DNB studies industry resilience to cost increases

All three cost increases – energy, the power grid and the carbon tax – affect European industry. These increases put pressure on the competitiveness of large industrial energy consumers.  

Energy-intensive industries provided 7% of value added in the Netherlands in 2023. The government has pursued both subsidy and pricing policies for these sectors, with implications for public finances. The competitiveness of these sectors also affects the economic structure of the Netherlands, public revenues and financial institutions that invest in these firms. This makes it relevant for DNB to identify the impact of these cost increases. 

Energy prices have biggest impact

The DNB study consists of two parts. In the first part, we study how rising prices affect output in energy-intensive sectors. Our results show that rising energy prices have the largest impact. Differences do exist between sectors: chemicals and basic metals are particularly affected, while paper producers actually seem to benefit slightly.

In the second part, we look at differences in sensitivity within the most energy-intensive industrial sectors. To capture these differences, we assume a substantial carbon tax increase; this can be seen as a stress scenario. Various policy options are possible to meet the government's climate goals: subsidies, standardisation and pricing. In this stress scenario, we look at one of the options: pricing. Differences found within industrial sectors are indeed large: we see, for example, that larger firms, firms that are not part of the five concentrated industrial clusters, and firms with a foreign parent company are relatively well placed to bear higher emissions costs.

No more Russian gas

Compared to other economic blocs such as the United States, energy prices in Europe rose significantly faster following Russia’s invasion of Ukraine three years ago and the subsequent cessation of imports of natural gas from Russia. As a result, prices have remained higher than in regions with which the EU competes. Gas futures trading suggests a gas price in the Netherlands of €39/MWh by the end of 2025, compared to €11/MWh in the United States. 

Electricity costs are also high, and there is no prospect of a decrease for the time being. Electricity grids will require significant investment in the coming years as they are expanded to cope with the increased supply of, and demand for, lower emission energy sources. Compared to other countries, costs for Dutch industrial consumers have risen sharply following the discontinuation of a key volume discount scheme at the end of 2024.

Furthermore, the price of allowances for greenhouse gas emissions under the European Emissions Trading Scheme (ETS) has risen sharply in recent years. For years the price fluctuated between €5 and €10, but it has risen considerably since 2018. An average price of €67 is expected for 2025. Even taking into account the free allowances allocated to European industry, European emitters pay more than emitters outside Europe, where emissions pricing is often minimal. The effect of the increased carbon tax remains small for now due to the free allowances when compared to the increase in energy prices.

Impact mainly on chemicals and basic metals

The impact of price increases on industrial firms varies widely, both between and within sectors. The chemical and basic metal industries are hit comparatively hard by cost increases. The combined effect of higher energy, power grid and emissions prices is estimated to be an 8% decline in the chemical sector’s output and a 9% decline in the basic metal sector’s output in the Netherlands. 

The decline in the chemical sector’s output is large compared to other EU countries due to the intensive use of gas, and because the Dutch chemical industry exports a comparatively large proportion of its products to countries outside the EU, where energy and emission prices are lower. In most other sectors, the fall in output is smaller.  

For competitiveness in the next decade, other factors that may play a role include opportunities for boosting sustainability, the introduction of a European import tax for carbon intensive products (CBAM), labour costs, subsidies and the national carbon tax. Our study does not look at these factors because they are either highly company-specific, operate on a different time scale or have already been analysed in great detail.

Not everyone loses out

Some sectors, such as paper production, actually benefit overall from the price increases. This has to do with their energy efficiency. For instance, some companies in these sectors receive more free allowances than they need because of their clean production techniques. Others may see their costs increase, but less so than their European competitors, which gives them a competitive advantage. 

There are considerable differences between sectors, as revealed by a calculation with a stress scenario involving a hypothetical, hefty carbon tax on ETS companies. Although this higher tax reduces profit margins in all sectors, the impact varies widely. Some companies largely maintain their margins, especially if they make appropriate adaptations, while others become loss-making. Even within relatively hard-hit sectors, such as chemicals, some companies continue to make a profit even after the hypothetical increase in the carbon tax rate. 

Price incentives also lead to behavioural adjustments. At a hypothetical carbon tax of €50 per tonne, much higher than the current effective cost of carbon emissions, the share of loss-making industrial companies rises from 17% to 32% if we assume that companies bear the full cost of the tax themselves. This is the most pessimistic scenario. In practice, the rate is lower, and companies can probably pass on some of the costs or recoup them by improving their energy efficiency.

European coordination pays off

Companies can pass on costs better or even in full if competing countries face similar price increases. Common European policies are therefore essential. This is important for Dutch industries, as they mainly compete in the European market.

Our estimates reveal that adjustments at the national level have a significantly larger impact on output than changes at the European level. For example, a national increase in power grid costs has a greater impact than a higher European carbon tax rate. This highlights the need for coordination of energy and climate policies at the EU level. 

Changing geopolitical realities underline the importance of a strong Europe. This also presents opportunities, for example to further harmonise policies for industrial energy consumers. This is good for Europe as a whole, but especially for the Netherlands. The EU has already taken steps with the Draghi Report, the Competitiveness Compass and the EU Clean Industrial Deal, including proposals for further integration of markets. At the same time, there is still much to be gained. The EU Clean Industrial Deal, for example, enables Member States to broaden the scope for subsidising their industries. This could result in a further subsidy race between countries in Europe. In particular, countries with fiscal space and willingness to support their industries will be likely to provide subsidies, rather than those whose industries produce most efficiently. This would not seem to be in the interests of Europe, and certainly not in the interests of the Netherlands.