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This paper explores the characteristics of a range of stylised devolved fiscal systems which have been applied, or proposed, as a means of funding the devolved Scottish Government. The central aim is to identify those fiscal mechanisms that most effectively incentivise the pursuit of growth promoting policies by the regional government. This implies identifying the extent to which different fiscal arrangements reinforce effective local growth policies by resulting in increased devolved budgets. Simulations using an intertemporal, computable general equilibrium model for Scotland, fail to rank uniquely a range of devolved fiscal systems on this criterion over a range of demand- and supply-side policy interventions. Moreover, rather counter-intuitively, tax-sharing regimes do not necessarily improve growth incentives relative to more basic block grants.

Achieving the targets for reducing greenhouse gas emissions set out in the UK Climate Change Act will require a significant transformation in the UK's energy system. At the same time, the government is pursuing a new UK Industrial Strategy, which aims to improve labour productivity, create high-quality jobs and boost exports across the UK. The economic and the energy systems in the UK are tightly linked and so policies adopted in one area will produce spillover effects to the other. To achieve the objectives set out in the two strategies it is therefore vital to understand how the policies in the energy system will affect economic development and vice versa. This study seeks to contribute to this by investigating how an increase in exports (a key pillar in the UK Industrial Strategy) could impact energy- and industrial policy. We address this question by systematically comparing the results of two types of energy-economy models of the UK, a computable general equilibrium model and a macroeconometric model. In terms of the implications of a successful export promotion strategy, the models agree that there is likely to be a beneficial impact on the economy, but an adverse impact on CO2 emissions and energy intensity. This reveals the extent of any policy adjustment that would be required to maintain a given level of emissions and serves to emphasise the need to complement UK industrial policies with appropriate action on energy use and carbon emissions to meet statutory carbon targets set by the Climate Change Act (2008). Our second main conclusion is that there are advantages to having a diverse mix, or portfolio, of energy-economy models with each having comparative advantages depending on: prevailing circumstances (including the state of the economy); the time-period of interest and the nature of the policy question being addressed.

The wider impacts of energy policy on the macro-economy are increasingly recognised in the academic and policy-oriented literature. But this interdependence similarly implies that policy interventions in the non-energy system also affect the energy system, though such spill-overs have not been extensively researched. Increasing labour productivity is a key component of the UK’s Industrial Strategy. The present paper analyses the impacts of success in this policy on key elements of the economic and energy systems through simulation. It uses a UK computable general equilibrium (CGE) model - UK-ENVI – to fully capture economy/energy interdependence. The simulation results suggest that there are trade-offs, particularly between achieving energy and economic policy goals. For example, increased labour productivity stimulates GDP but also energy use and territorial industrial CO2 emissions, whilst reducing short-run employment. Policy makers should therefore be aware that successfully implementing the Industrial Strategy might impact on the UK’s Clean Growth Strategy and on the goals of energy policy more generally. Knowledge of the nature and scale of economy/energy spill-overs potentially improves policy co-ordination and over-all effectiveness. For example, this analysis reveals the extent of energy policy adjustment that would be required to accompany a successful industrial policy in order to maintain a given level of emissions.

The energy system and the economy are inextricably intertwined. While this interdependence is, of course, widely recognised, it has not featured prominently in assessing the likely impact of economic policies. In principle, broad fiscal policies are likely to have a significant influence on key elements of the energy system, the neglect of which may lead to inefficiencies in the design of appropriate energy and economic policies. The importance of this in practice depends on the strength of the spillover effects from fiscal policy instruments to energy policy goals. This is the focus of this paper. We employ a multi-sectoral computable general equilibrium (CGE) approach for the UK which allows us to track the impact of key fiscal policy interventions on key goals of economic and energy policies. Overall, our results suggest that a double dividend - a simultaneous stimulus to the economy and a reduction in emissions – induced by an increase in current public spending or a hike in the income tax rate seem unlikely in the UK context. Nonetheless, there are undoubted differential spillover effects on key components of the energy system from tax and public spending interventions that may prove capable of being exploited through the coordination of fiscal and energy policies. Even if it seems doubtful that fiscal policies would be formulated with a view to improved coordination with energy policies, policymakers should at least be aware of likely direction and scale of fiscal spillover effects to the energy system.

The wider impacts of energy policy on the macro-economy are increasingly recognised in the academic and policy-oriented literature. Given the interdependence of energy and the wider economy, any economic policy change will impact on the energy system. However, such ‘spillovers’ on the energy system have not been extensively researched. This article analyses the impact of export promotion policies - a key element of the UK’s Industrial Strategy - on the energy system and energy policy goals. As the impacts of such policies are, in large part, transmitted via their effects on the economy, we use a computable general equilibrium model - UK-ENVI – to Economic Commentary, September 2018 fully capture impact. Our results suggest that an across-the-board stimulus to exports significantly increases total energy use, not directly via energy exports but indirectly via linkages between the energy sector and other sectors. We show that export-led growth has significant impacts on energy use and, in turn, on emission targets. Policy makers need to be aware that the successful implementation of the UK Industrial Strategy may create significant tensions with the UK’s Clean Growth Strategy and wider energy policy goals. The scale of such impacts depend upon both the mix of UK goods and services exports and the success of low-carbon policies. A knowledge of the nature and scale of the spillover effects of economic policies on the energy system provides a platform for more effective and efficient policy making.

The wider impacts of energy policy on the macro-economy are increasingly recognised in the academic and policy-oriented literatures. Additionally, the interdependence of energy and economy implies that a (policy) change in the non-energy system impacts on the energy system. However, such spillovers on the energy system have not been extensively researched. We begin by analysing the impacts of export promotion policies - a key element of the UK’s Industrial Strategy - on the energy system and energy policy goals. As the impacts of such policies are, in large part, transmitted via their effects on the economy, we adopt a computable general equilibrium model - UK-ENVI - that fully captures such interdependence. Our results suggest that an across-the-board stimulus to exports increases total energy use significantly. This does not come directly through energy exports, but indirectly through the energy sectors’ linkages to other sectors. Export led growth therefore impacts on energy use - and significantly so. This in turn is likely to have an adverse impact on emission targets. Policy makers should be aware of the fact that a successful implementation of the Industrial Strategy may create significant tensions with the UK’s Clean Growth Strategy, for example, and with the goals of energy policy more generally. The importance of this effect will in practice depend upon: the mix of goods and services that are exported (an issue that we shall address once the export strategy is published); the success of low-carbon policies. Ultimately, a knowledge of the nature and scale of these spillover effects of economic policies on the energy system creates the potential for more effective and efficient policy making.

There has been some controversy over the relative sizes of the short- and long-run rebound effects associated with energy efficiency improvements. Theoretical analysis by Wei (2007) and Saunders implied that the rebound effects would always be greater in the long-run than in the short-run. However, Allan et al (2007) and Turner (2009) found evidence from Computable General Equilibrium simulations that contradicted this result. In this paper we systematically explore the impact of energy price stickiness and real wage inflexibility for the evolution of rebound effects. We find that: the degree of energy price, but not wage, stickiness is an important determinant of the time path of rebound effects and of its relative size in the short- and long-runs; and that there is considerable variation in the scale of rebound effects through time, even where short-run rebound effects are lower than in the long-run. However, the most significant finding overall is that rebound reflects the system-wide interaction between energy producing and energy using sectors.

This paper demonstrates the importance of modelling energy-intensive household services in general, and private transportation in particular, as combinations of energy and other inputs. Initially a partial equilibrium approach is used to analyse private transport consumption as a self-produced commodity formed by household vehicle and fuel use. We particularly focus on the impact of private vehicle-augmenting technical progress in this framework. We show that household fuel use will fall if it is easier to substitute between vehicles and fuel in the household production of private transport services than it is to substitute between private transport and the composite of all other goods in overall household consumption. The analysis is then extended, through Computable General Equilibrium simulation, to investigate the wider implications of similar efficiency improvements when intermediate demand, prices and nominal income are endogenous. The subsequent reduction in the price of private transport service (not observable in market prices) allows the wage measured relative to the CPI to rise whilst the wage relative to the price of foreign goods falls. This simultaneously increases UK international competitiveness, encouraging increased exports and reduced import penetration whilst allowing employment to rise. This provides an additional supply-side stimulus to production, employment and household income.

The fiscal powers of the Scottish Government have recently been significantly enhanced as a consequence of the implementation of the Scotland Act 2012, which required the Parliament to set a Scottish Rate of Income Tax (SRIT) from April 2016. The SRIT can vary from that in the rest of the UK by up to 10p in the pound. More extensive powers over income tax will come into effect in April 2017 as a consequence of the Scotland Act 2016, which sought to implement the proposals of the Smith Commission (2014). The Scottish Government will then gain the power to set income tax rates and thresholds (but not personal allowances). All income tax receipts on wage income collected in Scotland will be received by the Scottish Government, with a corresponding adjustment in the block grant, as detailed in the new Fiscal Framework (2016). These changes will make Scotland one of the most powerful devolved governments in the world in terms of the proportion of public spending and tax revenues under its control, although there of course remains a debate about how effective these new powers are and whether or not they go far enough.