Energy Costs and Competitiveness in Europe

Abstract

The worldwide upswing in energy prices recorded in the last decade has placed decarbonization strategies, and their potentially negative consequences for firms’ costs and competitiveness, at the centre of the European policy debate. We evaluate the relevance of energy policies for competitiveness by augmenting the standard analysis, largely based on labour costs, with a Unit Energy Cost (UEC) indicator. We analyse how the UEC evolved in different countries and industries and we assess its main drivers (prices, energy intensity, sector composition). Modelling the relationship between foreign sales and the UEC in a gravity model setup, we find that an increase in UECs reduces bilateral exports; the largest negative effects are obtained when limiting the analysis to euro-area countries. Our results strengthen the case for pursuing further integration of European energy markets (as provided for in the Energy Union and Winter packages) to ensure that the ambitious long-term European decarbonization targets do not have a negative impact on the euro-area industry’s ability to compete worldwide.