Carbon tax boosts productivity but green tech key for long-term gains

Researchers used a dynamic general equilibrium model to simulate the impact of a carbon tax on the UK economy.

The model indicates that a carbon tax, introduced to drive the net zero transition, initially reduces both GDP and total hours worked.

However, since the decline in total hours is more pronounced than the fall in GDP, overall productivity experiences an rise.

This effect becomes more positive as electricity becomes increasingly substitutable for traditional fossil fuels like petrol and gas, allowing GDP to recover while total hours remain permanently lower.

The study highlights a nuanced relationship where policy-induced shifts in production methods lead to a rebalancing of economic inputs and outputs, ultimately impacting efficiency metrics in unexpected ways.

The paper addresses a central debate: whether the net zero transition will be productivity-reducing or productivity-enhancing.

One perspective suggests a move towards less efficient production means.

Conversely, proponents argue that the substantial capital investment in green technologies could boost productivity through direct gains and wider economic spillovers.

The study's long-run findings suggest that without significant technological advances in green sectors, the overall impact on productivity growth will primarily stem from capital deepening rather than broader efficiency improvements.

This implies that policy efforts must actively foster innovation to unlock the full economic benefits of decarbonisation.