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.
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 decarbonisation policies, the economic structure, the productive capacity, the import propensity, and whether other large economies also decarbonise
Uncertainties arise around whether cost savings are passed on into lower prices and how resources saved are spent by households and businesses.
Authors Jean-Francois Mercure, Hector Pollitt, Frank Geels, Dimitri Zenghelis