The effects of low-carbon transitions on labour productivity: analysing UK electricity, heat, and mobility with a techno-economic simulation model

The low-carbon transition is generally portrayed as involving costs to the economy through lower productivity and generating benefits through avoided impacts of climate change. This mainstream economic narrative hinges on two critical assumptions that stem from an allocation perspective: that low-carbon technologies are more expensive than high-carbon ones, and that low-carbon investment displaces resources from their optimal allocation. However, evidence increasingly suggests that neither assumption may be true. Drawing on evolutionary and complexity economics and making different, empirically-supported, assumptions about innovation dynamics, structural change, and the endogenous creation of finance, this paper examines the impacts on UK labour productivity of a low-carbon transition in the power, transport and heat sectors using a coupled macro-econometric and technology model (E3ME-FTT). Using realistic assumptions, the model results show moderate but positive productivity increases in the transition that stem from technological learning-by-doing and productivity growth in specific sectors, which induces investments that ultimately lead to expanded economic capacity across the economy.