Is the move to net zero in the United Kingdom likely to be productivity-reducing or productivity-enhancing? To analyse this question, this research uses a dynamic general equilibrium (DGE) model to explain how the economy produces and consumes energy and other goods. In the model, businesses make goods and services using a mix of carbon‑emitting inputs, such as oil and gas, and ‘green’ inputs like labour, capital, imported materials and electricity.
One argument is that the transition to net zero will lower productivity because it means shifting from today’s relatively efficient production methods to greener but initially less efficient ones. Another argument suggests the opposite: that the large wave of investment needed to ‘green’ the economy could actually boost productivity, both in the new green industries themselves and through spillover benefits to the wider economy.
The DGE model allows for the exploration of this potential trade‑off over the short, medium and long run. The research finds that introducing a carbon tax – designed to push the economy towards net zero – reduces Gross Domestic Product (GDP) and total hours worked. But because hours fall by more than GDP, productivity actually rises. As electricity becomes a more effective substitute for petrol and gas, the productivity effect strengthens: GDP recovers while total hours stay permanently lower.
The results suggest that unless investment in green technologies generates substantial technological improvements elsewhere in the economy, the transition to net zero is unlikely to deliver a major boost to productivity growth beyond the direct gains from additional investment.
Authors Sandra Batten, Stephen Millard