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Economic impact of the Sixth Carbon Budget (Cambridge Econometrics)

1. Outline

Alongside our work for the Sixth Carbon Budget the Climate Change Committee (CCC) commissioned Cambridge Econometrics to run their E3ME model, which replicated activity across the whole economy using our Balanced Pathway, and compared this to a world with no further climate action. In order to simplify assumptions this modelling assumed that the majority of increased costs incurred to pay for decarbonisation were paid through increased taxation, and no impacts of COVID-19 (e.g. higher unemployment) were considered.

2. Key recommendations

The results show that despite there being an overall cost in bringing about the technologies to reduce carbon emissions, there is an increase in economic prosperity, in terms of an aggregate increase in GDP, jobs and real disposable incomes. In particular, this is due to:

  • Investment in capital. The transition to a low-carbon economy requires that investment is brought forward into relatively capital-intensive technologies. The private and public investment stimulus makes use of spare capacity in the economy (i.e. unemployed resources, assumed to be available throughout the period to 2050 in the modelling) and therefore increases the level of output (GDP).
  • Reduction in oil and gas imports. A particular feature of the UK economy is the high proportion of imports in the supply of oil and gas. As the economy transitions from ongoing spending on imported oil and gas in favour of low carbon domestic investments, leakage from the UK economy is reduced and the implied economic multiplier increases, leading to increases in GDP and employment.
  • Falling electricity prices, from switching to a low cost, renewables-led system.

Overall, the increased level of economic output, as measured by GDP, creates demand for additional employment both in low-carbon jobs, and in the wider economy, as a result of increased GDP. Over the projection period employment is around 1% higher, equivalent to around 300,000 jobs.[1] As increased costs are assumed to be paid through increased taxation, the transition is progressive, and leads to increased income across all income brackets (including through paying less for electricity).

The study presents a simplistic illustration of what a transition to Net Zero could look like for the UK, and key limitations include not having assessed multiple alternative pathways, not considering the near-term impacts of COVID-19 (which would likely reinforce the results, driven by increased spare capacity in the economy), and major uncertainties such as fossil fuel prices, and different levels of climate action in other countries were not considered.

[1] This figure represents a net increase in employment, recognising that there is a reduction in employment in some sectors, such as refining, and an increase in others such as manufacturing and construction