Working Paper: CEPR ID: DP18262
Authors: Lionel Fontagn; Philippe Martin; Gianluca Orefice
Abstract: Based on firm level data in the French manufacturing sector, we find that firms adapt quickly, strongly and through multiple channels to energy shocks, even though electricity and gas bills represent a very small share of their total costs. Over the period 1996-2019, faced with an idiosyncratic energy price increase, firms reduce their energy demand, improve their energy efficiency, increase intermediate inputs imports and optimize energy use across plants. Firms are also able to pass-through the cost shock fully on their export prices. Their production, exports and employment fall. A consequence of these multiple adjustment mechanisms is that the fall in profits is either non-significant, small or specific to only the most energy intensive firms. We also find that the impact of electricity shocks has weakened over time, suggesting that only firms able to adapt their production process to energy cost shocks have survived. Importantly, when faced with large electricity and gas price increases, firms are less able to reduce their consumption. These results shed light on the mechanisms of resilience of the European manufacturing sector in the context of the present energy crisis
Keywords: energy crisis; employment; production; competitiveness; electricity; gas
JEL Codes: L6; Q41; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Energy price shocks (Q43) | Firm outcomes (L21) |
| 10% increase in electricity prices (L97) | 16% decrease in production (E23) |
| 10% increase in electricity prices (L97) | 15% decrease in employment (J63) |
| Energy price shocks (Q43) | Export prices (P22) |
| Energy price shocks (Q43) | Production decrease (Q31) |
| Energy price shocks (Q43) | Employment decrease (J63) |
| Electricity shocks (L94) | Profit decrease (D33) |
| Electricity shocks (L94) | Adaptation of firms (D21) |
| Electricity shocks (L94) | Limit on adjustment capabilities (F32) |
| Energy price shocks (Q43) | Demand elasticity (D12) |