Macroeconomic Effects of the Move to Net Zero

We use a calibrated DGE model of the UK economy (which we might estimate as part of the project) to examine the effects of the transition to net zero within the United Kingdom on UK output, consumption, productivity and real interest rates.  We model the transition by assuming that carbon-emitting ‘brown’ capital is taxed in such a way as to ensure there is no new investment in it.  Investment in green capital is either calibrated to the path of green investment proposed by the UK Climate Change Committee (CCC) or just left to be determined by the model.  Either way, the green capital stock increases over time so as to gradually replace the falling brown capital stock.

Existing work by NIESR for the Network on Greening the Financial System has focussed on the increase in economic tail risk from climate change but this model allows us to focus on transitional dynamics at three time horizons:  the short run (where we model brown and green capital as being complements within a CES production function), the medium run (where we assume output can be produced by either of two production technologies, one using brown capital and one using green capital) and the long run (where we use an ‘endogenous’ growth model in which green investment has spillover effects on productivity).

Having investigated the behaviour of productivity and other macro variables in response to the transition to net zero within each of the three models, we plan to bring the analysis together to produce some plausible paths for UK productivity over the next 20 years or so.

Researchers: Sandra Batten (Bank of England),  Karen Mayhew (Bank of England) and Stephen Millard (NIESR)