Obstacles to the greening of energy-intensive industries
An uneven recovery
The euro area was significantly affected by the recent surge in energy costs, with energy-intensive companies bearing the brunt. Our research reveals a contrasting picture: while less energy-dependent firms managed to restore their profit margins after the shock, energy-intensive firms did not. The latter experienced significant drops in input costs due to falling energy prices in 2023 yet failed to see a rebound in their profit margins.
Using quarterly firm-level data for the period 2021-23, we examined how 1 205 energy-intensive firms in Belgium, employing 96 000 workers, absorbed the energy price shock. We then compared their experience to that of 13 040 less energy-intensive manufacturing firms, with 486 000 workers. Belgium is an excellent sample as it hosts one of Europe’s main petrochemical clusters, has a very energy-intensive manufacturing sector, and boasts a similar industrial structure to Germany, the Netherlands and Italy.
While less energy-dependent firms managed to restore their profit margins after the shock, energy-intensive firms did not.
Notes: Sales refers to nominal sales in euro. Analysis was carried out at the detailed sector level. The manufacturing industry was split into 48 subsectors based on the classification used for the supply-use tables (SUT). “Energy-intensive industry” includes Belgium’s most gas-intensive sectors (fruit and vegetables, fertilisers, inorganic chemicals, agrochemicals, glass, bricks, cement and lime, concrete, steel and steel rolling). “Other industry” includes the 38 remaining manufacturing sectors.
Figures 1 and 2 break down the 2021-22 and 2022-23 change in sales per worker into input costs, wages and profit margins. As can be seen, “energy-intensive” and “other” industries adapted differently to the price shock. A rise of over 10% in nominal sales per worker across the board was seen in 2022 (Figure 1), linked primarily to higher input costs (blue bar) – particularly in energy-intensive sectors. Both groups surrendered a portion of their margins to absorb increased costs. In 2023, energy markets normalised, and energy-intensive firms experienced a significant drop in input costs due to falling energy prices, yet their profit margins failed to recover (see Figure 2). Conversely, less energy-dependent firms managed to restore their margins.
European carbon taxes – successes and challenges
Energy-intensive firms are now preparing for cost increases tied to the ETS. By financially disincentivising carbon emissions from industrial installations and aviation, the ETS is expected to incentivise investment in low-carbon production techniques and pressure heavy polluters to adapt or exit the market.
The scheme had met its 2020 emissions reduction target by 2014. In 2023, ETS-regulated emissions fell 16% year-on-year, meaning more than three quarters of the 2030 reduction target has already been realised.
Energy-intensive firms are now preparing for cost increases tied to the ETS.
Notes: The power sector includes emissions from stationary installations with two-digit NACE code 35. Industry includes emissions from all other stationary installations. The reference year is 2013, the start of phase 3 of the EU ETS. Emissions from Great Britain are excluded.
The power sector has emerged as a frontrunner in emissions reduction since 2013, when phase 3 of the EU ETS began. This sector’s progress (Figure 3, blue line) stems largely from two factors: the widespread adoption of renewable energy sources and the transition from coal to natural gas. While it notably accounted for 80% of the reduction in 2023, further emissions cuts by this sector are increasingly difficult.
Industry has not made comparable progress over the past decade (Figure 3, grey line). This disparity is due partly to regulatory differences, e.g. the allocation of free emissions allowances to manufacturing firms and technical challenges to green production. Indeed, there is still uncertainty regarding the financial feasibility of carbon abatement technologies in industry.
What’s the problem?
Industrial firms participating in the ETS mostly produce intermediate goods. The emissions of these firms fell by 14% between 2021 and 2023, while their output of intermediate goods declined by approximately 7% over the same period (Figure 4). The drop in emissions was therefore largely the result of lower production rather than greener processes, frustrating the ETS goal of balancing emission reductions with economic growth. Moreover, the phase-out of free emissions allowances will accelerate from 2026. Large-scale investment will be needed if emission reduction targets are to be met without a drop in industrial output. Otherwise, European firms risk becoming “brown zombies”, unable to compete in an increasingly green economy.
Carbon tax revenue is a potential source of financing for businesses. However, assuming realistic carbon prices, it is likely to be insufficient for countries to provide substantial funding; firms will therefore need to find internal wellsprings or rely on other sources.
Broader implications
Tighter profit margins undermine the self-financing ability of energy-intensive firms, potentially impeding crucial outlays on carbon abatement technologies, leading to higher carbon costs and eroding industry’s edge in the low-carbon transition. Yet high energy costs pose a broader threat to economic growth as they jeopardise the overall economic stability needed for the transition.
Retaining technologically advanced, energy-intensive sectors is crucial to Europe’s competitiveness and shift to carbon neutrality and requires coordinated efforts and substantial investment. In this regard, the proposed Industrial Decarbonisation Accelerator Act appears promising.
The views expressed in this blog post are those of the authors and do not necessarily represent those of the European Central Bank or the National Bank of Belgium.
