Public Disclosure Authorized Public Disclosure Authorized 10436 The Effects of Energy Prices on Firm Competitiveness Evidence from Chile Juergen Amann Arti Grover Public Disclosure Authorized Public Disclosure Authorized Policy Research Working Paper Finance, Competitiveness and Innovation Global Practice May 2023 Policy Research Working Paper 10436 Abstract This paper analyzes the impact of changes in energy prices on the competitiveness of manufacturing firms in Chile. Using the Chilean Annual National Industrial Survey data, the paper illustrates that, first, increases in energy prices generally do not hurt firm competitiveness. Second, the impact of energy prices depends on the fuel type—while electricity price increases are negatively correlated with firm outcomes, fossil fuel price increases have a positive association with investment and firm productivity, a result that is consistent with the strong version of the Porter hypothesis. Third, these effects are heterogeneous and vary by firm attributes such as size, ownership and location. Fourth, investigating non-linear patterns in firm outcomes based on the level of energy prices, the findings show that the positive correlation between fossil fuel price increases and capital upgrading is particularly pronounced when energy prices are at relatively low levels. This paper is a product of the Finance, Competitiveness and Innovation Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at agrover1@ifc.org. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team The Effects of Energy Prices on Firm Competitiveness: Evidence from Chile ∗ Juergen Amann (University of Nottingham)† Arti Grover (International Finance Corporation, World Bank Group)‡ JEL Classification: D21; D24; L60; O14; Q41; Q55. Keywords: Energy prices; Fossil fuels; Firm productivity; Firm-level technology adoption, Competitiveness. ∗ This research was completed under the guidance of Marianne Fay, Country Director for Chile. The authors are grateful to Doerte Doemeland and Yira J. Mascaro for their strategic guidance, and to Esperanza Lasagabaster, Vincent Palmade, Richard Record, Erik von Uexkull and several colleagues from the Ministry of Finance in Chile for their useful comments. † email: amannj.work@gmail.com ‡ Corresponding author, email: agrover1@ifc.org 1 Introduction Green growth requires green technologies, that is, production techniques that economize on exhaustible resources and emit fewer greenhouse gases. Yet, investment in such technological changes is inhibited because carbon, usually used as shorthand for greenhouse gases (GHGs), is highly mispriced.1 For instance, fossil fuels subsidies and the failure to implement taxes or controls for internalizing the risks of climate change result in a substantially lower user cost of carbon than is appropriate from a long-term societal perspective. Pricing carbon to reflect its true cost remains challenging due to political reasons.2 In addition, assessing the effects of energy price variation on firm-level outcomes is difficult due to extensive data requirements and identification issues. Consequently, empirical work analyzing the impact of energy prices on firm competitiveness is still relatively scarcer in developing countries compared to developed economies (Burke et al., 2016). This paper contributes to understanding the effects of energy price increases on manufacturing firm-level outcomes in Chile, an emerging economy, which has undergone fast-paced economic development in recent years.3 Chile is an interesting case as