Energy Systems Catapult has explored the links between carbon policy and economy-wide productivity, as part of our Rethinking Decarbonisation Incentives project.

The UK has reduced emissions by 42% since 1990 while the economy has continued to grow, but productivity has stagnated. Clear articulation of how carbon policy is linked to productivity is missing, but such a framework would help guide policy decisions.

Key points

The findings of the literature review lend themselves to three conclusions for policy, which bring policy design and productivity measurement to the forefront of the debate about how to ensure carbon policy supports and enhances productivity growth.

1. Policy needs to be informed by a more complete measurement of productivity. Traditional productivity measurement does not account for the positive value of output produced with lower emissions. In effect a cleaner economy is also a more productive economy.
2. Carbon pricing and environmental standards help drive innovation in the production of less damaging outputs. The appropriate policy and length of time to deliver new innovation will vary from sector-to-sector, but the existing evidence suggests a strong link between the two.
3. Carbon policies need to adapt to the specific context to improve aggregate productivity. The evidence suggests that how a policy is designed and implemented matter more for its success as the initial choice of policy instrument. Factors such as the credibility and stability of a policy are likely to be as important as the type of policy.