Assessing energy and economic impacts of large-scale policy shocks based on Input-Output analysis: Application to Brexit

The assessment of the prospective, economy-wide, economic and environmental impact of large-scale policy shocks is currently performed via general equilibrium models, relying on background input–output data usually characterized by a very aggregated definition of the energy conversion chain. Thus, such models are not always able to properly assess the impact of policy shocks on the energy conversion chain. On the other hand, empirical models based on physical data provide a detailed picture of the energy conversion chain but are unable to comprehensively address energy-economy interactions. This paper introduces an approach to analyze the impact of large-scale policy shocks with special focus on international trade and global energy conversion chains. The approach relies upon an empirical meso-economic equilibrium model and a physical supply and use model of the energy conversion chain. The link between the models is provided by the Multi-Factor Energy Input-Output model. The proposed approach is formalized and applied to assess the economic and energy impact of different Brexit scenarios, returning the related impact in terms of changes in value added generation, change in production of energy carriers and change in energy-related CO2 emissions. It is found that a highly disaggregated picture of the energy supply chain provides fundamental insights to assess the physical viability of economic scenarios. Therefore, the proposed method reveals important synergies that may arise from the joint application of the economic and physical models, hence becoming a suitable candidate to provide insights and guidance for policy making.