Rising energy prices and productivity: short-run pain, long-term gain?

By Christophe André, Hélia Costa, Lilas Demmou, Guido Franco, OECD Economics Department

Rising energy prices resulting from the strong post-COVID19 economic recovery and the war in Ukraine threatened to derail the post-pandemic recovery. Beyond exogenous price changes, increasing reliance on environmental policies to achieve climate change goals has also meant that energy prices have been on an increasing trajectory and will probably continue to be. Coal, natural gas and electricity are critical inputs to production in various sectors and an increase in their price can strain firms’ profitability. High energy prices could also deter investment, undermining firms’ productivity and competitiveness even further.

Policymakers may push towards temporarily shielding corporations from energy price shocks to preserve their economic performance and industrial jobs, at the expense of blurring the price signal needed for the green transition. To design policies that reconcile the two goals of providing firm support when faced with energy price increases and promoting the green transition, it is key to understand the conditions under which the impacts of energy price increases on firms materialise.

Against this backdrop, our new paper (André et al. 2023) uses historical cross-country firm-level data to estimate the impacts of energy price changes on firm productivity, a key driver of firms’ performance. We distinguish between the short- and the medium- term impact, by explicitly modelling the dynamics of gains and costs, on which the current literature is limited. Our analysis relies on newly updated measures of sectoral energy prices estimated through country-level prices and sectoral energy mixes, based on Sato et al. (2019), allowing us to explore country-industry-year variation in energy prices.

How do energy prices affect firms’ productivity?

Following an energy price shock, firms adjust their capacity utilisation, affecting their productivity. Specifically, our estimates suggest that a 5% increase in energy prices reduces productivity by approximately 0.4% one year later. The firms most affected are those operating in energy-intensive sectors, as well as firms that are financially constrained or small. This impact is also contingent on macroeconomic conditions: for example, when a country’s economy runs above potential (i.e., has a positive output gap), energy price increases have a less negative impact in the short term.

However, this impact changes over time, and firms may display positive productivity gains in the medium term. In particular, a shock corresponding to a 10% increase in energy prices is associated with an increase in productivity growth of around 0.9 p.p. four years after the shock. These gains are more likely in less energy-intensive sectors and for firms that are more likely to invest in newer, more energy-efficient capital. In addition, they are less likely to materialise in the case of more severe shocks.

Figure 1. The medium-term response of productivity to energy price shocks

Panel A: The thick black line represents the average change in firms productivity growth following a 10% energy price shock. Panel B: The blue solid (green dashed) line represents the average change in firms productivity growth following a 10% energy price shock in high (low) energy intensity sector. The shaded area represents the 90% confidence interval around the estimates.

Our analysis offers some indications that investment could be a channel through which this sign reversal operates. Energy price shocks are more likely to affect productivity positively when coupled with favourable conditions for investment to take place, as for example in countries with more stringent environmental policy, where managers are more likely to be aware of energy efficiency technologies. Conversely, in environments of large economic policy uncertainty, firms face lower scope for productivity gains as they are likely to delay irreversible investment including energy efficiency investment.

These results offer insights into policies for promoting firm performance and avoiding the risks of productivity stagnation, while encouraging the green transition. First, governments could incentivise firm-level decarbonisation by letting price signals on fossil fuel energy operate, especially in expansionary periods of the business cycle when the cost of adjustment is lower. Further, the analysis outlines several directions to establish a green-investment-friendly environment, for example by easing access to finance, reducing policy uncertainty, improving predictability of retail electricity prices, and increasing awareness of environmentally related challenges and solutions through environmental policy. Finally, this work suggests that in the case of severe shocks, like the one experienced last year, costs are likely to be high and persistent. To reduce scars for the corporate sector, some support to vulnerable but productive firms may be needed, especially for small and financially constrained firms which are the most at risk.


André, Christophe; Costa, Hélia; Demmou, Lilas; Franco, Guido, 2023. Rising energy prices and productivity: short-run pain, long-term gain?, OECD Economics Department Working Paper, no 1755, OECD Publishing, Paris, https://doi.org/10.1787/2ce493f0-en.

Sato, Misato; Singer, Gregor; Dussaux, Damien; Lovo, Stefania, 2019. International and sectoral variation in industrial energy prices 1995–2015. Energy Economics, 78, issue C, p. 235-258.