The Economic Impacts of UK Labour Productivity-enhancing Industrial Policies and their Spillover Effects on the Energy System

The wider impacts of energy policy on the macro-economy are increasingly recognised in the academic and policy-oriented literature. But this interdependence similarly implies that policy interventions in the non-energy system also affect the energy system, though such spill-overs have not been extensively researched. Increasing labour productivity is a key component of the UK’s Industrial Strategy. The present paper analyses the impacts of success in this policy on key elements of the economic and energy systems through simulation. It uses a UK computable general equilibrium (CGE) model - UK-ENVI – to fully capture economy/energy interdependence. The simulation results suggest that there are trade-offs, particularly between achieving energy and economic policy goals. For example, increased labour productivity stimulates GDP but also energy use and territorial industrial CO2 emissions, whilst reducing short-run employment. Policy makers should therefore be aware that successfully implementing the Industrial Strategy might impact on the UK’s Clean Growth Strategy and on the goals of energy policy more generally. Knowledge of the nature and scale of economy/energy spill-overs potentially improves policy co-ordination and over-all effectiveness. For example, this analysis reveals the extent of energy policy adjustment that would be required to accompany a successful industrial policy in order to maintain a given level of emissions.