Too much energy The perverse effect of low fuel prices on firms

Massimiliano Calì, Nicola Cantore, Leonardo Iacovone, Mariana Pereira-López and Giorgio Presidente

Journal of Environmental Economics and Management, 2022, vol. 111, issue C

Abstract: This paper provides novel evidence on the impact of changes in energy prices on manufacturing performance in two large developing economies — Indonesia and Mexico. It finds that unlike increases in electricity prices, which harm plants’ performance, fuel price hikes result in higher productivity and profits of manufacturing plants. The results of instrumental variable estimation imply that a 10 percent increase in fuel prices would lead to a 1.6 percent increase in total factor productivity for Indonesian and 1.4 percent for Mexican plants. These effects are driven by the incentives that fuel price increases provide to plants towards replacing inefficient fuel-powered with more productive electricity-powered capital equipment. These results help to re-evaluate the policy trade-off between reducing carbon emissions and improving economic performance, particularly in countries with large fuel subsidies such as Indonesia and Mexico.

Keywords: Fuel subsidy; Energy prices; Productivity; Technology adoption; Indonesia; Mexico (search for similar items in EconPapers)
JEL-codes: O13 Q4 Q55 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Working Paper: Too Much Energy: The Perverse Effect of Low Fuel Prices on Firms (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:111:y:2022:i:c:s0095069621001315

DOI: 10.1016/j.jeem.2021.102587

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