This report has set out the potential economic impacts from a modelled transition away from fossil fuel heating and towards low-carbon alternatives in Scotland.
The analysis demonstrates that there are net positive economic impacts from the transition. Our modelling suggests the shift to (more expensive) low-carbon heating technologies will lead to the net creation of around 16,400jobs in 2030 in our Extended scenario. The modelling estimates that around 11,600 jobs will be lost as a result of reduced demand for fossil fuel heating technologies and fuels, while an estimated 28,000 jobs will be created in the manufacture of low-carbon heating technologies and the supply of low-carbon fuels (chiefly electricity). This highlights one of the key challenges in managing the transition; ensuring that, as far as possible, the new jobs created can be matched to those workers that are losing their jobs in fossil fuel-related activities. If this can be achieved, by policies such as job- and skill-matching, and the implementation of relevant re-training schemes, then the worst of the spatial and distributional impacts of concentrated job losses could be mitigated. Such measures can also ensure that the Scottish labour force is suitably equipped to meet the future demands of the domestic heat industry, avoiding major supply-side constraints.
Furthermore, the analysis of heating technology deployments highlights some challenges in achieving the deep decarbonisation envisaged in the high-level targets of the Scottish Government. For example, due to their nature, heat pumps have a limited opportunity to penetrate the heating of flats, and it is important that policy frameworks take this into account and give the potential for the deployment of relevant technological solutions (including the use of heat networks and more substantive energy efficiency deployments), to ensure that heating costs do not increase substantially. This also points towards some potential concerns around the distributional impacts of the transition, where specific measures are likely to be required to ensure that the split incentives for property owners and tenants are overcome to ensure that rental properties (and the residents of them) are helped to take up low carbon heating technologies.
4.1 Challenges to achieving these outcomes
The modelling set out in this report is based upon a number of assumptions which must be addressed when considering how likely the modelled outcomes are to be achieved 'in the real world';
The input-output framework used for the analysis is purely demand-driven. This means that it is assumed that an increase in demand for (e.g.) heat pumps can be met by spare capacity in the economy, with no supply-side constraints. In practice, at a minimum, workers will require training to acquire the relevant specialist skills, and there could be more general shortages in the labour market in particular roles (most notably those requiring highly specific skillsets), which policy must seek to address to facilitate the transition of the Scottish economy.
The supply chain analysis assumes that the nature of intra-sectoral linkages (i.e. the level of inputs from different sectors required to produce £1m of a good or service) do not change over the period. However, clearly the economy is not static, and does evolve over time. While this can be expected to result in changes to the precise economic activity and employment created through supply chains, over the ten-year period to 2030 it would not be expected to fundamentally change the messages from the analysis.
The input-output analysis operates at a 2-digit sector level. This means that, for the purposes of this analysis, it is assumed that demand for (for example) electrical equipment is met through the same mixture of intermediate inputs, whether that electrical equipment is part of a gas boiler or a heat pump. In practice, different capital, and most probably different labour skills, are required for the manufacture of these two components. The analysis seeks to address this through separately analysing the jobs created and the jobs lost in the transition, but nonetheless it is important to highlight that the jobs lost and the jobs gained within a single industry will not necessarily require the same skills or be in the same place. Furthermore, although the input-output tables, and therefore our analysis, include demand for imports (and therefore leakage out of the Scottish economy), the analysis does not include detailed data (or assumptions) on the export content of the different heating technologies – so there is the potential for domestic demand for heat pumps to be captured by imports to the Scottish economy to a greater extent than in the impacts presented here.
These issues demonstrate that the quantitative work, both the input-output modelling and the data analysis that follows, can only tell part of the story. Such data-driven approaches necessarily make assumptions and should be part of a wider narrative around the impacts of the transition which is sector- and place-based.
The decarbonisation of heating is part of the wider decarbonisation journey that the Scottish economy, and indeed an increasing number of global economies, are committed to. In the transition to a zero-carbon Scotland in 2045, the nature of the economy will shift substantially, as consumers move away from consumption of fossil fuels and products based upon fossil fuels, such as plastics. This transition requires careful management, and clear signposts and certainty to industry, to ensure that the economy can adjust in response to changing consumer demands and regulation. However, such transitions have (and continue to be) managed in the past. It is also worth noting that decarbonisation is just one of a number of transitions that will affect the development of the Scottish economy over the coming years, including long-term trends such as automation and the increasing use of AI, the changing demographics (aging) of the Scottish population, the pace of globalisation, and changing use of resources. In such a context, the decarbonisation challenge, while it presents transformative challenges to some sectors, could be nonetheless a relatively small part of the overall transformation of the economy, and of Scotland more widely, in the coming years.