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

04 Sep 2019

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.

 

Comparing modelling approaches

The differences across the models are informative, reflecting in part differences in the underlying macroeconomic vision of the UK economy.

We show that it can be useful to have a range of energy-economy models for exploring the different links between the economy and key elements of the energy system, and for identifying the circumstances in which each model is most likely to be directly applicable.

In the context of energy-economy modelling, our analysis suggests that it is advantageous to have a mix, or portfolio, of energy-economy models with each having comparative advantages depending on: prevailing circumstances, notably the state of the economy (as reflected in any excess capacity); the time period of interest and the nature of the question being addressed.

 

Policy implications

There is evidence that an industrial strategy aimed at ‘across the board’ export led growth may produce a trade-off with the achievement of economic and carbon emission targets in the UK.

Given the urgency of climate change mitigation, this evidence highlights that the development of any economic policy needs to consider the possible implications for energy use and carbon emissions.

On the flipside, any policies for climate change need to make sure that they are compatible with important economic objectives, such as the provision of high quality jobs across all regions of the UK.

Ultimately, achieving both our environmental and economic objectives requires a holistic strategy that considers both objectives together.

Coordinating industrial, energy and environmental policies increases the complexity of the challenges faced by policy makers and researchers. However, such coordination not only helps to overcome trade-offs, but also offers the opportunity to exploit potential complementarities, which could produce more effective policies and create social benefits across policy areas.