No. 2026-29 - The impact of the net-zero transition on aggregate productivity

Abstract:

The net-zero transition requires investment but is expected to induce cost declines in various parts of the economy, notably in renewable energy. The overall effect on aggregate productivity growth, a key driver of GDP and income, is therefore an empirical question. Here, we develop a simple framework that maps sectoral price and quantity paths, readily available from techno-economic transition scenarios, into aggregate total factor productivity (TFP) growth. Our approach combines a reduced-form industry level mapping and Domar aggregation. We validate both steps on historical data to show that our long-horizon forecasts are close to unbiased and to use backtest forecast errors as data-driven prediction intervals. We apply the framework to UK economy-wide scenarios and find small aggregate effects by 2050, either slightly positive or modestly negative (-1.2% to +0.1%). By contrast, we find that global energy transition scenarios with rapid renewable deployment imply substantial aggregate productivity gains, about 3% by 2050.