The transition of societies to a net zero future presents a number of political economy challenges. In particular, how can net zero actions be achieved in a way that delivers sustained prosperity, economic wellbeing and, thus societal and political consensus and feasibility?
This week the Centre for Energy Policy is hosting a webinar to coincide with the celebration of our 5th birthday, where we will explore these questions further. At the online event we will discuss how a range of energy and climate policy actions such as domestic energy efficiency programmes and CCS could impact the wider economy and therefore society.
We will also discuss in more detail the wider economic impacts of electrifying private transport. In particular we will explore the electricity network investment activity needed to enable the projected EV rollout in the UK. This has been a key focus of our work at the Centre over recent years.
Our latest findings in this policy area show that there is opportunity for sustained gains in GDP, employment and earnings, but with the transition pathway sensitive to how investment levels and trajectories respond to the speed of consumer behaviour adjustments and how this may impact electricity prices in particular. The insights emerging can support policymakers in prioritising and planning net zero actions with the aim of unlocking and maximising benefits. In the next few weeks, we will produce a more detailed briefing paper setting out our results. This blog provides a preview of what we did and what we’ve found.
The questions considered
Our new work extends our previous analyses of the projected UK EV rollout to 2030 to focus now on the extended and substantial investment in network upgrades required to enable 99% EV penetration (i.e. an almost complete substitution of conventional private transport with EVs) by 2050 in the UK. We also introduce attention to underlying labour productivity and average wage performance that are central to considerations of economic wellbeing. We consider three scenarios, each of which includes simulation of a steady rollout and uptake of EVs across the UK to a 99% penetration level by 2050. The scenarios vary in terms of the level and time path of investment to upgrade the UK electricity network to support this under different assumptions regarding the rate of consumer response to smart charging (considering slow/central/fast scenarios).
The specific research questions we address are: 1. How does the electricity network upgrade, repayment and the EV roll-out combine to impact the wider economy? 2. What is the nature, evolution and extent of the potential impacts on key economic wellbeing indicators? 3. What sectors of the economy gain the most and which lose out? In addressing these questions, we show that the crucial challenge lies in understanding how low/net zero actions are funded and who ultimately pays/bears the burden of cost recovery if outcomes are to be sustainable.
What have we found?
Our simulated scenario analysis suggests that investment in electricity network upgrades to support the EV rollout can indeed help shift a transitioning economy onto a pathway with higher and better quality GDP and employment, as reflected by the impact on labour productivity, earnings and average wage levels in all three-investment scenarios we modelled. In the UK case considered here, we find that a 99% penetration of EVs by 2050 could move the UK economy onto a higher trajectory with an additional 0.15% GDP per annum, underpinned by a 0.04% gain in labour productivity (GDP per full-time equivalent, FTE, employee). The associated 0.12% boost in employment is associated with a 0.22% boost in annual earnings so that the real average wage increases by 0.1%.
The key driver of this nature of expansion in the UK case is the shift to fuelling vehicles using electricity, where the domestic electricity industry has extensive high value-added and relatively high average wage supply chains, rather than petrol/diesel, which, while a high-value industry, is more import intensive in its supply chain activity.
However, our results show that the wider and ultimately demand-driven economic expansion will change the composition of GDP, with potential negative impacts on the competitiveness of export-orientated sectors, driven by price rises reflected in a 0.16% rise in the UK CPI and an overall drop in UK exports of 0.35%. The impacts of increased electrification on electricity prices faced by consumers and businesses alike (a sustained rise of 0.15%) plays a part in constraining the expansion, but lasting labour supply constraints are a dominant force in both subduing the sustained long run expansion and the changing composition of activity.
Nonetheless, dual demand and cost recovery drivers of the rising electricity prices require careful consideration as key determinants of how the economy transitions. This is most evident in the scenario we model where slow consumer response implies a need to incur and recover particularly high up-front investment costs. Here increased electricity prices are a key driver in slowing GDP, employment, earnings and labour productivity growth over extended timeframes through the transition to full EV penetration. For example, only 83% of the long-run GDP expansion is achieved by 2050, in contrast to the ‘fast’ scenario adjustment where 91% is achieved by this point. Earnings growth is even more subdued, with only 75% of the ultimate 0.22% gain achieved by 2050 in the ‘slow’ scenario, compared with 86% where consumer responses enable the more gradual and overall lower investment requirement in the ‘fast’ scenario. This finding could be relevant to other net zero actions, such as electrifying heat, which may require substantial upfront investment to reinforce UK electricity networks and, thus, compound both rises in electricity prices faced by consumers and constrain the timing of wider economy returns.
Going forward, it is important to extend the investigation of economy-wide impacts to fully consider the balance of benefits against the costs that may fall on different types of consumers. Cost recovery via non-discriminatory electricity price increases, combined with the impacts of increased demand for electricity as EV use grows, will impact all consumers. In particular, low income consumers who already have to spend a disproportionate share of their income on energy bills, may be less likely to benefit directly or indirectly from the EV roll-out and the associated wider economy expansion, at least in the near term. This is likely to be a point of concern for a range of decision makers, in local and central government, and regulatory contexts alike.
Our ‘whole economy’ scenario analysis presented here emphasises the need for decision-makers to take a holistic economic/societal system approach to climate policy and net zero actions. In that, net zero manifests as a political economy and public policy challenge: without social societal acceptability, our net zero ambitions may prove even more difficult to realise.
|Dr Jamie Stewart
Depute Director, Centre for Energy Policy