in Leuna is receiving 40 million worth of funding. 87 There is support for the construction of pilot plants from various federal and regional ministries, examples including a second-generation bioethanol production plant in Straubing, a plant for recycling biogenic waste in Karlsruhe and a refinery for producing kerosene from algae in Jülich. Japan, like Germany, has a specific strategy for the bioeconomy at the national level. Although the term bioeconomy is not used often, there is an emphasis on the production of biomass and its use in industry. The Biomass Nippon Strategy was released in 2002, and aimed to stimulate the development of a sustainable economy by efficient use of biomass resources. This was followed in 2009 by the Basic Act for the Promotion of Biomass Utilisation, which sets out principles of biomass utilisation and government responsibilities. Subsequent measures have included the establishment of the National Biomass Policy Council, the adoption of the National Plan for the Promotion of Biomass Utilisation in 2010 and the Biomass Industrialisation Strategy of Further initiatives have followed the Comprehensive Science and Technology Strategy of 2013, and a national strategy and action plan for biodiversity. The United States also has a specific strategy for the bioeconomy at the national level. The Bioeconomy Blueprint, developed by the White House itself, touches on all aspects of the bioeconomy 88 and the Department of Agriculture s Farm Bill, which covers key areas. The Bioeconomy Blueprint seeks to facilitate improved technology transfer. The Farm Bill deploys a range of incentives to stimulate selected areas of the bioeconomy. One example is the Biorefinery Assistance Programme which offers loan guarantees for the development, construction and retrofitting of commercial-scale biorefineries. The American government has also initiated a Bio- Preferred Program that maintains a list of current designated items along with the minimum biobased content required. The Bio-Preferred Catalog on the United States Department of Agriculture website provides federal and contractor personnel with a searchable database of bio-based products. The catalogue enables customers to compare information on Bio-Preferred products and the companies that provide them. Many of the policy support mechanisms focus on grant funding, which is being given to technologies at all levels of readiness, from research and development to first commercial deployment. This suggests that government-funded grants are vital in kick-starting many of these nascent technologies which must currently compete with well-established industries. There is a lot 84 BonaRes Centre for Soil Research, About BonaRes, (BonaRes Centre for Soil Research, Halle) 85 Bundesministerium für Bildung und Forschung, GlobE Research for the global food supply, (Bundesministerium für Bildung und Forschung, Berlin) 86 Deutsches Pflanzen Phänotypisierungs-Netzwerk, German Plant Phenotyping Network, (Pflanzen Phänotypisierungs-Netzwerk, Jülich) 87 The German Bioeconomy Council, The German Bioeconomy Council - Recommendations and activities on the way to the biobased economy (The German Bioeconomy Council, Berlin), October The White House, National Bioeconomy Blueprint (The White House, Washington DC), April

72 of European Union grant funding available to the United Kingdom in this area (e.g. via Horizon 2020 funding). In addition to the policies presented here, many countries worldwide have blending mandates and subsidies available to support the biofuels and bioenergy sectors. 89,90 Many of the policies in other countries are focussed around funding for projects in emerging sectors of the bioeconomy. Several key aspects of successful policies can be identified: certainty around funding project time frame (for example the EU Horizon 2020 and ERA-NET funding programmes), flexibility in types of funding awarded (for example the PAISS programme offers debt finance, stakeholder equity, economic subsidy), and ease of access (clearly communicated eligibility criteria and relatively simple application process). Finally, a combination of supply-push and demand-pull policies may be more successful Comparative assessments A report by the Pugatch Consilium conducts bioeconomy policy comparisons across both emerging and developed markets. It identified a number of key attributes that may be considered key policy facilitators of a successful bioeconomy. Table 12 below shows these and compares and evaluates the policy environments in the four highly developed countries that form part of the study (Singapore, Switzerland, the United Kingdom and the United States). Table 12: The Biotech Policy Performance Measure, selected countries Singapore Switzerland UK US Factor 1: Human capital No of researchers per capita (million population) % of population in tertiary education N/A Performance compared to sample Attractive Attractive / Mixed Attractive / Mixed Attractive / Mixed Factor 2: Infrastructure for R&D R&D spending % of GDP Clinical trials per capita Performance compared to sample Attractive Attractive Mixed Attractive Factor 3: Intellectual property protection RDP Attractive Attractive Attractive Attractive PTE Attractive Attractive Attractive Attractive Performance compared to sample Attractive Attractive Attractive Attractive Factor 4: The regulatory environment Existence of regulatory framework and efficiency Attractive Mixed / Attractive Attractive Attractive Factor 5: Technology transfer frameworks Frameworks in place Attractive Attractive Attractive Attractive Factor 6: Market and commercial incentives P&R policies Mixed Mixed Mixed Attractive Factor 7: Legal certainty (including the rule of law) RoL index ranking 10 N/A Performance compared to sample Attractive N/A Attractive Attractive Sources: Capital Economics and Pugatch Consilium 89 Biofuels digest, Biofuels mandates around the world: 2016, January International Energy Agency and International Renewable Energy Agency, Global renewable energy joint policies and measures database 71

73 On these measures, the United Kingdom compared favourably with those other countries in the study that are considered to be world leading in research and innovation underpinning the bioeconomy (the country also ranked ahead of the emerging markets on most metrics). Across five of the seven metrics, the country was close to the leading country. These included human capital (including educational attainment and number of researchers), intellectual property protection, the regulatory environment, the existence of technology transfer networks and legal certainty. The two metrics in which the United Kingdom performed less well were pricing and reimbursement policies and research and development. Only the United States scored highly on the former, but Singapore, Switzerland and the United States outperform the United Kingdom by some margin when it comes to research and development as a proportion of gross domestic product and numbers of clinical trials per capita. In general, this shows that the United Kingdom is doing relatively well, but that there is still room for improvement. 72

74 Highlights of section five The United Kingdom transformative bioeconomy is smaller, in terms of gross value added, than those in most of the other four large European countries. If, however, we strip out the contribution of agriculture, the bioeconomy in the United Kingdom is larger than those in Italy and Spain and similar to that of France. Metrics suggest that the United Kingdom is one of the leading countries in bioeconomy innovation. The United States ranks as the leading nation in the area, but the United Kingdom lies anywhere between 2nd and 7th, depending on the metric reviewed. In respect of fieldweighted citation impact, a measure of the quality of research, the country is actually in first place. Measures of revealed technological advantage show the country is strong in bioeconomy-related fields such as organic chemistry, biotechnology and pharmaceuticals and medical technology and biological analysis and this also shows up in the quality of research in clinical, biological and environmental sciences. The United Kingdom has a wide range of policy initiatives already deployed in respect of the bioeconomy. These range from tax incentives to specific public sector financing and support networks for innovation. In terms of policies across countries: There is a dichotomy across countries between those that follow national bioeconomy strategies and those with a regional or more specific industry focus. It is too early to say whether one is more successful, but the former at least confers a greater degree of coordination. Countries do not necessarily have the same bioeconomy objectives, with some prioritising specific sectors, or goals such as energy security. Several of the most notable policies in other countries are not at the research and development end of the value chain, where there appears to be a good deal of similarity across countries, but in their measures to raise awareness of bio-based products versus others through bio-preferred procurement or bio-standards. The United Kingdom rates near first-in-class in terms of the general policy environment, human capital (including educational attainment and number of researchers), intellectual property protection, the regulatory environment, the existence of technology transfer networks and legal certainty, but falls down on the levels of research and development spending. 73

75 6 GROWTH AND PRODUCTIVITY In this section, we examine the historical growth of the bioeconomy and the productivity story to date. We then look at the growth prospects in the future and the barriers that could hold it back. 6.1 Historical growth and productivity Between 1997 and 2013, the real terms gross value added of the United Kingdom s transformative bioeconomy edged down by around seven per cent, from 56 billion to 52 billion in This has not been a smooth process, there are three distinct troughs in that period. The first is between 1997 and The second comes between 2003 and The third falls between 2008 and 2013, the latter being the best year since In real terms gross value added, water and remediation activities increased by 23 per cent. Industrial biotechnology and bioenergy was the only other sector to have grown between 1997 and 2013 (by five per cent). All of the other sectors saw declines in their real terms gross value added. Forestry and logging saw the biggest decline, of 29 per cent, over the period followed by agriculture and fishing, with a fall of nineteen per cent, and then manufacture of food and beverages, with eight per cent. (See Figure 43.) Figure 43: Real output of United Kingdom transformative bioeconomy sectors and real whole economy output, billions in 2013 prices 60 1,800 1, , ,200 1, Agriculture and fishing Forestry and logging Water and remediation services Manufacture of food and beverages Industrial biotechnology and bioenergy Total output (right-hand-side) 0 Sources: Capital Economics and the Office for National Statistics 74

76 In consequence, the shares of agriculture and fishing, forestry and logging and manufacture of food and beverages in total transformative bioeconomy output declined over the period, whilst those of water and remediation activities and industrial biotechnology and bioenergy rose. (See Figure 44.) The decline in respect of forestry and logging most likely reflects the drop in the growth rate of new woodland areas that has occurred over the last ten to twenty years. Meanwhile, agriculture has been on a long term decline and the National Farmers Union has reported that the country s self-sufficiency in homegrown food has dropped from 78 per cent in 1984 to 62 per cent as of Figure 44: Sectoral shares of United Kingdom transformative bioeconomy real output, per cent 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Agriculture and fishing Forestry and logging Water and remediation services Manufacture of food and beverages Industrial biotechnology and bioenergy Sources: Capital Economics and the Office for National Statistics Over the same period the British economy s overall output has grown by around 40 per cent in real terms (black line in Figure 43). As a result, the bioeconomy s share of the United Kingdom s output has fallen from 4.9 per cent in 1997 to 3.3 per cent in Economic wellbeing is, at root, driven by improved productivity. We have proceeded to assess productivity in bioeconomy sectors. (See Box 1.) Growth in turnover productivity varied significantly across bioeconomy sectors. Downstream activities had the highest compound annual growth rate over the period, at 3.9 per cent. They were followed by upstream activities with a rate of 3.7 per cent and forestry and logging at 3.4 per cent. Only firms in two sectors exhibited shrinking average annual turnover per employee: agriculture and fishing and industrial biotechnology and bioenergy. (See Table 13.) 91 The National Farmers Union, Backing British farming in a volatile world: the report (NFUonline, Warwickshire), September

77 Box 3: Assessing productivity Using the TCR database, we have analysed measures of productivity for the bioeconomy and its sub-sectors. These were the ratios of turnover and gross value added to the number of employees. The analysis began by identifying all bioeconomy firms in the TCR database that were present in both 2004 and This generated a universe of firms working in bioeconomy sectors over the full ten year period, which we refer to as continuing firms. Utilising these samples of firms, turnover and output productivity over the decade analysed were derived. Importantly, firms in the TCR database in upstream and downstream categories are only those whom we have definitively identified as being bio-related. Inevitably, there are many other upstream and downstream firms that do not register as being bio-related based on a keyword search of their activities. For this reason, the total size of the upstream and downstream sectors is considerably smaller than that identified via input-output tables in section two (and therefore not comparable). Table 13: Bioeconomy sectors turnover per employee, continuing firms, 2004 to 2014 Bioeconomy sector 2004 ( thousands) 2009 ( thousands) 2014 ( thousands) Compound annual growth rate (per cent) Agriculture and fishing Forestry and logging Industrial biotechnology and bioenergy Manufacture of food products and beverages Water and remediation activities Upstream Downstream Whole bioeconomy Source: TCR database, TBR 2016 The story is different with respect to productivity expressed in terms of gross value added per employee. Upstream activities are the best performer, again alongside forestry and logging and downstream activities, and no sector exhibited average falling annual productivity. (See Table 14.) Over the decade and within each of the bioeconomy sectors, there have, as expected, been both company closures and the birth of new start-ups. What s more, there have been a number of companies that have both started and ceased trading during the period between 2004 and We refer to these firms, which were active for a time during the period, as mayflies. Figure 45 shows gross value added for all types of firms that were active over the ten year period. For continuing firms, it remained broadly unchanged between 2004 and At the same time, the gross value added of start-ups has offset, almost exactly, the gross value added by companies that closed at some point in time during the period. Figure 46 shows a similar trend in employment, except here we see a slight increase in employment by continuing firms. 76

78 Table 14: Bioeconomy sectors gross value added per employee, continuing firms, 2004 to 2014 Bioeconomy sector 2004 ( thousands) 2009 ( thousands) 2014 ( thousands) Compound annual growth rate (per cent) Agriculture and fishing Forestry and logging Industrial biotechnology and bioenergy Manufacture of food products and beverages Water and remediation activities Upstream Downstream Whole bioeconomy Source: TCR database, TBR 2016 Figure 45: Gross value added by type of firm within the transformative bioeconomy, millions 160, , , ,000 80,000 60,000 40,000 20, Continuing Firms Closures Startups Mayflies Source: TCR database Figure 46: Employment by type of firm within the transformative bioeconomy, persons 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , Continuing Firms Closures Startups Mayflies Source: TCR database 77

79 Box 4: Pharmaceutical biotechnology case study Two start-up companies in TCR s database that have nonetheless made great strides in the advancement of pharmaceutical biotechnology are Glycomix Ltd and Glythera. Glycomix provides research and development expertise in glycopolymers for nutrition, pharmaceutical and biotechnology companies. They provide a range of products and services that help clients add functionality to carbohydrate polymers and related processes. They work with clients to develop dietary supplements and medicines, and modify foodstuffs for particular textures or consistencies. This is a sector poorly served by existing technology, and they play a vital research and development and product development role for their clients. Of note is that Glycomix are an example of a new company working across bioeconomy sectors. Their work spans both industrial biotechnology and food and drink manufacturing. Glythera is a biotechnology company focused on developing antibody-based therapies for the treatment of cancer as well as broader based therapeutics. They have developed technologies called biotherapeutics, including PermaLink TM and PermaCarb TM. These technologies are an integral part of modern medicine due to their effective properties and ability to target specific molecules within the human body. Measures of changes in productivity are most pertinent for continuing firms, as these firms do not, by definition, start or end the period at zero. Nevertheless, it is also interesting to look at how productivity has changed by sector for all firms (i.e. including continuing firms, closures, start-ups and mayflies ). This shows that labour productivity as measured by gross value added per employee has grown most within upstream activities. This is followed by water and remediation activities and then industrial biotechnology and bioenergy. (See Figure 47.) Finally, we assess productivity by firm type regardless of sector. Continuing firms had, for the most part, the highest productivity, though start-up firms came to have considerable higher productivity that those that closed down and rivalled continuing firms in the second half of the period. (See Figure 48.) 78

80 Figure 47: Compound annual growth rate of labour productivity (measured by gross value added per employee) between 2004 and 2014 for all firms within the transformative bioeconomy, per cent Upstream Source: TCR database Water and remediation activities Industrial biotechnology and bioenergy Agriculture and fishing Forestry and logging Downstream Manufacture of food products and beverages Figure 48: Labour productivity, measured as gross value added per employee, by type of firm in the transformative bioeconomy 2004 to 2014, thousands Continuing Firms Closures Startups Mayflies Source: TCR database 79

81 6.2 Outlook for growth Applying a detailed projection methodology we outline in Box 5, we estimate that the real terms output of the United Kingdom bioeconomy could grow by thirteen per cent over the years ahead from 52 billion in 2013 to 58 billion in 2030 (in 2013 prices), or by 0.7 per cent per annum. (See Figure 49.) This is based on estimates for the growth of demand for the products of each of our bioeconomy sectors. The expectation of growth is substantially derived from expected expansion of industrial biotechnology and bioenergy. Drawing on work undertaken by Capital Economics in 2015 in the Biotech Britain report, we expect the industrial biotechnology sector as defined in this report to grow by over four per cent per annum on average. In the following sections, we review the growth prospects for the sub-sectors of industrial biotechnology. We aim to give an assessment of their potential for growth, based on a range of literature. These sections also explore where policy has influenced market development and we conclude this section with a review of the barriers to growth for the bioeconomy as a whole. Figure 49: Real output of British bioeconomy sectors, billions in 2013 prices Sources: Capital Economics and the Office for National Statistics 80

82 Box 5: Projection methodology Our methodology is based on looking at forecasts of economic activity, consumer behaviour and likely policy trends over the next fifteen years from reputable sources. In some cases, we use forecasts for the United Kingdom specifically. In others, projections for the developed world in general are employed. In a 2012 report entitled World Agriculture towards 2030/2050, the United Nations Food and Agriculture Organisation estimated that, in the developed world, agricultural production growth was 0.5 per cent per annum between 1997 and 2007 and that it will be 0.7 per cent per annum between 2005/2007 and On average, this sector contracted by 3.2 per cent every year between 1997 and 2007 in the United Kingdom. Assuming therefore that this also increases by 0.2 per cent, we see the agriculture and fishing sector in the United Kingdom shrinking by 3.0 per cent per annum on average out and In 2013, the government set out a goal for woodland cover in England to rise from ten per cent to twelve per cent by We assume that the same increase in England will take place all over the United Kingdom. This means that woodland cover in the United Kingdom will be around thirteen per cent by 2030 and fourteen per cent by 2060 i.e. it will increase by around 0.3 per cent every year until We think it reasonable to assume that forestry and logging will increase in line with woodland cover. To estimate output for water and remediation services, we use the Waterwise s 2012 factsheet titled Water the facts. This states that water consumption per person in the United Kingdom has grown by one per cent every year since This will probably fall between now and 2030 due to conservation and less-water wastage efforts. We think it reasonable to assume that, over the next fourteen years, it will change from growing by one per cent to falling by one per cent. We add these rates to the United Nations Population Division s medium forecast for population growth every year out to 2030 to find a forecast for growth of water and sewerage output out to The United Nations Food and Agriculture Organisation estimates that, in the developed world, food consumption will increase from 3,360 kilo-calories per day per person in 2007 to 3,430 kilo-calories per day per person by 2030 i.e. it will increase by around 0.1 per cent every year within that period. Between 2009 and 2013, growth in the food and beverages sector s output in the United Kingdom has been around 0.42 per cent per annum. We assume that this will converge to the 0.1 per cent highlighted in the Food and Agriculture Organisation report as more people in the developed work become more aware of the dangers around sugary products and potential to become diabetic. We add this changing growth rate to the United Nations Population Divisions medium forecast for population growth for every year out to 2030 to derive a forecast for the manufacture of food and beverages. Our forecast for industrial biotechnology and bioenergy is based on that which we produced for our 2015 report, Biotech Britain, for the sectors covered in that report. (These cover half of the sector and include: agrichemicals, bio-chemicals, bio-electronics, bio-pharmaceuticals and bio-processed pharmaceuticals, bio-plastics and finally, health, personal care and household products.) For the others, which cover the other half of the sector and which lie in diverse standard industrial classifications, we assume they will grow at the same rate as the British economy overall. Our forecast is based on current expectations regarding oil prices (moderate recovery expected in prices), transportation costs (maintaining low levels), global demand (a fairly strong growth environment), sustainability (moderate policy activism is undertaken) and climate change (there is modest warming over the time period). There is modest upside potential in this higher economic growth and a return to high prices may stimulate higher demand and also incentivise a faster shift from petroleum-based to bio-based products. In this case, growth may reach an annualised rate of one per cent per annum. In a pessimistic scenario, with a negative economic environment, some political instability impeding trade, worse climate change (affecting domestic agriculture as well as import feedstocks) and low oil prices, growth could conceivably be per cent per annum rather than per cent in our base case. 92 Department for Environment, Food and Rural Affairs, Government forestry and woodlands policy statement (London), January

83 6.2.1 Biofuels In 2008, the United Kingdom Government introduced the Renewable Transport Fuels Obligation, which intends to reduce greenhouse gas emissions from road transport by encouraging the supply of biofuels. The Renewable Transport Fuels Obligation places an obligation on suppliers of fuel for road transport to supply a proportion of biofuels, or buy-out of their obligation, paying 30 pence per litre of biofuel that would otherwise have to have been supplied. In the first year of the obligation (2008/09), 1.28 billion litres of biofuel were supplied in the United Kingdom, mainly biodiesel (82 per cent). 93 The majority of fuels were imported, with the most widely reported feedstock soy originating from the United States, oilseed rape from Europe and sugarcane from Brazil. The United Kingdom contributed eight per cent of reported feedstocks. In 2011, the obligation was amended to implement the transport elements of the European Union renewable energy directive, including the introduction of mandatory carbon and sustainability standards, so that in order to contribute towards a fuel supplier s obligation, biofuels must provide minimum greenhouse gas emissions savings compared to fossil fuels, and they must not be made from feedstocks originating from land with high biodiversity value or high carbon stock. The amendments also allowed for biofuels from waste feedstocks to be counted double towards the obligation. The impact of double counting has reduced the volume of biofuel needed to meet the obligation, and therefore reduce the overall market size, and has led to a shift in the feedstock mix. In 2008/09 and 2009/10, soy and oilseed rape made up over 50 per cent of total feedstocks, but since 2011/12 waste feedstocks have made up 50 per cent of total feedstock (primarily used cooking oil), with very little biofuel supplied from soy, oilseed rape and palm. 94 The result of these policy changes and global market factors to the United Kingdom biofuel industry, was that the volume of biofuel from domestic feedstocks supplied to the United Kingdom grew from 2008/09 to 2010/11, then reduced in 2011/12 as a large amount of used cooking oil derived biofuel entered the United Kingdom. The supply of United Kingdom origin biofuels to the United Kingdom market reached pre-european Union renewable energy directive levels in 2013/14, with growth from the production of used cooking oil biodiesel and wheat ethanol. In the 2014/15 obligation year, 1.67 billion litres of biofuels were supplied in the United Kingdom, of which 30 per cent were sourced from feedstocks of United Kingdom origin, including wheat, used cooking oil, sugar beet and tallow. The remaining supply was dominated by imports from France, Spain, Ukraine and United States. In 2008/09, the level of the obligation was introduced at 2.5 per cent and increased annually to 4.75 per cent in 2013/14, but since then there has been no increase in the level of the obligation, and no trajectory towards the European Union renewable energy directive target of ten per cent renewable fuel in transport in This is linked to concerns over the impact of indirect land use change as, in October 2012, the European Commission published a proposal to introduce measures to limit indirect land usage change and it took until 2015 for the European Council and Parliament to reach agreement on an amended version of this proposal, and it will take until 2017 for these amendments to be implemented in the United Kingdom. 93 Renewable Fuels Agency, Quarterly Report 4: 15 April April Department for Transport, Renewable Transport Fuels Obligation Statistics: period 7, 2014/15, report 6 82

84 million litres The supply of United Kingdom origin biofuels to the United Kingdom market reached 500 million litres in 2014/15. This however compares to total biofuel production capacity of over 1,500 million litres per year in the United Kingdom, including six biodiesel plants (Argent Energy, Harvest Energy, Olleco, Ennovono, Convert2Green and Greenergy), three bioethanol plants (British Sugar, Vivergo and Crop Energies AG), and one biomethane plant (Gasrec). In addition to these big players in the biofuels field, there are over 60 smaller companies registered with the Renewable Transport Fuels Obligation operating system, producing from a few thousand to a million litres of biofuels per year. 95 United Kingdom biodiesel and bioethanol production has been significantly lower than production capacity in recent years. Figures from the Digest of UK Energy Statistics, using HMRC data, suggest that around 160 million litres of biodiesel and around 516 million litres of bioethanol was produced in the United Kingdom in This contrasts with production capacities of about 600 million litres in the case of biodiesel and 900 million litres in the case of bioethanol (See Figure 50). United Kingdom production has been constrained by limited increase in the market size in the United Kingdom, due to domestic policy uncertainty resulting from the current freezing of the obligation level and uncertainty over the future of the Renewable Transport Fuels Obligation, as well as commercial pressures, including feedstock costs, low oil prices, and reduced demand for exports. The prospects for United Kingdom production in the near term and investment in existing or new production capacity is also hampered by uncertainty regarding the future policy framework for biofuels in the European Union, as it has been suggested that specific targets for renewable energy in transport will not be included in the European Union renewable energy directive after Figure 50: United Kingdom bioethanol and biodiesel production capacity and actual production 1, Capacity - bioethanol Production - bioethanol Capacity - biodiesel Production - biodiesel Sources: Ecofys and Eurostat In 2010/2011, the number of companies across the British biofuel transport supply chain was estimated at 200, providing 3,500 jobs. The United Kingdom s sector turnover was estimated at 95 Ecofys, Overview of UK Biofuel Producers, Euractiv, Green transport target will be scrapped post-2020, EU confirms,

85 485 million, within a global market value of 15.4 billion. 97 The Renewable Energy Association estimate that by 2020 the United Kingdom s biofuels industry could employ over 6,000 people, but given the unsteady growth in United Kingdom biofuel capacity (Figure 50) and the stalling of the Vireol project, this now appears to be unlikely Bioenergy Bioenergy is the use of biomass to provide heat or power. Bioenergy generation in the United Kingdom has been incentivised through the renewables obligation, renewable heat incentive, and the feed-in tariffs. The renewables obligation is the main mechanism by which the United Kingdom government incentivises large scale electricity generation, while small scale generation via anaerobic digestion is incentivised through feed-in tariffs. The renewables obligation operates through the allocation of renewable obligation certificates per MWh of electricity generated, with different technologies banded with regards to the number of renewable obligation certificates they receive per MWh of electricity generated. Since its introduction in 2002, the number of renewable obligation certificates issued for biomass power increased from 0.6 million to two million in 2011 and provides support for the conversion of coal fired power stations to biomass, and dedicated biomass power plants with combined heat and power. In 2013, bioenergy accounted for 5.2 per cent of total electricity generation in the United Kingdom 99 and between 2013 and 2014 electricity generation from bioenergy increased by 25 per cent, from 18,159 GWh to 22,702 GWh 100, as a result of the conversion of a second unit at Drax from coal to dedicated biomass and several new smaller installations. However, cost control mechanisms under both the renewables obligation and feed-in tariffs are impacting the deployment of bioenergy; for example, in 2013, support for new dedicated biomass power plants was capped at a total of 400 MW capacity resulting in the abandonment of several planned plants. Meanwhile, the threat of degression in tariff levels under the feed-in tariffs scheme and the prospect of scheme closure have reportedly contributed to an increase in anaerobic digestion plant construction in 2015, as developers try to secure subsidies before these changes occur. In 2015, there were over 130 new projects in operation, but a smaller number of new projects entering planning. From 2017, the renewables obligation will close to new installations with the introduction of contracts for difference. The contracts for difference scheme will offer generators long-term contracts for their power, with the level of support determined through an auction. In a funding round prior to the first contracts for difference auction, three large biomass projects (two coal plants converting to biomass and one biomass combined heat and power plant) received contracts, while in the first round of contracts for difference auctions, five energy from waste plants received funding but no dedicated biomass combined heat and power plants. 101 Delays to the second round of auctions have created uncertainty for investors, and the contracts for difference scheme has been 97 Renewable Energy Association and Innovas, Renewable Energy: Made in Britain, Jobs, turnover and policy framework by technology (2012 assessment) 98 Renewable Energy Association UK Biofuels Sector Key Facts & Figures, Department of Energy and Climate Change, Bioenergy statistics UK overview, Digest of UK Energy Statistics, Chapter 6: Renewable sources of energy, Department of Energy and Climate Change, Contracts for Difference (CfD): Allocation round one outcome,

86 criticised by stakeholders such as the Association for Decentralised Energy for not giving enough support to medium-sized biomass combined heat and power projects. 102 Nevertheless, evidence from the first round of auctions suggests that energy from waste and advanced conversion technologies such as gasification are benefitting from the contracts for difference scheme. The renewable heat incentive supports biomass heat at small and large scale, and also the injection of biomethane into the gas grid. In 2013, around 84 per cent of renewable heat came from bioenergy sources, equating to around 2.4 per cent of overall heat energy 103. In the 2015 Spending Review, the government announced that the renewable heat incentive would continue with funding increased to 1.15 billion to 2020/21. However, scheme reforms are expected. Looking forward, the United Kingdom Bioenergy Strategy recognises that bioenergy has an important role in helping the United Kingdom to meet its greenhouse gas emissions targets in Modelling indicates that excluding biomass from the energy mix would significantly increase the cost of decarbonising the energy system. The strategy does however reiterate the risks government s concern with ensuring that bioenergy offers genuine greenhouse gas emission reductions, in a cost effective way. It is therefore expected that there will be continued changes to bioenergy policy to ensure that biomass is produced sustainably. 104 Modelling by the Energy Technologies Institute demonstrates that bioenergy could meet ten per cent of the United Kingdom s final energy demand, with around two-thirds of this delivered by United Kingdom-sourced feedstock, and highlights that bioenergy combined with carbon capture and storage is the only credible route to meet the United Kingdom s 2050 greenhouse gas emission reduction targets 105, 106.The sector has a long way to go to meet its potential in the United Kingdom, and the market is strongly impacted by developments in policy and the wider markets. The current policy landscape is different to that anticipated in the Energy Technologies Institute project, in particular the recent withdrawal of funding for carbon capture storage projects, which creates uncertainty around the development timescale and likely success of bioenergy with carbon capture and storage as a negative emissions technology. The Renewable Energy Association estimate that in 2010/11 21,700 people were employed in bioenergy in the United Kingdom 107. A study by NNFCC 108 estimated that if bioenergy deployment reached levels anticipated in the Department of Energy and Climate Change s UK renewable Energy Roadmap (2011) then there may be 35,000-50,000 jobs in bioenergy in the United Kingdom by These figures include jobs in development, construction and installation, operation and maintenance, and United Kingdom feedstock production and supply. 102 Business Green, Contract for Difference Auction - the reaction, Department of Energy and Climate Change, Bioenergy statistics UK overview, Department for Transport, Department of Energy and Climate Change, Department for Environment, Food and Rural Affairs, UK Bioenergy Strategy, Energy Technologies Institute, Bioenergy Enabling UK biomass 106 Energy Technologies Institute, Bioenergy Insights into the future UK Bioenergy Sector 107 Renewable Energy Association and Innovas, Renewable Energy: Made in Britain, Jobs, turnover and policy framework by technology (2012 assessment) 108 NNFCC, UK jobs in the bioenergy sectors by

87 6.2.3 Bioplastics Globally, production of bio-based polymers is expected to grow faster than overall polymer production, from 3.5 million tonnes in 2011 to nearly twelve million tonnes by 2020, corresponding to a growth of 14.7 per cent per annum. However, most investment in new bio-based polymer capacities will take place in Asia and South America, resulting in a drop in Europe s share of the global bio-based polymer market from twenty per cent to fourteen per cent. 109 The bioplastics industry in the United Kingdom is currently small but growing. The Bio-based and Biodegradable Industries Association estimate that the United Kingdom s current annual domestic demand for bio-plastic products is 4,000 tones - of this 1,000 tonnes is presumed to be manufactured in the United Kingdom, with the remaining 3,000 tonnes imported. In 2014, the gross output of the bio-plastics sector was valued at million, of which 43.4 million was the direct output contribution to the British economy. This is estimated to support approximately 1,000 jobs and add 50.5 million of gross value added to the economy. 110 Given supportive legislative and commercial conditions, Bio-based and Biodegradable Industries Association estimate that United Kingdom bio-plastics production could reach 120,000 tonnes, which would mean a gross output for the bio-plastics sector of around 4.2 billion. In that eventuality, around 35,000 jobs would be supported and approximately 1.92 billion of gross value added is predicted to be added to the United Kingdom economy Bio-based chemicals Bio-based chemicals are currently manufactured in very low volumes in the United Kingdom, and are often produced alongside large volumes of fossil-derived chemicals by large companies. Low production volumes to-date can be attributed to the historic low price of fossil feedstocks and existing fossil-based production processes that are highly optimised, coupled with the lack of any specific incentives for bio-based chemicals. For this industry, data on United Kingdom production of bio-based chemicals was not available, with most reports or data available only at a European or a global level. Nevertheless there is some activity documented at the national level, such as the CoE Bio3 research cluster in Manchester, 112 the Green Chemistry Centre of Excellence at the University of York, the Biorenewables Development Centre, and the bio-refining work at the Centre for Process Innovation. Companies operating in the United Kingdom with interests in bio-based chemicals include Croda, who produce a line of bio-based phase change materials, and Evonik, who produce a range of bio-based materials. 109 Nova Institute, Market study and Database on Bio-based Polymers in the World 110 Bio-based and Biodegradable Industries Association, The future potential economic impacts of a bio-plastics industry in the UK 111 Bio-based and Biodegradable Industries Association, The future potential economic impacts of a bio-plastics industry in the UK, BioEconomy Regional Strategy Toolkit, Good Practices in selected bioeconomy sector clusters; a comparative analysis 86

88 At a European Union level, chemicals and plastics in the bioeconomy are estimated to have turned over around 42 billion in 2013 and to have created 180,000 jobs. 113 Given that the United Kingdom accounts for approximately eleven per cent of the turnover of the European Union chemical industry, and around nine per cent of employment, United Kingdom chemicals and plastics in the bioeconomy can be estimated to have a turnover of approximately 4.6 billion and create approximately 16,200 jobs. It is widely anticipated that the bio-based chemicals sector will show strong growth in the European Union, which is likely to be reflected in the United Kingdom. The Bio-based Industries Consortium, an industry body representing a broad range of companies working in the bio-based industries in Europe, have ambitious targets to grow the bio-based chemicals industry across the continent, aiming to replace at least 30 per cent of oil-based chemicals and materials with biobased and biodegradable ones. In addition, they aim to create a competitive bio-based infrastructure in Europe and greatly expand the availability of bio-based products. 114 The Biobased Industries Consortium are part of a 3.7 billion public-private partnership with the European Union, aiming to increase investment in the development of a sustainable bio-based industry and thus grow the sector Synthetic biology Synthetic biology involves the design and construction of novel artificial biological pathways, organisms and devices or the redesign of natural biological systems. It is a major research initiative in the United Kingdom and is one of the fastest-growing scientific and technological fields. There is, for example, DNA Synthesis. With affordable methods of DNA synthesis available, the range of possible new antibiotic products to meet antibiotic-resistant pathogens has potentially grown exponentially. Synthetic biology makes use of a number of innovative platform technologies. An example is microfluidics. Microfluidics draws on engineering, physics, chemistry, biochemistry, nanotechnology and biotechnology. It has practical applications to the design of systems in which low volumes of fluids are processed. Microfluidic structures include micro-pneumatic systems, i.e. microsystems for the handling of off-chip fluids (liquid pumps, gas valves, etc.), and microfluidic structures for the on-chip handling of nano-and picolitre volumes. So far, the most successful commercial application of microfluidics is the inkjet printhead. 113 Nova Institute, European Bioeconomy in Figures 114 Bio-based Industries Consortium, A new Public- Private Partnership (PPP) on Bio-based Industries 87

89 Box 6: Synthetic biology case study Synthetic biology involves the design and construction of novel artificial biological pathways, organisms and devices or the redesign of natural biological systems. It is a major research initiative in the United Kingdom and is one of the fastest-growing scientific and technological fields. Researchers at the Pirbright Institute have used synthetic biology to create genetics-based methods to eradicate mosquitos that transmit dengue fever to humans. They created a targeted approach that modifies male mosquitoes so that they will not produce viable offspring. Field trials in the Cayman Islands and Brazil saw an over-90 per cent reduction in mosquito numbers which models suggest should be enough to prevent epidemic dengue anywhere in the world. This technique can also be used to tackle other mosquito-transmitted diseases, such as malaria and the zika virus. Source: Nature Communications Agri-tech Agri-tech businesses have a significant presence in the United Kingdom. This was emphasised recently by the 68 million government investment in three new Centres for Agricultural Innovation covering livestock, crop protection, and engineering to help translate agricultural 88

90 innovation into commercial opportunities for United Kingdom businesses. 115 Agrimetrics, the first Centre for Agricultural Innovation and a big data centre of excellence for the whole food system, was launched in October 2015 and represented a further 11.8 million investment from government. 116 Another initiative is the Agri-Tech Catalyst, which was set up by the Department for Business, Innovation and Skills, Innovate UK, the Department for International Development and the BBSRC with an investment of 70 million, to help businesses and researchers commercialise their research and develop innovative solutions to global challenges in the agriculture sector. 117 Box 7: Plant breeding case study Plant breeding is a key factor in addressing concerns over food security and sustainability as the global population continues to grow. None of the major food crops grown in the United Kingdom today are native to this country. Staples such as wheat, barley, pulses and potatoes all have their origins in other parts of the world. They have all been adapted, through plant breeding, to thrive in British growing conditions. Enhancing plant traits through traditional methods such as cross-breeding was time-consuming. However, biotechnology has considerably shortened the time for new crop varieties to be brought to the market to less than ten years. Over the past 30 years, more than 90 per cent of the yield gains in the United Kingdom s major crops have been due to plant breeding innovation. One of the major biotechnology tools used for plant breeding is marker-assisted selection, where a marker is used for indirect selection of a genetic determinant of a specific trait of interest thus offering a sophisticated method to accelerate classical plant breeding. Marker-assisted selection does not involve the same kinds of uncertainties as genetic modification. Plant breeding makes a significant contribution to the growth and competitiveness of the United Kingdom s food economy. Studies have shown that every 1 invested in plant breeding generates at least 40 in gross value added within the wider economy. 118 In summary, the biofuels and bioenergy sectors have become established in the United Kingdom with the support of a policy framework, and the continued growth of these sectors is dependent on a continuation of policy support to 2020 and beyond. The bio-based chemicals and bio-plastics 115 Department for Business, Innovation & Skills, Department for Environment, Food & Rural Affairs, Department for International Development, Centres for agricultural innovation: launching in 2016, Agritech strategy blog, February Innovate UK, New agrimetrics centre will boost food and farming industries, October Department for Business, Innovation and Skills, Innovate UK, Department for International Development and the BBSRC, Agri-tech catalyst, July Donald Webb, Economic Impact of Plant Breeding in the UK, (British Society of Plant Breeders and DTZ, Manchester) July

91 sectors have largely emerged without the support of a policy framework, and continued growth will depend upon their competitiveness either directly on price or on the basis of improved properties and functionality. Moreover, individual sectors are often mutually dependent on each other for raw materials and energy. According to the Organisation for Economic Cooperation and Development, recent developments have increased the level of integration between biotechnology fields. Examples include the enzymatic production of fine chemicals by industrial firms for use in the pharmaceutical sector, improved varieties of crops for biofuel and bioplastic production, the production of large-molecule biopharmaceuticals in genetically modified plants, the use of recombinant vaccines and biodiagnostics in agriculture, and functional foods and nutraceuticals that are expected to improve health. 119 Figure 51: Current and expected integration across biotechnology applications Source: Organisation for Economic Cooperation and Development 119 Organisation for Economic Cooperation and Development, The Bioeconomy to 2030: Designing a Policy Agenda: Designing a Policy Agenda, (OECD publications, Paris),