Macro-economic impacts of green policies in the Economic Recovery Package post-Covid

Jennifer Dicks, Michael McGovern, Hector Pollitt, Clare Downing and Nick Eyre

Executive summary

During the ongoing Covid-19 pandemic, Government policy has tried to achieve the twin goals of saving lives and maintaining the economy. It is estimated that the full lockdown in spring 2019 resulted in lowering global greenhouse gas emissions by 8%. The UK needs to reduce its emissions by an average of 6% every year to meet the Sixth Carbon Budget goal. Full lockdown is clearly not a viable approach to meeting climate targets. Instead, the increasingly urgent goal of carbon emissions reduction will need to part of the post-Covid recovery economy and this will involve significantly more rapid technical and societal change than has been seen to date.

This report sets out findings from research on the investments and policies that will be required to generate jobs and economic activity and to support the levelling up agenda in the short-term and set us on track to meet the long-term Net Zero target in a socially inclusive and fair way. The study uses the Cambridge Econometrics E3ME modelOpens in a new tab to project the macro-economic impacts of a post-Covid green economic recovery package. E3ME is most often used for scenario analysis, evaluating the impacts of an input shock to a reference/baseline scenario. By comparing outcomes in different scenarios against those in a ‘business-as-usual’ baseline scenario, it is possible to assess the economic, social and environmental impacts of changes in policies and/or economic assumptions. The baseline forecast in this study is constructed from official published economic and energy-sector projections and adjusted to account for the expected impacts of the Covid-19 pandemic – this is referred to as the ‘brown’ scenario. The green scenario analyses the impacts of potential energy efficiency in buildings and industry policy measures that could ensure a green recovery from the Covid-19 pandemic in the UK, such as direct investments in energy efficiency.

Previous work from the Centre for Research in Energy Demand Solutions (CREDS) has shown that significant reductions in energy demand have already been achieved in an economically beneficial way and that further progress with reducing demand will form an essential part of future emissions reduction (The role of energy demand reduction in achieving net-zero in the UKOpens in a new tab). ‘Building Back Better’ (Building on our strengths: A market transformation approach to energy retrofit in UK homes) needs to be part of that process and the findings from this report indicate some of the ways that this could be achieved.

CREDS is part of the UK Research and Innovation’s Energy Programme and the research focuses on reducing the use of energy, increasing its flexibility and using decarbonised fuels.

Key findings

Investments that have the triple purpose of economic recovery, tackling climate change (both reducing emissions and making the UK more resilient) and creating jobs will be critical to the Covid recovery. The E3ME modelling assessed a range of buildings and industrial policies to determine their potential impact.

The buildings policies include a 0% rate of Stamp Duty granted to those who have increased the energy efficiency rating of their home, a Social Housing Decarbonisation Fund, a large, long-running retrofit programme rollout and a skills and retraining programme for construction workers that could include re-training of gas installers.

The industrial policies include a resource and energy efficiency programme, zero interest loans for energy efficiency investment by SMEs and expansion of the Industrial Strategy Challenge Fund (ISCF), for Industrial Decarbonisation. (The existing challenge fund of £170M from government (also co-funded by industry) supports radical decarbonisation efforts in six key industrial clusters. By expanding the scheme a greater number of locations and sectors could be supported, particularly in some of the most marginalised industrial communities, such as Belfast, West of Scotland, and Tyne and Wear.)

The modelling results are separated into economic, social, environmental and distributional welfare impacts.

Economic impacts

Both sets of policies analysed would have positive long-running gross domestic product (GDP) impacts, with the buildings policies having a slightly greater positive impact on GDP. The combined impact of both sets of policies 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 would benefit the economy.

Social impacts

The proposed policies would have positive impacts on employment, as the combined policies proposed are projected to add around 215,000 jobs to the UK economy in 2040, a 0.6% increase relative to baseline employment. In the medium-term (by 2030) the largest employment impacts would be seen in the construction sector, and in the long-term (by 2040) the services sector would see the largest employment gains. The model results indicate that investment in green policies is projected to lead to better employment outcomes than investment in ‘brown’ policies.

Environmental impacts

The positive economic impacts would be accompanied by a significant improvement in environmental performance. Resource and energy efficiency improvements in the industrial and buildings sectors would drive 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 forecast period, and eat into the UK’s limited carbon budget. In contrast, a green recovery represents an opportunity to drastically improve environmental performance, while also benefiting the economy.

Distributional welfare impacts

The distributional impacts of the policy scenarios were analysed in terms of welfare outcomes, defined as the change in income plus the expected energy savings households might experience. The results show that the buildings policy scenario, in particular, would have important distributional impacts, 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.

In summary, investing in ‘green’ rather than ‘brown’ recovery measures would:

• Drastically improve environmental performance (7% reduction in UK annual CO2 emissions)
• Benefit the economy (1.5% increase in GDP)
• Have better employment outcomes (more jobs), and
• Have important distributional and equity impacts, with low-income households seeing greater relative welfare improvements from these policies.

Implications for policy

Using plausible assumptions about the structure and impacts of the Covid recovery package policies targeted at improving energy efficiency in buildings and industry, the results of this modelling analysis show that such policies can deliver simultaneously on short-term goals related to economic recovery, social improvement on levelling up and medium- and long-term goals to reduce greenhouse gas emissions.

The results of the analysis show that active energy efficiency policy can:

• Increase economic growth
• Provide short term job opportunities, especially in communities most affected by the economic impacts of the pandemic
• Improvement welfare for low-income households
• Contribute to the medium- and long-term investments to ‘build back better’
  Increase business liquidity and household spending by reducing energy expenditure
• Add to and stimulate private sector green investment
• Reduce UK net energy imports
• Catalyse innovation in decarbonisation of transport, buildings and manufacturing.

The pandemic has demonstrated how quickly social change can occur. Moving to zero-carbon is a longer-term challenge, requiring very large capital investments for system change, not only behavioural change. But some of the same imperatives apply. Change needs to involve people, not simply be ‘done to them’ and the role of government in driving this change is critical.

Based on this analysis we conclude that strong Government support for, and investment in, energy efficiency can form a critical part of both the economic recovery and climate policy. We recommend that Government should develop a comprehensive energy efficiency 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 such as G20 Summits and annual UNFCCC COP events.

Banner photo credit: Alireza Attari on Unsplash