Energy and economic competitiveness study: Comments Ross Lambie General Manager Resources and Energy Economics May 2016

The study Objectives Why is it important? Quantitative analysis on how energy affects economic competitiveness using the most up to date knowledge of energy and industrial competitiveness Policy recommendations based on the analysis for policymakers in the APEC region Dissemination of information to the policymakers and concerned parties Why is it important? We should not forget that in 2014, APEC accounted for approximately: 40 per cent of the world’s population 54 per cent of the world’s total GDP (PPP) 47 per cent of the world’s trade

The study What is competitiveness? A meaningless concept? (Krugman, 1991; 1996) Ill-defined, conceptually vague, subject to abuse? (Spence and Karingi, 2011) Includes a country’s comparative advantage, traded prices and the benefits of specialisation – dynamic and frequently in conflict Conceptually complex But, export competitiveness is an important issue as evidenced by the motivation for this study The researchers note that there is no agreement on the key factors and improvement measures for economic competitiveness So, understanding export competitiveness is important, but difficult to do and choices have to be made

The review Contribution being sought Feedback and additional insights on energy efficiency and energy costs in major industries in major economies/countries Comments on the tentative results of empirical analysis on the relationship between the competitiveness of major economies and energy costs/energy prices Comments on the tentative results of macro-analysis using the GTAP Model

Energy costs Dynamics at play Gas and oil prices, 1995 to 2015 We need to keep in mind that a lot has happened since 2011 Energy prices Commodity prices Trade-offs - The energy trilemma: Equity Security Environment Department of industry, Innovation and Science (2016) Gas Market Report 2015

Energy costs Insights from tentative results Energy intensity of manufacturing in APEC Wide range across economies – Russia (458 toe/million USD) compared to Japan (91 toe/million USD) – attributable to different types of manufactured products (sector and sub-sector composition)? Also, a range across industries (Iron and Steel, Pulp and Paper) – attributable to different types of processes and technologies? Energy cost of manufacturing in APEC Energy’s share of total manufacturing costs increased by 0.7% between 1997 and 2011, while EU’s increase was 1.1% While in 2011, the share of energy’s cost in manufacturing were the same in APEC and the EU, over the period APEC has incurred a relatively larger increase in the cost of petroleum and coal products (0.5%) and a reduction in the cost of electricity (-1%)

Energy costs Comments Economy level comparisons between APEC and the EU provide insightful results, but the real benefit is in highlighting further questions relating to manufacturing in the different economies – what are the factors underlying the differences? A few definitions: Energy efficiency – ratio of activity or output to energy inputs Energy intensity – ratio of energy used per unit of activity or output Activity effect – changes in the level of overall economic activity Structural effect – changes in the activity mix in economic sectors of the economy Intensity effect – changes in the productivity of energy use

Energy costs Energy intensity and energy consumption Decomposition of change in energy consumption Decomposition of change in energy consumption – Australia manufacturing and construction Source: Department of Industry and Science (2015) End-use energy intensity in Australia.

Competitiveness and energy Tentative results Impact of energy intensity on industrial competitiveness not significant Impact of energy price on industrial competitiveness not significant Impact of relative energy price level on Revealed Comparative Advantage significant for iron and steel The models suggest is that in general there is no strong evidence that energy prices and efficiency are correlated with competitiveness using data from 1995 to 2013

Competitiveness and energy Model specification Other factors were mentioned that affect economic competitiveness: Geographical characteristics Foreign exchange rate Infrastructure Taxation system Other input costs Also, we know from the gravity model that: Bilateral trade between countries is proportional to size, measured by GDP, and inversely proportional to the geographic distance between them (Anderson) Firm size matters – larger firms export over longer distances (Chaney) – problem here is that coefficient on distance may be capturing both variable and fixed costs of trading if both increase with distance And, trade costs matter (although they are difficult to get good data on): Tariffs and non-tariff barriers, transportation costs, administrative hurdles, corruption, contractual frictions, access to trade finance…

Macro-analysis using GTAP Tentative results Case 1- Impacts of low carbon power generation Case 2 – Impacts of lower energy price Case 3 – Impacts of improved energy efficiency

Macro-analysis using GTAP A few comments To evaluate the results we need to understand each specific policy, how it has been modelled and the assumptions concerning the particular scenario For example, if environmental policies to reduce carbon emissions are represented as a tax, then what type of tax, what is its scope and what is done with the revenue raised - is it being ‘recycled’ to offset the impacts on consumers and producers? How would other policies to reduce emissions affect results? Need to be aware that dynamics are likely to play a significant role – adjustment costs either in capital investment or the labour market will affect outcomes (relative trade balance) – technical change (movement of the production possibility frontier) Coal is an interesting fuel to model in a CGE model. Not homogeneous - thermal and metallurgical; different thermal content, impurities, moisture etc. - All have implications for efficiency and environmental quality, including carbon emissions

Ross Lambie General Manager, Resources and Energy Economics Branch Department of Industry, Science and Innovation (02) 6243 7548 ross.lambie@industry.gov.au