Energy performance and capital expenditures in manufacturing industries

Abstract

Little is known about how firms change energy consumption over time. Yet, to meet global climate change targets, understanding how changes in firm investment impact environmental performance is important for policymakers and firms alike. To investigate the environmental performance of firms, we measure the energy consumption and efficiency of firms in the Netherlands’ manufacturing industries before and after large capital expenditures over the 2000 to 2008 period. Unique to this data set is that firm investment is decomposed into the following three streams: investment in buildings only, investment in equipment only, or a simultaneous investment in both buildings and equipment. We find that firms increase energy consumption when experiencing a simultaneous investment. However, after large capital expenditures, energy efficiency increases. Further decomposition by firm types suggests that the building capital investments of firms active in high-tech, energy-intensive, and low labor-intensive industries do not coincide with energy efficiency improvements while energy efficiency does increase with capital expenditures in equipment. From a policy perspective, it is important for regulators to understand firm investment and production processes, which help regulators understand when and where energy efficiency increases are feasible across firm types and expansionary production strategies. Firms, regulators, and other third parties may work together to develop an energy efficiency plan in line with investment strategies, including enhanced transparency by firms, energy efficiency subsidies, and R&D tax credits, for innovation. Targeted agreements may work to cooperatively improve energy performance.