Energy Prices and International Trade: Incorporating Input-Output Linkages

Research output: Working paper

Abstract

This paper examines the effect of energy costs on export competitiveness. Most previous studies in the literature use direct energy consumption (that is energy consumption at the final stage of production) and domestic energy price to compute energy costs faced by domestic industries. Using multi-country input-output information, we measure the effect of aggregate energy costs aggregated over all stages of production on export performance. We develop a theoretical trade model that incorporates tradable intermediate goods to inform our empirical strategy. We then estimate a reduced-form model using panel data for 10 manufacturing sectors in 43 countries from 1991 to 2012. We find that
ignoring input-output relationship could significantly overestimate or underestimate the impact of energy shocks on export depending on intermediate factor intensities and trade relationship. Based on estimated trade elasticity, we simulate the economic consequences of energy cross-subsidies and carbon taxes. We find energy cross-subsidies that raise energy tariffs on industry to support lower rates for households and agriculture consumers could cost India USD $6.1 billion a year due to a decline in net exports. The impact of a carbon tax that unilaterally increases energy prices by 10 percent in the European Union (EU) is a reduction of EU-wide net export of 1.9 percent per year.

Bibliographical metadata

Original languageEnglish
PublisherWorld Bank Group
Number of pages40
Publication statusPublished - May 2017

Publication series

NamePolicy Research Working Paper