The impact of climate-related targets on Belgian business
Most readers in Belgium are familiar with the renovation obligation for family dwellings, but they may not know how Belgian businesses perceive stricter climate-related rules. How will these impact their costs and sales prices? How do they see demand and investment moving forward? In May of this year, we conducted an online survey of Belgian firms to gauge their views on climate-transition policy. To do so, we were able to rely on a broad network of employers’ organisations, which had previously provided us with useful insight during the Covid-19 and energy crises. Around 300 firms from various industries and of varying size responded to the survey.
Judging from the response rate, firms’ interest in this survey appeared much more limited than for those conducted in the period 2020-2021, when there were thousands of respondents. This may suggest that not all firms are losing sleep over climate-related issues. Indeed, it is likely that mainly those most affected by the climate transition or related policies opted to take part in the survey, which attracted a relatively large share of respondents from the manufacturing industry, more specifically energy-intensive firms. Therefore, it is not possible to generalise the results for the Belgian business landscape as a whole.
Exploratory questions: carbon price, obstacles and drivers
The exploratory questions provided some surprising insights: most respondents were unable to correctly assess the current carbon price in the EU Emissions Trading System (ETS). Nonetheless, this is an important pillar of European climate policy, which aims, among other things, to reduce net greenhouse gas emissions by 55% by 2030 (compared with 1990 levels) and to reach climate neutrality by 2050.[1] Belgian firms, incidentally, question the feasibility of the 2030 target: as many as three quarters of respondents doubt it can be achieved.
The survey also probed the obstacles to and drivers of climate-related decisions. The main obstacles include, unsurprisingly, cost and profit considerations, an unclear policy framework and a heavy administrative burden. The factors most often cited as influencing climate-related investments by 2030 were energy and carbon prices, climate regulations and requirements from clients or investors. With regard to energy prices, respondents expect a remarkably similar increase in Belgian gas and electricity prices, in the region of 40% on average by 2030. In addition, 90% expect energy prices in Belgium to remain relatively higher than in the rest of the world.
[1] You can read more about European climate policy in this blog post: The macroeconomic aspects of climate neutrality – a European perspective | nbb.be.
Key questions: the impact of the climate transition
After the exploratory questions, it was time to get down to brass tacks. We asked firms to assess the impact of the climate transition on their input costs, sales prices, demand and investment over the past three years and the expected impact by 2030. Over three quarters of respondents attributed a recent increase in input costs and sales prices to the climate transition. Firms have not been able to pass on higher input costs to customers to the same extent through higher sales prices. Our analysis suggests that it is relatively more difficult for large manufacturing firms with foreign competitors to do so. A similar proportion of respondents believe that the climate transition will lead to higher costs and prices in the near future.
Three quarters of respondents believe that the climate transition will lead to higher costs and prices in the near future.
The impact on demand is somewhat less clear: some firms saw a climate-related increase in the past, while others reported a decrease. This is also the case for the future. Respondents in the manufacturing industry indicated a net negative impact in both cases, with more firms anticipating a drop in demand. It is notable that while this group has been able to pass on higher costs to a lesser extent, they nonetheless on average signal a contraction in demand. This weighs on their financial capacity while it is mainly these firms that will have to make additional (investment) efforts in the coming years to reduce greenhouse gas emissions.
The impact on investment is also rather mixed. Some firms intend to invest more for climate-related reasons, e.g. to meet certain emission requirements, while others may invest less in additional capacity. While the expected net effect on investment in Belgium and other European countries is not unequivocally positive or negative, the survey does reveal a clear trend towards more net investment outside the EU. About a quarter of respondents cited plans in that direction, while only 8% of firms foresee scaling back extra-EU investment. A portion of this may entail the relocation of investments: several firms in our sample indicated that they expect to cut investment in Belgium by 2030 but are planning to invest more outside the EU.
A negative supply shock
All in all, the survey does not paint a very rosy picture of the climate transition’s expected impact on participating firms and seems to predict a negative supply shock with higher prices and lower growth.
All in all, the survey does not paint a very rosy picture of the climate transition’s expected impact...
Of course, critical readers may note that the results could be presented here in a more negative light, as we can assume that only the hardest-hit firms chose to take part in the survey and may have deliberately given more pessimistic answers. We tried to compensate for this by means of supplementary analysis. For instance, at the end of the survey, firms were asked again about the foreseen impact of the climate transition by 2030, but only after we had provided them with information on the expected path of the carbon price in two ways, which can be seen as an approximation for the stringency of climate policy. We were able to compare their answers with their previous carbon price expectations to calculate the extent to which the “information shock” led to different expectations.
This allowed us to determine a causal relationship between the carbon price and certain business variables through econometric regression. For more (technical) information on this study, we invite you to read the working paper to be presented at the NBB’s biennial international research conference on 3 and 4 October. The main takeaway is that we found a significant positive relationship between the carbon price and business expectations for energy and input prices by 2030. Moreover, a higher carbon price also increases the probability of firms transferring investment outside the EU.
