Climate change has risen inexorably up the agenda not only of governments, but of the private sector too.  Nowhere is this more evident than in the manufacturing sector, which is one of the primary producers of greenhouse gas emissions.

In many ways, it seems like something of a no brainer for the sector to target emissions, as making their operations more efficient has productivity benefits as well as environmental ones.  Indeed, research has highlighted a direct correlation between process improvement and energy reductions.

This narrative was further explored in a recent study that also set to take into account things like energy prices alongside the quality of management.  The study assessed around 2,250 manufacturing companies from 38 different countries.  The assessment captured management practices from each firm alongside energy data from the European Bank for Reconstruction and Development (EBRD) – World Bank (WB) Business Environment and Enterprise Performance Survey (BEEPS) and the EBRD, European Investment Bank (EIB) and WB Middle East and North Africa (MENA) Enterprise Survey (ES) combined with the supply cost, consumer prices and environmental cost of fossil fuels data from the IMF.

Driving change

Fossil fuel subsidies are hugely important, as they amounted to nearly $5 trillion around the world in 2013, or 6.5% of global GDP.  This has to be set alongside the high environmental costs in many of the countries in the study, but particularly those with a tradition of energy intensive industry, such as Ukraine.

Perhaps unsurprisingly, the analysis found that subsidies matter, but that better managed companies appear to respond to the external environment more intensely.  In other words, if subsidies are greater, then so too is their energy usage, and vice versa.

Put quantitatively, when managerial quality moves from the 25th to the 75th percentile, they show a 21% reduction in energy usage when subsidies are low.  This relationship was unsurprisingly found to be strongest in energy-intensive sectors.

Environmental costs

Whilst managerial practices didn’t appear to change when environmental costs were high, this was nonetheless linked with lower energy usage, suggesting that companies do take things like pollution and climate change into account.

The data suggests that these environmental costs are similar in magnitude to the fossil fuel subsidies, such that the overall effect on the relationship between the firm’s management quality and their fuel intensity was negligible.  It did, however, find that in high-energy sectors, environmental costs were not sufficient to compensate for any gaps in the consumer price and supply costs of energy.

So whilst improving management can most definitely increase the productivity of the firm, it’s no guarantee that it will result in better environmental performance.  Indeed, if the right incentives aren’t present, it could even result in more energy usage as better managed firms tend to use energy more efficiently.

If governments wish to reduce their overall emissions, therefore, it would pay them to carefully consider the way subsidies distort the price of fuel in the knowledge that this has a significant impact on company behavior.