ENERGYSUBSIDYREFORMINACTIONFIRM-LEVELEFFECTSOFENERGYPRICEINCREASESEvidenceandInsightsfromRecentResearchTECHNICALREPORTPublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizediiiCONTENTSContentsAcknowledgmentsvExecutiveSummaryvi1Introductionxx1.1.BackgroundandFirstPrinciples21.2.WhatDoMicrodataSayaboutFirm-LevelImpactsofEnergyPriceChanges?41.3.Firm-LevelResponseMechanismstoPolicy-InducedEnergyPriceChanges52ASummaryoftheLiterature122.1.Pass-Through152.2.Absorption172.3.Substitution222.4.InnovationandProductivity243TheImportanceofCarefulPolicyDesign324AreasforFutureWork34References37ivLISTOFFIGURESListofFiguresFIGURE1.1Firm-LevelResponseFramework6FIGURE2.1ScopeandCoverageofReview14vACKNOWLEDGMENTSAcknowledgmentsThisreportwaspreparedbystaffandconsultantsoftheWorldBankandtheEnergySectorManagementAssistanceProgram(ESMAP).TheunderlyinganalysiswasfundedbyESMAP’sEnergySubsidyReformFacility.ThemainauthorsareJuergenAmann,DefneGencer,andDirkHeine.Theauthorswouldliketoacknowledgecolleagueswhowereinvolvedindifferentstagesofthestudy,inparticularMinALee,NoeReidt,andTanjaLarsen.TheproductionofthereportbenefitedfromsupportfromSherrieBrownforeditingservices,LauraJohnsonfordesign,andHeatherAustinforpublications.TheauthorsareparticularlygratefultoMassimilianoCaliandPaoloAgnolucci,whoservedaspeerreviewersandwhoseinputsandadvicehelpedstrengthentheanalysisandthefinalreport.Anyerrorsofinterpretationarethesoleresponsibilityoftheauthors.TheauthorswouldliketorecognizeDemetriosPapathanasiou,GlobalDirectorforEnergyandExtractives,andChandrasekarGovindarajalu,ManagerofESMAP,forprovidingtheguidance,encouragement,andresourcesforthiswork.EXECUTIVESUMMARYviExecutiveSummaryEnergyisacriticalfactorofproductionforfirms,andenergysubsidiesencourageexcessiveandinefficientenergyuse.Whenthegovernmentsubsidizesanyspecificinput,firms’decisionsregardingtheoptimalmixofinputfactorstoproduceoutputaredistorted,whichcanreduceeconomicefficiency:reducingthepriceofoneparticularinputencouragesfirmstousemoreofitperunitofoutput,distortingboththeamountandthewayagoodisproduced.1Reformingenergysubsidiescanhelpaddressdistortionsandmisplacedincentivesforfirmstooveruseenergyandcanencouragefirmstoallocateproductioninputsmoreefficiently.Thecomplextopicofhowfirmsareaffectedbyandrespondtopolicy-inducedenergypriceincreaseshadnotbeenextensivelyexploredinresearchandtheacademicliteratureuntilrecently.Inthepastfewyears,moreevidenceandstudiesexploringthissubjecthavebecomeavailable.Tobetterunderstandemergingknowledgeandevidenceinthisfield,thisreportreviewsaselectionoftheacademicandempiricalliteratureonthefirm-levelimpactsofenergypriceincreasespublishedfrom2010onward.Therecentempiricalliteratureshowsthattheimpactofenergypriceincreasesandfirms’responsestothemdependonmultiplefactors.Thesefactorsincludethefirm’senergydependence,themagnitudeofthechangesinpricelevels,andtheavailabilityofoptionsthefirmcanusetoadaptandreduceenergyconsumptioninresponsetopricesignals.Firmshaveseveralresponsemechanismsattheirdisposalwhenconfrontedwithpolicy-drivenenergypriceincreases.Firmstypicallynavigatepolicy-inducedenergypricechangesby(1)passingthepriceincreaseontocustomers;(2)absorbingthepriceincrease;(3)replacingoneenergycarrier2withothers,orchangingtherelativesharesofenergyandotherinputs;or(4)usingfirm-levelcapaci...
