A dynamic production network approach to model resource productivity shocks from policy interventions in the UK

Widespread interest in circular economy policies to drive resource productivity with positive environmental and social spillovers has led to a proliferation of small-scale studies and case examples. To date, there remain relatively few macroeconomic approaches to estimate aggregate resource productivity impacts mostly reliant on static input–output (I/O) general equilibrium approaches rather than discrete sectoral value chain analysis. This paper presents the first steps in a novel approach to measuring the potential effects of transitioning to a circular economy in the UK by modelling the propagation of resource productivity shocks in a large-scale dynamic production network model. In contrast to static approaches, our framework assumes rich dynamic adjustment through input–output linkages. Using production network I/O data from the UK, we examine the interconnectedness of the UK economy and how this impacts the potential propagation of total factor productivity shocks. We find that highly connected sectors benefit more from an increase in productivity. Furthermore, we show that a subsidy program scenario based on potential outcomes of circular economy interventions, such as reduced material costs initially in the manufacturing sector, amplifies the effects of a positive total factor productivity shock, leading to large output gains. These gains are even larger when the subsidy support is allocated to influential sectors, and slightly less when extended to large sectors. We also show that this program generates positive spillover effects on non-targeted sectors.