Increasing energy costs are unlikely to affect businesses and trade

Researchers from the London School of Economics and Political Science (LSE) have published the first analysis to quantify the effect that energy prices have on global trade.

Dr Misato Sato and Dr Antoine Dechezleprêtre analysed 62 business and industry sectors in 42 countries over a 15-year period, using data that covers 80% of global merchandise trade. They concluded that a large increase in energy prices would have only a very small effect on a country’s exports and the balance of trade.

The paper stated that energy prices explain less than 0.01% of the variation in trade flows, suggesting that differences in energy prices are a marginal driver of trade globally. For instance, the authors calculated that a 10-fold increase in the EU carbon price would be equivalent to a 30% increase in energy prices, but would cause exports to fall by only 0.5% and would increase imports by 0.07%.

“To put things into perspective, while a 30% increase in energy costs in the European Union would increase imports by less than one-tenth of a per cent, imports have actually been growing at an annual rate of 15.6% since 2009,” said Dr Sato. “Therefore, the impact on trade of more ambitious policies to reduce greenhouse gas emissions is likely to be extremely limited.”

Even in energy-intensive sectors, changes in energy prices explain less than 0.01% of the variation in exports and imports over the past 15 years. Dr Dechezleprêtre said, “Contrary to some claims … even a sizeable difference in the price of energy relative to the rest of the world has only a very small impact on a country’s imports and exports.”

The paper therefore suggests that the risks of ‘carbon leakage’ - whereby a high carbon price would force the biggest polluters to relocate and cause greenhouse gas emissions to increase elsewhere - while not entirely unfounded, have been overstated.

“Even heavy, energy-intensive industries are more resilient to high energy prices than has been suggested by some companies and politicians,” Dr Dechezleprêtre said. “Policy-makers should not allow the prospect of an increase in energy and carbon prices to dictate efforts designed to cut emissions and tackle climate change.”