Asymmetric industrial energy prices and international trade

Produced as part of the Evaluating the performance of climate policies CCCEP research programme theme

This paper measures the response of bilateral trade flows to differences in industrial
energy prices across countries. Using a panel for the period 1996-2011 including 42
countries, 62 sectors and covering 60% of global merchandise trade, we estimate the
short-run effects of sector-level energy price asymmetry on trade. We find that changes
in relative energy prices have a statistically significant but very small impact on imports.
On average, a 10% increase in the energy price difference between two country-sectors
increases imports by 0.2%. The impact is larger for energy-intensive sectors. Even in
these sectors however, the magnitude of the effect is such that changes in energy price
differences across time explain less than 0.01% of the variation in trade flows. Simulations
based on our model predict that a €40-65/tCO2 price of carbon in the EU ETS would
increase Europe’s imports from the rest of the world by less than 0.05% and decrease
exports by 0.2%.