The Net Zero Challenge for Firms’ Competitiveness

The European Union (EU) is planning to become carbon neutral by mid-century. This bold objective might have far-reaching consequences for the region capacity to remain cost-competitive, at least in the short term. Until now the decarbonization policies (e.g. ETS and renewable support) meant higher energy prices paid by households and firms: boldest targets will probably, at least in the short and medium-term, further out pressure on energy prices. To explore the impact of climate policies on European firms’competitiveness, we extend the standard analysis that links input costs and competitiveness including a Unit Energy Cost (UEC) measure. We study the UEC dynamics in different countries and industries, assessing its main drivers (prices, energy intensity, sector composition). Modelling the relationship between firms’ foreign sales and the UEC in a gravity model setup, we find that an increase in UECs reduces bilateral exports; euro-area countries show the largest negative effects. Our results strengthen the case for pursuing a stronger integration of European energy markets in order to avoid that the ambitious long-term European decarbonization targets penalize the European manufacturers. It is also important to establish a global “carbon”level playing field such as a EU-level carbon border adjustment, or other form of EU low-carbon exports support. We finally suggest to use some energy cost indicator in monitoring country competitiveness, as it happens for ULC, for example adding UEC to the Countries’ MIP prepared by the European Commission.