Innovation is key to increasing EU business competitiveness

‘Telling stories’ is a unique and powerful human tradition. Its power lies in the ability to influence the choices we make together and how we see the world. By way of repetition and using symbolic language that hits our emotional imaginary, stories develop their own reality, including fear and hope, no matter how ungrounded in facts they might be. The shale gas ‘revolution’ is one of these stories. The story goes like this: gas is so much cheaper in the US that their industries are gaining a competitiveness advantage that is killing business in the EU.Despite the fact that the economic data shows the opposite- that industry exports remain strong and industry is managing price increases through becoming more efficient – many actors of society, including industry associations, Government departments and the media, are telling the opposite story. This in turn is generating unnecessary fear, weakening EU’s commitment to climate change, increasing EU reliance on fossil fuels. The result is that if left unchecked this story will threaten EU innovation capacity- which is key to unlocking EU competitiveness and productivity.

According to the International Energy Agency (IEA), outside the petrochemicals sector there is no evidence that low energy prices have led to a resurgence in investment or production in the US.This is true also for employment figures: the number of overseas firms moving to the US appears negligible compared to the 6 million jobs that disappeared there between 2000 and 2009. Using official US Government data, the IEA estimates that since 2010 only 50,000 manufacturing jobs out over 500,000 have been added to the economy by investment from overseas firms. A closer look at the facts shows that EU energy-intensive goods still dominate global export markets, despite the widening gap in energy prices that has been in play since 2008. EU steel imports have fallen and exports risen since 2009. A similar picture is shown by analysis undertaken by the European Chemical Industry Council. It shows that despite a severe economic crisis and cheap US gas prices, between 2005 and 2010 the EU chemicals industry grew by +1.6% per annum, whereas the chemicals industry in North America shrank by -1.4%.

High energy prices

Another story fuelling the current debate is that ‘ambitious’ climate and energy policies are responsible for high energy prices in Europe. A quick look at the evidence shows that this is more a myth than reality. Energy-intensive companies have stated privately to shareholders that the EU flagship climate policy, the Emission Trading Scheme, is not a threat to their European operations.Analysis from the European Commission backs this leaked position: a recent European Commission Energy Price and Costs Study found that taxes and levies for financing energy and climate policies are the smallest element of energy prices in most Member States. For most companies energy costs are not a reason of concern as they are only a small share of total costs. In Germany, for example, more than 90% of the manufacturing industry spends less than 2% of revenue on energy.Only for some energy intensive industry, such as cement and steel, energy costs are more than 6% of revenue. They comprise however less than 2% of the overall economy and most of them enjoy large exemptions from green charges – in 2014, grants for German heavy industry will rise by more than 20% to €5.1 billion.

What is actually driving energy prices up is rising global fossil fuel prices as well as EU’s rising fossil fuel import dependency. Brent oil prices increased by 60% and traded coal by 35% between 1990 and 2013 – driven by rising energy demand in emerging economies. China’s energy consumption alone increased by more than 75% between 1990 and 2011. At the same time the EU increased its reliance on fossil fuels, with its dependency rate rising from 40% to 54% between 1990 and 2011.[1]In 2012 the EU spent $500 billion on imports of oil alone.

Smart innovation

What Europe needs to protect the competitiveness of its businesses is a story of what really enhances business competitiveness in an increasingly globalised and crowded world that is hungry for natural resources. This is a story of smart innovation based on a doing-more-with-less approach that creates new business opportunities and enhances the competitiveness and productivity of EU industry. According to the IEA, the best way to protect industry against rising electricity prices is through promoting greater energy efficiency which allows energy intensive and non-energy intensive industries to produce more using lowered energy inputs – thus managing overall costs. As shown by a recent report by Climate Strategies, there is a large, untapped potential for investment in efficiency technologies and for the efficient operation of existing assets.However, without action by governments to encourage industry to make the necessary investments, even those which pay for themselves, the economic potential for improving energy efficiency and generating new revenue will not be realised. Similarly, OECD analysis shows that through a robust implementation of energy efficiency measures profits in the EU iron and steel sector will actually increase by 0.5% by 2035 as production shifts from least developed countries to the EU as a result of reduced production costs.

The EU 2030 process offers the opportunity to guide businesses successfully through the low-carbon transition and protect them from the risks of rising energy costs. To prosper, Europe’s business community doesn’t need to import a revolution, simply needs to start its own one.

[1] E3G, Public support, competitiveness and growth: Why energy efficiency is a key component for making the 2030 package work

This blog first appeared on the the E3G website: http://www.e3g.org/library/innovation-is-key-to-increasing-eu-business-competitiveness 

 

Luca Bergamaschi (@lucaberga) is a Researcher at E3G. He is an UoE Energy Policy Group alumnus.

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