New study concludes increases in energy costs are unlikely to have much effect on European businesses and trade

Posted on 2 Mar 2015 in

A large increase in energy prices in the European Union would have only a very small effect on exports by European industry and the balance of trade, according to a new academic paper published today (2 March 2015) by the Grantham Research Institute on Climate Change and the Environment and the ESRC Centre for Climate Change Economics and Policy at London School of Economics and Political Science.

The authors of the paper, Dr Misato Sato and Dr Antoine Dechezleprêtre, analysed 62 business and industry sectors in 42 countries over a 15-year period, using data that covers 80 per cent of global merchandise trade. This is the first analysis to quantify the effect that energy prices have on global trade.

The paper found that energy prices “explain less than 0.01 per cent of the variation in trade flows, suggesting that differences in energy prices are a marginal driver of trade globally.”

The authors calculated that a ten-fold increase in the carbon price – which is currently around €7 per tonne of carbon dioxide – to €65 per tonne in the European Union Emissions Trading System, would be equivalent to a 30 per cent increase in energy prices, but would cause exports to fall by only 0.5 per cent and would increase imports by 0.07 per cent.

Dr Sato said: “To put things into perspective, while a 30 per cent increase in energy costs in the European Union would increase imports by less than one-tenth of a per cent, imports have actually been growing at an annual rate of 15.6 per cent since 2009. Therefore, the impact on trade of more ambitious policies to reduce greenhouse gas emissions is likely to be extremely limited.”

Even in energy-intensive sectors, changes in energy prices explain less than 0.01 per cent of the variation in exports and imports over the past 15 years.

Dr Antoine Dechezleprêtre said: “Contrary to some claims, rises in energy prices do not have much effect on the global competitiveness of businesses. Even a sizeable difference in the price of energy relative to the rest of the world has only a very small impact on a country’s imports and exports.”

The paper suggests that the risks of ‘carbon leakage’ – whereby a high carbon price within the European Union would force the biggest polluters to re-locate and cause greenhouse gas emissions to increase elsewhere – have been overstated.

Dr Dechezleprêtre says: “Concerns about carbon leakage and the competitiveness of European industry are not entirely unfounded, but they have been overstated. Even heavy, energy-intensive industries are more resilient to high energy prices than has been suggested by some companies and politicians. Policy-makers should not allow the prospect of an increase in energy and carbon prices to dictate efforts designed to cut emissions and tackle climate change.”

Download the report

NOTES FOR EDITORS

  1.  The Grantham Research Institute on Climate Change and the Environment (http://www.lse.ac.uk/grantham) was launched at the London School of Economics and Political Science in October 2008. It is funded by The Grantham Foundation for the Protection of the Environment (http://www.granthamfoundation.org/).
  2. The ESRC Centre for Climate Change Economics and Policy (https://www.cccep.ac.uk) is hosted by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council (http://www.esrc.ac.uk/). The Centre’s mission is to advance public and private action on climate change through rigorous, innovative research.

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