Productivity implications of the move to net zero

By Sandra Batten and Stephen Millard

In this paper, we use a dynamic general equilibrium model to examine the effect of the move to net zero in the United Kingdom on productivity. One argument is that the transition is likely to be productivity-reducing, as it will involve a move from more to less efficient means of producing. Alternatively, it could be argued that the transition will be productivity-enhancing, as the capital investment required to bring about this move leads to a rise in productivity, both within the specific ‘greening’ industries and more generally via productivity spillovers to the rest of the economy. Our model enables us to examine how this potential trade-off varies depending on whether we look at the short, medium or long run. We find that the introduction of a carbon tax, applied to encourage the move towards net zero, reduced GDP and total hours worked, but since total hours fell by more than GDP, increased productivity. As electricity becomes more substitutable for petrol and gas, the effect on productivity becomes more positive as GDP recovers while total hours remain permanently lower than initially. Finally, our results suggest that unless investment in green technology leads to significant technological gains elsewhere, it is unlikely that the move to net zero will have a large effect on productivity growth above and beyond the direct effect resulting from the capital deepening that will be associated with it.

Productivity implications of the move to net zero