A new TPI-funded study, published in Climate Policy finds that low-carbon transitions in UK electricity, heat, and mobility are projected to boost labour productivity economy-wide by reducing costs of key energy services.
Abstract
The low-carbon transition is generally portrayed as involving costs to the economy through lower productivity and generating benefits through avoided impacts of climate change. This mainstream economic narrative hinges on two critical assumptions that stem from an allocation perspective: that low-carbon technologies are more expensive than high-carbon ones, and that low-carbon investment displaces resources from their optimal allocation. However, evidence increasingly suggests that neither assumption may be true. Drawing on evolutionary and complexity economics and making different, empirically-supported, assumptions about innovation dynamics, structural change, and the endogenous creation of finance, this paper examines the impacts on UK labour productivity of a low-carbon transition in the power, transport and heat sectors using a coupled macro-econometric and technology model (E3ME-FTT). Using realistic assumptions, the model results show moderate but positive productivity increases in the transition that stem from technological learning-by-doing and productivity growth in specific sectors, which induces investments that ultimately lead to expanded economic capacity across the economy.
Key policy insights
Low-carbon transitions in power, transport and heat can increase UK labour productivity growth economy-wide by reducing costs of key energy services. Indirect induced economy-wide benefits of transitions on productivity are far larger than direct sector-based impacts of technological change. The impacts of transitions on UK productivity depend on the ambition of decarbonization policies, the economic structure, the productive capacity, the import propensity, and whether other large economies also decarbonize. Uncertainties arise around whether cost savings are passed on into lower prices and how resources saved are spent by households and businesses.
“The paper makes the case not just for climate policies, but for smart economic policy more broadly. We provide compelling evidence to show how this is a global race for competitive advantage that the UK can’t afford to sit out. For an energy importer like the UK, the clean transition is a win-win. Even fossil fuel exporters can benefit, though it’s time to diversify fast.”
Dimitri Zenghelis, Bennett Institute for Public Policy
To read about the study, funded by The Productivity Institute, visit Climate Policy journal.
