Energy-tax changes and competitiveness: The role of adaptive capacity

- Estimation of the effect of energy-tax changes on industry TFP and net trade.
- Can sectors with high adaptive capacity mitigate negative effects?
- Data: European manufacturing sectors tracked over the period 1990-2003.
- Adaptability is key to reducing the impact of energy taxes.
- It can even change the sign of the impact, making energy taxes a win-win.

This paper estimates the effect of energy tax (and price) changes on Total Factor Productivity (TFP) and net trade at the industry level, using a panel of industries from European countries covering the period 1990-2003. We investigate the hypothesis that industries with high adaptive capacity (measured by their relative level of labour compensation) are able to mitigate the adverse effects of energy tax rises better than others. We identify the pro-adaptation effect by interacting wage levels (a proxy for human capital) with energy taxes. We find that the negative marginal effect of higher energy taxes on TFP and net trade is significantly reduced for industries with stronger human capital and even turns to an overall positive effect in at least two cases. Up to three low-wage sectors display an overall negative effect. This suggests that human capital is key to adaptation to higher energy costs and climate policy, in some cases making it a win-win.