The economic impacts of Scottish fiscal policies and their spillover effects on the energy system

Ross, Andrew G. and Allan, Grant and Figus, Gioele and McGregor, Peter G. and Roy, Graeme and Swales, J. Kim and Turner, Karen (2019) The economic impacts of Scottish fiscal policies and their spillover effects on the energy system. Fraser of Allander Economic Commentary, 43 (2). ISSN 2046-5378

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The energy and economic systems are inextricably intertwined. This means that fiscal interventions are likely to have a significant influence on the energy system, the neglect of which could lead to inefficiencies in the design of energy and economic policies. The importance of this in practice depends on the strength of the spill-over effects from fiscal instruments to energy policy goals. This is the focus of the present paper which employs a multi-sectoral computable general equilibrium (CGE) model to track the impacts of fiscal adjustments on key economic and energy policy goals. In particular the effect of tax and public expenditure changes are quantified and compared both with and without the imposition of a balanced budget. We are interested in identifying conditions under which a fiscal policy “double dividend” might occur. This is a stimulus to the economy accompanied by a simultaneous reduction in emissions or increase in energy productivity. Our results suggest that such an outcome is possible but these impacts depend on the public’s valuation of the amenity associated with the greater public expenditure and the extent to which this is reflected in workers’ wage bargaining behaviour. There are undoubtedly differential spillover effects on key elements of the energy system from tax and expenditure policies that may prove capable of exploitation through the coordination of fiscal and energy policies. Whilst it seems doubtful that fiscal policies would be formulated with a view to improved coordination with energy policies, policymakers can benefit from knowledge concerning the likely direction and scale of fiscal spillover effects to key elements of the energy system. For example, this analysis reveals the extent of any energy policy adjustment that would be required to maintain a given level of emissions.