A
major element of Trump proposals for US energy policy targets complaints that
energy costs, driven by supposedly excessive concerns over climate issues, are
disadvantaging US industry, notably in competition with China. As usual there
is a complex story to be told, probably too complex for a short comment, but
the following observations ought to provoke some thought.
“It’s a lament that rarely holds up under examination
of the facts. All too often, these complaints are part of a lobbying campaign
that is essentially political. And when that’s not the case, we usually find
there’s a lot of money at stake in industries that are reluctant to invest in
adjusting to future challenges. And even when corporate leaders know that these
investments are necessary, a majority of them still believe the cost should be
paid by the taxpayer. That leads them to threaten using their deadliest weapon,
the threat of job cuts and the relocation abroad of their factories and
production operations.”
Does
this sound familiar in a US context? Could it have been written by a US
commentator? I suspect it does and could. But, surprising as this may seem, it
was written
by a former German environment minister in 2014. The context was not the supposedly high
costs of US industry, but concerns about the competitiveness of European and
especially German industry in relation to a low energy cost USA. He continues the
attack.
The complaints by European industry lobbyists, that
energy costs are putting them at a “destructive” competitive disadvantage,
simply doesn’t stand up to scrutiny. Industry lobbyists will say either that
the costs of labour are too high, or that their big problem is the price of
energy. America’s historically low gas prices are at present the cause of yet
more European moaning.
The facts show how wrong they are. Energy costs
account on average for less than 3% of gross production costs in Germany,
whereas staffing costs account for about 20%. Even if you look at shares of
gross value creation, the energy costs don’t exceed the 10% mark. Yet,
industrial lobbies and trade associations continue to prophesy the end of the
Western world.
I
made similar points in recent evidence to the House of Lords in respect of their
questions about loss of industrial capacity in the UK and energy costs as a
possible cause.
It is
difficult to argue that there is a strong relationship between high energy
costs and the loss of industrial capacity in the UK. The following points tend
to support this sceptical perspective.
1. The Committee on Climate Change analysis[1] suggests that the proportion of industry
and GDP for which energy costs are a significant influence on a firm’s price competitiveness
is quite small. [c 2.6% of GDP]. If
analysis is confined to goods in extra-EU trade the proportion will be smaller.
2. Exchange
rate movements are substantially more significant in their impact on cost
competitiveness. The recent depreciation of sterling will have substantially
improved the UK position in an international energy price comparison (except to
the extent that domestic prices embody international fuel prices). But the same
exchange rate depreciation will also have a much bigger and generally more
important competitive impact on firms through making their comparative labour
costs, and other domestically incurred costs, more favourable (since these are
a bigger proportion of total costs even for most energy intensive industry),.
3. The
loss of UK industrial capacity in the 1980s and 1990s has been strongly
associated with the advent of North Sea oil, sometimes known as the “Dutch
disease”, and strongly associated with the exchange rate impacts of North Sea
oil as well as of economic policy during that period. It had little to do with
energy prices per se.
4. In
general the association of energy prices with measures of competitiveness looks
weak. Many of our Asian competitors have
faced higher energy costs than the UK or EU. Germany, widely regarded as the
most “competitive” of the EU economies, also has among the higher levels of
energy costs, in spite of what is sometimes seen as an artificially competitive
exchange rate position within the euro[2].
5. There
are likely to be some “carbon leakage”[3]
issues for particular energy intensive and internationally traded products and
industries, especially if competitors are subject to less stringent emissions
targets. This should not in principle be a problem in relation to EU
competition, assuming the UK were to continue to participate in a reformed EU
ETS[4],
but may be a problem in relation to other countries, eg Chinese steel.
6. However
the appropriate response may be to consider remedies for each of the small
number of affected sectors on its merits, rather than to distort the general
pattern of UK energy policy. The
political and economic issues are very much akin to those of general trade
policy, anti-dumping etc. Anticipation of a changing post-EU trade environment
obviously adds to the potential complexity of this particular issue.
From all this we might deduce
the probability of a strong read across to the US, ironically with US gas being
a main focus of comparison for European “moaning”. The reality for the US is, I
suspect, closer to the following.
US coal, and coal communities,
will have been hit hard by the fall in US gas prices. Climate policies are a
convenient scapegoat in a political environment that includes a strong ideological
commitment to rejection of climate science.
There is also a very strong
perception that American jobs have been destroyed by competition from “cheap”
Chinese labour. Migration of some industry to poorer countries with lower
labour costs is an almost inevitable consequence of globalisation. We can and
do argue at length in every developed economy about how best to deal with that.
It is a serious issue of adjustment to globalisation and free trade. But that
is a debate for another day.
The real point though is that energy
prices per se seem unlikely to have much connection with concerns over “unfair”
Chinese competition, for the reasons given above. What dominate are first real labour costs,
and second exchange rates. Exchange rates are part of the process of adjustment
that allows trade to balance in response to differing comparative advantage
between countries[5].
Inevitably someone will have a comparative advantage in labour costs and
someone else in energy or agricultural production.
Given its resource endowment,
the US has always been in a strong position on energy compared to Europe, and
it is worth noting that China is pressing ahead hard with an emissions
reduction agenda. So using competitiveness concerns as an excuse to avoid
ambitious climate targets looks like a particularly specious argument.
There have been other concerns
in Europe, mainly on the emissions impact of the unloading of surplus US coal,
but that is another and more familiar story.
What is challenging and
depressing is the apparent universality of almost entirely phoney claims for
the profound significance of energy costs in industrial competitiveness. A good
time to ask if the emperor actually has any clothes, or to shout “Cui Bono?”.
Who benefits?
[1]Reducing the UK’s carbon footprint and managing competitiveness risks,
Committee on Climate Change April 2013.
[2] In the sense that reversion to the DM
would make Germany much less competitive. But it should be noted that Germany
has also been accused of cross-subsidising parts of its heavy industrial
sector.
[3] Carbon leakage occurs if a country
exports its own industry emissions to another country solely as a result of
having a more stringent policy on CO2 reduction, possibly resulting
in the unintended consequence of higher global CO2 emissions.
[4] This point, and that the bulk of this
trade is intra-EU, is made in the 2013 Committee on Climate Change report.
[5] In fact the whole concept of industry competitiveness
becomes quite questionable in this context. But that again is another question for
another day.
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