Energy-demand-reducing measures can play a major role in helping the economy to bounce-back from the long-term impacts of Covid-19

07 February, 2022

Jennifer Dicks

Reading time: 5 minutes

In this blog, Jen Dicks summarises the report Cambridge Econometrics worked on with CREDS and argues that energy demand reduction measures should form a critical part of both the economic recovery and longer-term climate policy.

Analysis by Cambridge Econometrics for CREDS reveals the positive economic, environmental and welfare impacts of green, energy-demand-reducing policies that could be part of the ongoing economic bounce-back following the Covid-19 pandemic. Here, we consider how the findings of this analysis also have implications for addressing the current energy price crisis.

The importance of energy-demand-reducing policies in light of the current energy price crisis

In recent months, gas prices in the UK have continued to rise steeply and energy bills will continue to climb throughout 2022 in line with increases to the energy price cap. The increase in household energy costs will add further to the rising cost of living in the UK, affecting all households, some of whom will struggle to make ends meet and will face difficult decisions that may force them to choose between food or fuel. Likewise, businesses are facing rising costs of production, leading to some going out of business while others pass on costs through higher prices for consumers.

The current energy price crisis highlights the need for energy-demand-reducing measures, in particular energy and resource efficiency measures, to play a key part in the Government’s strategy to decarbonise buildings and industry.

The Cambridge Econometrics analysis estimated the macroeconomic impacts of a post-Covid green economic recovery package, consisting of a range of policies aimed at improving energy and resource efficiency in buildings and industry. The findings showed that emphasising energy-demand-reducing policies as part of the continued economic bounce-back from Covid-19 can address multiple pertinent issues; reducing emissions as part of the transition to net-zero and supporting the levelling up agenda (through job creation and welfare benefits), all while reducing the total amount of energy required and therefore the adverse effects of the energy price crisis.

A post Covid-19 economic strategy based on reducing the amount of energy needed to heat and power our homes and to operate industries could set the UK on track to meet the net-zero target in a socially inclusive and fair way.

Key findings

  • Clear benefits to the economy from investing in green rather than brown recovery measures: The policies analysed would have positive long-running gross domestic product (GDP) impacts. The combined impact of all green policies analysed is projected to be around £46bn in 2040 (in 2019 prices), a 1.5% increase relative to baseline GDP. The results indicate that investing in green rather than ‘brown’ recovery measures (i.e. measures with higher associated emissions) would benefit the economy.
  • There are better employment outcomes too: In addition, the proposed policies would have positive impacts on employment, leading to an estimated 215,000 increase in jobs in 2040, a 0.6% increase relative to baseline employment. The results indicate that investment in green policies is projected to lead to more jobs than investment in ‘brown’ policies.
  • As well as better economic outcomes, green policies have better environmental outcomes: Resource and energy efficiency improvements in the industrial and buildings sectors would lead to a reduction in UK annual CO2 emissions of around 20 MtCO2 in the combined scenario in 2040, a 7% reduction relative to baseline emissions. Targeting funds in ‘brown’ categories of investment would represent a missed opportunity in environmental terms, as economic gains would be made at the expense of a slight increase in carbon emissions relative to the baseline. Though small, these emissions increases would accumulate over the entire operational life of these assets, and eat into the UK’s limited carbon budget.
  • There are important distributional and equity impacts, with low-income households seeing greater relative welfare improvements from these policies: The analysis finds that, in particular, policies aimed at improving energy efficiency in buildings would have important distributional impacts in terms of increased welfare, with low-income households seeing greater relative welfare improvements from these policies than high-income households. Conversely, the welfare outcomes from ‘brown’ investments are more regressive than for the other policies.

Energy efficiency measures should form a critical part of both the economic recovery and longer-term climate policy

Strong Government support for, and investment in, energy and resource efficiency can form a critical part of both the economic bounce-back and response to the energy price crisis in the short-medium term and in longer-term climate policy. The analysis concludes that Government should develop a comprehensive energy-demand-reducing strategy, including:

  • Ambitious standards for energy efficiency in buildings, vehicles and products to stimulate private investment.
  • A programme for skills and training for the communities most affected by the economic downturn and for retraining workers from fossil fuel sectors.
  • A long-term programme of investment in low-carbon building retrofits.
  • A waste strategy to promote the move towards a circular economy.
  • Support for local government and the private sector to invest in infrastructure to make it easy for people to walk, cycle, and work remotely.
  • Funding for innovation in energy demand reduction and decarbonisation.
  • Using these commitments to influence international partners to make low-energy, green recovery a key part of international negotiations.

Banner photo credit: Michael Wheatley / Alamy Stock Photo