The economic and energy impacts of a UK export shock: comparing alternative modelling approaches

Abstract:

This study investigates how an increase in exports (a key pillar in the UK Industrial Strategy) could impact energy and industrial policy by comparing two types of energy-economy models.

Achieving the targets for reducing greenhouse gas emissions set out in the UK Climate Change Act will require a significant transformation in the UK's energy system.

At the same time, the government is pursuing a new UK Industrial Strategy, which aims to improve labour productivity, create high-quality jobs and boost exports across the UK.

The economic and the energy systems in the UK are tightly linked and so policies adopted in one area will produce spillover effects to the other.

To achieve the objectives set out in the two strategies it is therefore vital to understand how the policies in the energy system will affect economic development and vice versa.

Our study contributes to this by investigating how an increase in exports (a key pillar in the UK Industrial Strategy) could impact energy and industrial policy.

We address this question by systematically comparing the results of two types of energy-economy models of the UK, a computable general equilibrium model (CGE) and a macroeconometric (ME) model.

In both models we analyse a stimulus to demand from an increase in exports arising from a successful export strategy as motivated by the UK Industrial Strategy.

Main findings

The qualitative results of the export stimulus are similar across all models in that GDP and employment are always stimulated. In this sense, the results are reassuring for the UK’s Industrial Strategy that emphasises export promotion.

However, the models also find that total energy use and CO₂ emissions increase, and so does the energy intensity and emissions intensity of GDP.

The increase in CO₂  emissions occur because the study identifies the energy and CO₂ impacts of an export shock with other things remaining unchanged. Therefore the models do not simultaneously incorporate the UK carbon budgets or policies to support energy efficiency and decarbonisation of energy supplies.

However, our analysis reveals the likely adjustment of energy and climate policies to counteract the increase in CO₂ and energy intensity that may result from export promotion. It therefore emphasises the need to complement UK industrial policies with appropriate action on energy use and carbon emissions to meet statutory carbon targets set by the Climate Change Act (2008).

The results highlight the interdependence of the energy and economic systems. They show that there are benefits to coordinating strategic initiatives aimed at stimulating economic activity with those aimed at tackling carbon emissions, as envisaged in the UK’s Clean Growth Strategy.

Publication Year:

2019

Publisher:

UKERC

DOI:

No DOI minted

Author(s):

Allan, G., Barrett, J., Brockway, P., Sakai, M., Hardt, L., McGregor, P.G., Ross, A.G., Roy, G., Swales, K. and Turner, K.