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

Analysis by Cambridge Econometrics for the Centre for Research into Energy Demand Solutions (CREDS) reveals the positive economic, environmental and welfare impacts of ‘green’ policies relative to a ‘business-as-usual’ approach that could be part of a post-Covid, green, economic recovery.

The analysis used the E3ME model to project the macro-economic impacts of a post-Covid green economic recovery package. This report sets out the macroeconomic impacts of this package which consists of a range of green policies aimed at improving energy and resource efficiency in buildings and industry.

The findings of the analysis demonstrate that these policies have the potential to generate economic activity, support the levelling up agenda in the short-term and set the UK on track to meet the long-term 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 green 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 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 better employment outcomes 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 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.
• There are important distributional and equity impacts, with low-income households seeing greater relative welfare improvements from green 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.