Effects on the manufacturing, utility and construction industries of decarbonization of the energy-intensive and natural resource-based industries

Abstract

Decarbonizing the energy-intensive and natural resource-based industries is possible but may substantially increase the cost of production. Whether such cost increases will reduce economic welfare depends on how the downstream industries respond to the higher cost for intermediate goods. In this paper, we explore how downstream industries in the EU15 responded to upstream carbon technology shocks and prices shocks during the period 1998–2014. Our results show that downstream industries do not respond to technology shocks directly but that they do respond to price shocks. A 5 percent upstream price increase is followed by a 4 percent increase in capital investments, 3 percent increase in productivity and a 4 percent reduction in the carbon intensity among manufacturing industries. The utilities and construction industries respond primarily by increasing prices and reducing wages. Prices increase by approximately by 1 percent and real wages fall by approximately 2 percent following a five percent upstream price increase.