Summary
- A $75 carbon tax could affect up to 150,000 manufacturing jobs in the largest EU countries. The jobs could either be lost or need reallocating to other firms, industries and/or regions.
- Financially constrained manufacturing firms, especially electricity-intensive ones, are most at risk of the price pressures from a carbon tax.
- Five regions spanning Southern Germany and Northern Italy are forecast to lose the most jobs during the transition to ‘climate neutrality’.
Introduction
The European Union has committed to climate neutrality by 2050. To achieve this, the share of renewable energy sources in total electricity generation must rise, and greater environmental regulation is necessary. A new ECB working paper examines how a significant investment in clean electricity generation and a carbon tax will impact EU manufacturing firms. The results are as follows:
- A 20% electricity price increase could reduce employment by 2-4% for the industries most impacted.
- The greatest impact would be on electricity-intensive industries (e.g., chemicals, metals and paper), on which Belgium, Southern Germany and Northern Italy rely heavily.
- Alongside the labour market effects of automation, higher electricity prices could have long-lasting negative effects for the affected regions and workers.
Higher Electricity Prices and Employment
Renewable energy sources (RES) subsidies are often recovered by levies and surcharges paid by the electricity consumer. A 2017 study showed that private households in Germany paid an additional 22% surcharge for renewable energy usage, making them the second-highest payers for electricity in Europe. While many think introducing a carbon tax will efficiently curb greenhouse gas emissions, research also shows that it will likely be passed to wholesale electricity prices almost in full.
The concern, therefore, is that the EU’s climate neutrality objective will inflate energy prices for consumers. And industrial sector businesses are the largest energy consumers, accounting for almost half of total usage. For manufacturing firms in particular, electricity costs comprise a significant proportion of total production costs. For example, in energy-intensive industries (those whose energy costs are at least 3% of production value) such as paper or metal, electricity costs amount to 5-6% of total production costs.
Research on the impact of higher electricity prices on employment is inconclusive. Higher prices lead to higher input costs and lower competitiveness, reducing employment (scale effect). Or higher prices make machinery relatively more expensive, increasing the appeal of labour but reducing productivity (substitution effect). Alternatively, firms could also relocate (parts of) their production to regions with lower electricity prices.
Research so far shows employment churn at a firm level but limited effect on aggregate sector-level employment. This is because jobs shift from less energy-efficient to more energy-efficient firms. Most agree, however, that there will be some losers and that these will probably be electricity-intensive manufacturing industries and lower-skilled workers.
Measuring Electricity Costs
We can break down the electricity cost for the end user into three parts. First, the end user must pay for the electricity generation, and this cost ranges from less than 50% to 90% of the final price. Second, there exists a network cost: charges for transmitting the electricity via the grid of transmission system operators and distribution system operators. The network charge is a function of voltage usage. Finally, there is a system of country-specific tariffs, charges, levies and exemptions thereof. The total end-user price varies by country (Chart 1).
Data and Methodology
The authors estimate the electricity price elasticity of firm-level labour demand by modelling the impact of electricity prices and wages on a firm’s employment. They collect data on end-user electricity prices paid by industrial firms in six European countries over 2009-2017, available on Eurostat. For heavy users (consumption over 150,000 MWh), the authors calculate prices using Deloitte’s methodology. In all, they create 15 consumption bands and, using firm-level data on tangible fixed assets, sort 200,000 manufacturing firms into these bands.
Results: The Sectoral Impacts of Energy Price Rises
The authors find that a 1% electricity price increase will reduce labour demand by 0.02%-0.06% on average for all manufacturing firms. Decomposing the results by country (Chart 2) and by sector (Chart 3), higher electricity prices will more likely affect manufacturing firms in Belgium and within energy-intensive sectors (e.g., chemicals, metal and paper).
These industries are unevenly distributed across European countries. Consequently, the authors pinpoint five regions that could face substantial job losses due to the EU’s transition to cleaner energy: Nordrhein-Westfalen, Baden-Wurttemberg and Bavaria in Germany and North-West and North-East in Italy.
Findings also show a 10% rise in electricity prices reduces next year’s investment by 2-5%. This negative impact on investment affects most sectors. Evidence also suggests that the same 10% rise in electricity prices in one country over another creates a 3.2% rise in the number of acquisitions of firms or assets located in the countries where the energy price is lower.
Lastly, the authors look at the short- and long-run implications on employment by including the lagged value of the dependent variable (employment) as an explanatory variable into the regression. They find that the negative impact on labour demand increases from 0.02% in the short run to 0.07% in the long run. And so, a sustained increase of 10% of the electricity price will, after several years, decrease employment by 0.6%.
Results – Can Other Characteristics Pinpoint Those at Risk?
If energy prices rise, firms that are financially constrained experience two things. (i) They are more likely to increase output prices faster than non-financially constrained firms. (ii) They have fewer possibilities to invest in electricity-saving technologies.
The authors proxy financial constraints by age, profitability, leverage and liquidity, and they estimate the labour demand impact of higher energy prices on more financially constrained firms. They find manufacturing firms that are younger, more in debt, and less profitable reduce employment by more than non-constrained firms. For example, doubling a firms’ debt level increases the average estimated reduction in employment 1.5 times.
Results – The Impact of a Carbon Tax
Using these elasticities estimated above, the authors quantify the number of jobs lost under a scenario in which a $75 per ton carbon tax is introduced – the amount the IMF estimates is necessary to keep global warming at 2 °C. They assume such a tax increases electricity prices by 2% in France, 18% in Germany and Italy, and 16% in the UK.
According to the authors, imposing a carbon tax could affect around 150,000 jobs. These jobs are either lost or need to be reallocated to other more electricity-efficient firms, industries and/or regions. Germany is most affected (80,000 jobs) followed by Italy (35,000 jobs). Again, the burden is highest for Southern Germany and Northern Italy and the German region of Nordrhein-Westfalen.
Bottom Line
The transition to climate neutrality, or net-zero carbon emissions, is a key step in minimising global warming. We recently published a note explaining why this transition could gain traction now. However, this new ECB research suggests that moving towards a carbon-neutral economy will bring large job losses. And so, to ensure positive sentiment towards the green transition remains firm, policymakers will need a framework in which other areas of the economy can absorb job losses.
Citation
Bijnens, G., Et Al., (2021), The interplay between green policy, electricity prices, financial constraints and jobs: firm-level evidence, ECB, Working Paper (2537), https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2537~002be51914.en.pdf?02e968801e01b448be8d0954154ad8bd
Sam van de Schootbrugge is a macro research economist taking a one year industrial break from his Ph.D. in Economics. He has 2 years of experience working in government and has an MPhil degree in Economic Research from the University of Cambridge. His research expertise are in international finance, macroeconomics and fiscal policy.
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