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Conflict, climate and constitutions

Establishing sustainable and affordable sources of energy is a central policy challenge. But cutting off funds to Putin’s war machine, and continuing to make progress towards net zero, may come at the expense of further escalation of the cost-of-living crisis.

Newsletter from 8 April 2022

In the aftermath of the atrocities uncovered this week in the city of Bucha, Ukraine, Western governments have intensified their sanctions on Russian individuals and goods. Shifting European energy supply away from Siberian oil and gas is key to cutting off the Kremlin’s sources of foreign exchange. It may also bring a potential ‘double dividend’ if it leads to increased use of renewable energy sources, such as nuclear power.

In an article for the Economics Observatory this week, Raj Patel (associate director of policy at Understanding Society) explains that while supply-side energy policies are favoured politically even without war, emissions reductions on the demand side will also have an important role to play if the UK is to reach its net-zero emissions targets. Around 20% of greenhouse gas emissions can be directly attributed to households – and research evidence suggests that households could be indirectly responsible for as much as 80% (for example, through emissions in the supply chain for food and clothing).

The Understanding Society survey of a representative sample of UK households is a useful tool for revealing potential changes in behaviour that could benefit the planet. Pessimistically, the data show that households make the easiest but least effective efforts when trying to be greener – turning off lights and saving water – rather than more significant life changes, such as walking to work or taking fewer flights. But on the brighter side, the data also indicate that increasing active travel is feasible for many commuters.

To appreciate how the UK can make the transition to a low-carbon economy, as well as the distributional consequences of doing so, Raj highlights the need for granular, linked datasets. The impact of the transition on households will vary based on emissions levels. For example, people living in homes that are inefficient in their use of energy and families that have multiple petrol cars will be more affected.

But our working lives are important too – delivery drivers who have to change to electric vehicles may suffer short-term disruptions, but technological change that causes their jobs to be replaced by drones, for example, would be much more significant.

More broadly, the effects of production on the environment remain absent from GDP figures. In a data piece for the Observatory on Wednesday, Elias Wilson (University of Bristol) analysed the updated quarterly national accounts for the end of 2021. GDP growth was revised upwards by 0.3 percentage points for the period from October to December, indicating annual GDP for 2021 of 7.4%. This is the largest annual increase since the Second World War, and it means that GDP is now only 0.1% lower than before the pandemic began.

Elias argues that this is largely a mechanical rebound from the devastating recession caused by Covid-19 in 2020. Indeed, output excluding government spending (such as the generous Covid-19 support measures) has not recovered so much, remaining nearly 3% below the its level in the fourth quarter of 2019. Exports of goods and services are also depressed in comparison with other G7 countries, with Brexit frictions potentially looming over trade.

This could be a cautionary tale for a potential second Scottish independence referendum. In a new piece for the Observatory series on constitutional change in Scotland, Brad MacKay (University of St Andrews) looks at how business leaders assess these risks and opportunities.

Evidence on how firms react to regulatory uncertainty is mixed, but many seem to adopt a ‘wait and see’ approach to further investment. Research on the specific effect of political independence is limited, but what little data there are suggest that large businesses tend to oppose constitutional change (for example, Medina and Molins, 2014). Brad notes that firm size is also likely to be a proxy for factors such as ownership structure, which may be the true driving force behind this effect.

Brad’s earlier research finds that 90% of executives reported uncertainty around the 2014 independence debate (MacKay, 2013). Digging deeper, concerns about risk overshadowed potential opportunities, particularly for large, UK-facing and publicly traded companies with Scottish headquarters. On the other hand, private companies, which are typically free of pressures from external shareholders, generally exhibited a greater willingness to absorb downside risks.

The 10% of leaders who emphasised opportunities over risks were largely from medium-sized businesses trading mostly within Scotland or globally, rather than with the rest of the UK. This suggests that the structure of a business and its key market locations explain risk appetite more accurately than generic classifications – a result also found in pre-Brexit business surveys.

The heightened uncertainty in the UK since 2016 is unlikely to change the opinions of Scottish executives if another independence vote does go ahead. With 60% of Scottish exports going to the rest of the UK, it will remain Scotland’s largest export market even if membership of the European Union were possible post-independence. But while the recent experience of Brexit would make any constitutional change less of a surprise than it might have been before, it does not necessarily mean that it would be any less painful.

Observatory news

  • Royal Economic Society conference. Next week (11-13 April) is the 2022 RES 2022 Annual Conference, featuring a presidential address by Tim Besley (one of our lead editors), as well as plenary lectures by Stefanie Stantcheva (Harvard), and Nicholas Bloom (Stanford). Diane Coyle (another of our lead editors) is also speaking with former RES president Partha Dasgupta, lead author of the independent government review of the economics of biodiversity.
  • Scottish Economic Society conference. Later this month (25-27 April), the birthplace of economics hosts the annual gathering of economists in Scotland, including some policy roundtables in Edinburgh and Glasgow with the Observatory. No doubt there will discussion of some of the issues raised in our continuing series on the economics of Scottish independence, curated by Graeme Roy (University of Glasgow), another of our lead editors, and Stuart McIntyre (University of Strathclyde).
  • ESCoE conference. Next month (25-27 May), the Economic Statistics Centre of Excellence (ESCoE) will hold its annual conference, organised in partnership with the UK Office for National Statistics (ONS) at the University of Strathclyde. The Observatory will be running a data masterclass introducing best practice in data visualisation and a 'code along' to create an interactive chart (including using the ONS API). We're also contributing to a panel on effective communication of data and statistics.
Author: Ben Pimley
Picture by Daniil Dubov on iStock
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