Energy Prices and the Competitiveness of Energy Intensive Industries in Egypt

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1 Energy Prices and the Competitiveness of Energy Intensive Industries in Egypt Noha Elboghdadly 1, El Sayeda Ibrahim 2 and Ramadan Maklad 3 Egypt has been facing a number of challenges concerning supplying affordable energy needed for sustainable development. One of the main challenges is the energy subsidy system. As a result, the Egyptian government has started a plan to phase out those energy subsidies at the end of The first steps were directed towards energy intensive industries through a gradual in natural gas and electricity prices. Five energy intensive industries namely; aluminium, cement, ceramic, iron &steel and fertilizer industries are selected to be studied in this research. The research follows a "Before and After" approach to first study the impact of higher natural gas and electricity prices on the competitiveness of the selected energy intensive industries during the period ( ). Higher energy prices has its largest effect on raising the cost of producing nitrogen fertilizer (urea) industry by 84%, while the smallest in costs has been shown in ceramic industry by 13%. The research then investigates the estimated impact of two expected scenarios; importing natural gas and importing coal, on the selected energy intensive industries. The study found out that the selected industries are expected to experience a large in their cost of production when importing natural gas, while a decrease in their production costs when importing coal. However, after internalization of social costs of both natural gas and coal in cement industry, as a case study, the study found out that the highest energy cost and the lowest profit is expected to be when importing coal. Keywords: Energy subsidy, Energy Intensive Industries, Natural gas, social costs, Egypt. 1. Introduction: Energy subsidies in Egypt have recently become one of the most debatable issues for being inefficient and for its heavy burden on the public budget. They capture the largest share of total subsidies in Egypt. In the fiscal year 2012/13, the share of energy subsidies was 70% of total subsidies and around 20% of total government expenditure in Egypt, (MOF, 2014) Energy intensive industries capture a large share of energy subsidies for being the largest energy consumers in the industrial sector. The following two figures show the share of the natural gas and electricity subsidies allocated to five energy intensive industries in Egypt in 2006/2007. The amount of natural gas subsidy given to these industries was about L.E 3.4 billion at that year, which was around 51% of total natural gas subsidy. While the amount of electricity subsidy allocated to energy intensive industries was around L.E1.1 billion that represents 36 % of total electricity subsidy at that year. 1 Teaching assistant of Economics, Department of Economics. Alexandria University, Egypt. noha.nagy@alexu.edu.eg 2 Professor of Economics, Department of Economics. Alexandria University, Egypt. elsamoustafa@yahoo.com 3 Associate Professor of Economics, Department of Economics. Alexandria University, Egypt. ramadanmaklad@yahoo.com

2 Figure (1): Allocation of natural gas Figure (2): Allocation of electricity Subsidy in 2006/07 subsidy in 2006/07 Others 49% Ceramic 1% Source: Calculate by the author based on data from (Egyptera, 2011/12, CAPMAS, 2013). Due to both its inefficiency and its huge strain on the budget, the government recently has started to phase out energy subsidies. As a result, the government has taken steps toward eliminating energy subsidies as an unsustainable policy tool of energy pricing. The government issued some decrees since 2008 to gradually remove energy subsidies to those industries. These steps have been questioned with fears concerning the competitive position of energy intensive industries after raising energy prices. This study concentrates only on both natural gas and electricity subsidies; however those industries still benefit from subsidies on other petroleum products like mazut and indirect subsidy of gasoline used in transportation. 2. Literature Review: Iron & steel 8 % Fertilizer 28 % Cement 13.7 % Others 64 % Cement 10 % Iron &Steel 12% Aluminm 10 % Fertilizers 3 % Ceramic 1.3 % There are many studies that show the effect of an in energy prices on the cost of production and the competitiveness of industries. Most of the studies focus on the energy intensive industries as energy accounts for large proportion of their cost of production. Some of these studies deal with in energy prices in developing and emerging countries, mainly as a result of eliminating or reforming energy subsidies. Other studies focus on developed countries that experienced energy price s; either due to in the global energy prices or as a consequence of environmental regulations and the EU Emissions Trading Scheme (EU ETS). In the following part we will present some of these studies that give insight into the relationship between energy cost and the competitiveness of industries Competitiveness Impact of Energy Price Increase in Developing Countries: A study by (Hope and Singh, 1995) examined the experience of six developing countries 1 that have implemented domestic energy price reform during the 1980s. The study investigated the effect of energy price on inflation, growth, public revenue and industrial competitiveness. With respect to the effect on industrial competitiveness, energy cost shares and industrial output changes were presented. In Ghana, most industries showed an expansion of output during the period of energy price except for diamond and iron rods which accounted for the highest energy cost share. The in energy prices might have been absorbed through reduction in profit margin. In Zimbabwe the decline in the output of metals (mainly steel) was significant, and the competitive nature of the international metal market limited the possibility for passing through in costs to final consumers.

3 A simulation made by (Saunders and Schneider, 2000) assumes that subsides on coal, natural gas and petroleum products are removed progressively in some developing and transition economies over the period from 2001 to 2005 and the impacts are projected to The simulation in that study is based on the application of ABARES' 2 Global Trade and Environmental Model (GTEM) 3. They examined the effect of removing energy subsidies on 17 regions and 15 industries. The commodity aggregation has been chosen to include three fossil fuel petroleum products and major energy intensive products. GTEM requires a reference case which represents the likely outlook of 2010 in absence of any policy to reduce or remove energy consumption subsidies. The results of the simulation showed that there are significant declines in energy intensive output at 2010 relative to the reference case. These declines occurred because the in the price of energy inputs that the production costs of these industries and reduce their competitiveness. Similarly, in assessing the impact of raising energy cost by 100%, a study by the (ESCWA, 2005b) found out that this could have a large impact on the competitiveness of some industries in selected Arab countries. The study measures the loss of competitiveness by the decrease in production and exports of these industries. The study found that the loss of price competitiveness associated with the higher production costs could generate a 5-15 % loss in exports. The most significant loss in exports was found in cement industry in Jordan by 60% followed by Lebanese food & beverage industry by 25%. Also the Egyptian raw cotton exports could fall by 14% as result of raising energy costs. In Egypt, (Khattab, 2007) investigated in his paper the potential impact of reducing energy subsidies in Egypt on the profitability of energy-intensive industries. A partial equilibrium approach was applied to assess such policy. Results about profitability ratios under various subsidy reduction scenarios indicated that energy-intensive industries would not be severely affected. On average profitability ratios were relatively high; the highest profit ratios appeared in the cement industry where for some companies profit ratios exceeded 40%, while the lowest ratios appeared in the steel industry. As a conclusion, the study argued that subsidy reduction would not severely affect the profitability of energy-intensive industries. However, a gradual approach would be advisable if the government was to consider a complete elimination of energy subsidies. This will give the energy-intensive sector time to adjust to free market pricing of energy products. This results came to assert the studies made by (IDSC, 2004, IDSC, 2005b); where the first study concluded that removing subsidy of natural gas and electricity, which raise the cost of producing fertilizers by 27%, wouldn t affect the competitiveness of this industry negatively since it enjoys high profit margins. Also the second study revealed that raising the prices of natural gas and mazut could raise the cost of producing cement by 33.6%. However, the nature of oligopoly in the cement industry in Egypt enables the producers to pass the in the cost to the consumers, as result their profit margin wouldn't affect dramatically Competitiveness impact of energy price in developed countries: To have a closer look at the developed countries, they experienced energy price at different period of time due to the in the global energy prices. Furthermore, the effect of environmental regulations that was imposed on these countries also leads to an in industrial energy prices.

4 The global energy prices showed an during the period ( ) mainly natural gas, fuel oil and LPG due to the surge in the demand for energy especially from US and Asian countries. The European Commission (EC) was concerned about the impact of d energy prices on the competitiveness of energy-intensive industries. As a result, a study was presented by ICF International (2007) to The European Commission to investigate the impact of the in global fuel prices on the EU energy sector as well as on those manufacturing sectors that are high energy users. Using the information on the share of each energy product in the industry s total fuel use and the percent in the price of each energy product, they found that the energy costs of the EU iron and steel industry d by 73% from ( ), while the energy costs of the US industry d by 75% over the same period. This in the energy costs lead to an of 15% in the total manufacturing costs of the EU industry and an 11% in the total manufacturing costs of the US industry. The energy costs of the EU and the US primary aluminium producers d by 55% and 52%, respectively. This in the energy costs lead to an of 20 % in the total manufacturing costs of the EU industry and a 17 to 18% in the total manufacturing costs of the US industry. Energy costs of the EU and the US producers d by 56% and 25%, respectively in the paper and pulp industry. As a result, total manufacturing costs of the EU pulp and paper industry d by close to 11% in the period, while the US industry s total manufacturing costs d by slightly over 4%. Despite raising energy costs, the EU-25 position in external trade has improved since 2000, with Europe currently having comparative advantage in the pulp and paper production. The total energy costs of the EU producers d by about 91% while the energy costs of the US producers d by 47% in the glass industry where both the EU & US position in external trade has deteriorated over these five years. Recently, many studies link the in energy prices and industrial competitiveness through the environmental regulations. More than three decades ago, the first Earth Day in 1970 marked the beginning of the modern environmental movement. Since then, an increasing number of industrialized countries have adopted environmental regulations measures on their energy and pollution intensive industries. This has led many to suspect that environmental regulation may be playing a major causal role in impairing the competitiveness of these firms. The conventional wisdom is that environmental regulations impose significant costs, slow productivity growth, and thereby hinder the ability of the firms to compete in international markets. This loss of competitiveness is believed to be reflected in declining exports and increasing imports, (Jaffe et al., 1995). Concerns over the international competitiveness of industrial sectors, mainly the energy intensive industries, have even d after the launch of the European Union Emission Trading Scheme (EU ETS) 4 in Most of the literatures in the above context are concerned with EU and U.S energy intensive industries. Many authors examined the impacts of energy price changes resulting from different carbon-pricing policies on the competitiveness of selected US energy-intensive industries. For example, (Morgenstern et al., 2007) studied the impact of a $10 per ton CO 2, which implies higher energy prices (including electricity), on total production cost of energy intensive industries in U.S. The most adverse effect was found in the petroleum sector followed by primary metals (e.g.

5 iron & steel and aluminium), paper and printing and non- metallic minerals (cement). With pass through of cost into prices, the study shows that the above industries experienced a loss of demand under 1% with exception of primary metal of 1.5% reduction in demand. Similarly, (Aldy and Pizer, 2011) forecast the impact of carbon price of $15per ton CO 2 on the competitiveness of energy intensive industries. Their study based on econometric analysis of historic relationship between electricity prices (as proxy for energy prices) and employment, output and trade. They found out the competitiveness (which is measured by production- consumption) of both industrial chemicals and papers decreased by 0.9%, followed by iron & steel by 0.8% and aluminium and cement each by 0.7%. Also some studies examined the impact of ETS on the competitiveness of industrial sector in Europe. Both (Reinaud, 2005) and (McKinsey & Ecofy, 2006) studied the impact on iron & steel, cement, paper& pulps, refineries and primary aluminium sectors. The two studies showed that cement bear the largest in cost of production followed by refinery sector. The effect of in electricity prices, as an indirect effect of ETS, has its largest impact on cost of production of aluminium. 3. Methodology: This research uses "Before and After approach" to show the effect of raising energy prices since 2008 on the cost of production, prices and profit margins of five selected energy intensive industries in Egypt ( Cement Iron& steel Nitrogen Fertilizers Aluminium - Ceramic). Assumption of the approach: 1- There is an only in the prices of natural gas and electricity. 2- The price of natural gas to the electricity sector is constant. 3- Change in the cost of production is due to change in energy cost only, other things being equal. 4- No change in energy intensity of the selected industries, so they use the same amount of energy to produce one unit of output. 5- Exchange rate used is the official exchange rate of each year based on the average monthly exchange rate. Steps of the approach: For each of the selected industry, both natural gas and electricity cost per ton was calculated before and after the laws of raising energy prices as follows: 1) Natural gas cost is calculated by multiplying average thermal energy requirement by the natural gas prices. MBTU/ton * L.E/ MBTU = Natural gas cost (L.E/ ton)... (1) 2) Electricity cost per ton is calculated by multiplying average electricity requirement per ton by the electricity prices. KWH/ton * L.E/ KWH = Electricity cost (L.E/ ton)... (2) 3) Total energy cost (L.E/ton) = natural gas cost + electricity cost...(3) 4) Change in average cost of production is the original cost of production plus the change in the energy cost New average cost production (L.E/ton) = Original cost of production (L.E/ton) change in energy cost (L.E/ton)... (4)

6 5) Gross profit margin is calculated in percentage with respect to the final product prices per ton Profit margin (%) = [{Domestic price (L.E/ton) Average cost of production (L.E/ton)} / Domestic price (L.E/ton)] * (5) 4. Findings: 4.1. The effect of raising energy prices on the energy intensive industries in Egypt: Phasing out energy subsidies has the largest impact on the cost of production of nitrogen fertilizers (Urea) as shown in the two figures below (3, 4). Raising both natural gas and electricity prices during period ( ) led to an in energy cost by L.E 443 / ton. This has raised the cost of producing one ton of urea by 84% Raising natural gas prices gradually by 380%, from $1.25/MBTU to $6/MBTU, leads to raising the cost of producing one ton of cement by 55.6% during the period ( ). While raising electricity prices by 124%, from L.E /KWH to L.E 0.3 /KWH, leads to raising the production cost by only 9%. Iron and steel follows, where raising natural gas prices gradually by 220%, from $1.25/ MBTU to $4/MBTU, leads to an in the cost of production by 12% during the period ( ). On the other hand, raising electricity prices by 124%, from L.E0.134/ KWH to L.E0.3/ KWH, has the effect of raising the cost of production by 6.6%. Therefore, the total effect will be an in cost of producing one ton of steel by 18%. Aluminium uses only electricity, so the in cost of production is due to the in electricity prices only. Raising electricity prices by 124%, from L.E0.134/ KWH to L.E0.3/ KWH, has raised the electricity cost by L.E 2407/ton during ( ). As a result, the production cost has been d by 29%. The least effect was seen in ceramic industry; where raising natural gas prices by 76%, from $1.25 to $2.2 /MBTU, has raised production cost by 8.6%. On the other hand, raising electricity prices by 113%, from L.E0.134 to L.E 0.286/ KWH, have raised the production cost by only 4.5%. As result, the production cost has been d by around 13% during ( ).

7 Figure (3): The effect of raising natural gas prices on the production cost of energy intensive industries in Egypt 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 82% Natural Gas Cost Effect 55.6% 11.7% 8.6% N.Fertilizers Cement Steel Ceramic Source: Prepared by the author based on table (1) in the appendix. Figure (4): The effect of raising electricity prices on the production cost of energy intensive industries in Egypt 35% 30% 25% 20% 15% 10% 5% 0% 29% Electricty Cost Effect 9% 6.6% 4.5% Aluminum Cement Steel Ceramic N.Fertilizers Source: Prepared by the author based on table (1) in the appendix. 2% Comparing the in the cost of production of the selected industries with the in their prices during the same period, figure (5) shows that in most cases prices more than energy cost. As mentioned above, fertilizers had the largest in the production cost, while prices have been d by only 26%. As a result, profit margin has been reduced to be 31% during the same period. Increasing energy prices would adversely affect producers who are directing all their production to the domestic market, such as Abu Qir Company. However, free zone companies that are allowed to export are still having large profit margin since the export prices are far above the domestic ones.

8 Percentage Proceedings of Paris Economics, Finance and Business Conference On the other hand, both cement and steel experienced high prices which are far above in energy costs. Cement prices have d by 36% more than the energy cost, while for steel, the average price of the product has risen by 23% more than the in energy costs. As a result, profit margin has d for cement and steel by 10% and 8%, respectively. If cement producers passed all the in the energy cost to the consumers, prices would be 22% less than actual price while keeping the same profit margin in However, if cement producers borne all the in the energy cost and prices remained at their level L.E 358/ton, their profit margin would drop to be 10%. Although the profit margin decreases significantly, this price is still making the industry relatively more competitive. In a similar way, if the steel producers absorbed all the in the energy cost and prices remained at their level L.E 3530/ton their profit margin would decrease to 22%, however the price would be more competitive. Similarly aluminium prices have been raised by around 40%; i.e. by 9% more than the in the electricity cost. This has raised its profit by around 5% during the same period. Also ceramic prices have been raised by 18.5% more than energy cost effect. Figure (5): The change in energy intensive industries' cost of production and prices in Egypt during the period ( ) N.Fertilizers Cement Aluminum Steel Ceramic Production cost Actual prices Source: Prepared by the author based on table (1) in the appendix The effect of expected scenarios on energy intensive industries: The natural gas shortage in Egypt has its effect on the industrial sector and mainly the energy intensive industries. As a result, a number of policy options should be considered to take place in the energy sector in the near future to augment supply and satisfy the increasing demand for energy. This would change the energy mix in Egypt. Two of the expected scenarios are presented below: importing natural gas and importing coal. These scenarios are compared to the reference (baseline) scenario of $6/MBTU that is assumed to be currently paid by all the selected industries to show their effects on energy intensive industries, assuming constant output prices and the exchange rate of

9 Percentage % Proceedings of Paris Economics, Finance and Business Conference I: Importing natural gas: The anticipated shortage of natural gas has encouraged the government to suggest that industrial private companies to import their need of natural gas. According to the Egyptian Electricity Holding Company (EEHC), the import price of natural gas ranges between $12 and $14 per MBTU based on 2012/13 prices, (EEHC, 2013). Assumptions: 1) The import price is expected to be $12/ MBTU. 2) The price of electricity supply is assumed to be constant (not affected by the in natural gas prices). 3) The change in the cost of production is assumed to arise from change in natural gas price, other cost items being equal. As shown below in figure (6), the fertilizer industry is expected to be the most affected of the selected industries, where its cost s by 69%. Cement and ceramic industries are to experience an in the production cost by 41% and 32%, respectively. The least effect is expected to be in the steel industry, where the cost of producing one ton rises by only 19%. Figure (6): The effect of importing natural gas scenario on the production cost of energy intensive industries in Egypt N.Fertilizers Cement Ceramic Iron &steel Source: Prepared by the author based on data in table (2) in the appendix. On the profitability side, doubling natural gas prices have the greatest negative effect on the fertilizers industry that reduces its profit margin to (-50%). The second industry being affected is cement, where profit margin drops to 37%, by around 33%. The extent of the negative effect is smaller in both of the steel and ceramic industries, where their profit margins are expected to decrease to 31% and 58.6%, respectively.

10 Percentage Proceedings of Paris Economics, Finance and Business Conference Figure (7): The effect of importing natural gas scenario on profit margin of energy intensive industries in Egypt cement Iron &steel N.Fertilizers Ceramic Baseline Source: Prepared by the author based on table (2) in the appendix II: Importing coal: Imported NG scenario According to the Egyptian Electricity Holding Company (EEHC), the import price of coal ranges between $4 and $5 per MBTU, and this is considered cheaper than both domestic natural gas price and import price of natural gas, (EEHC, 2013). To analyse the effect of importing coal scenario on energy intensive industries, we will focus only on cement, iron& steel and ceramic industries. Assumptions: 1) The import price is expected to be $5/MBTU. 2) Costs don't include the cost of fuel switching, neither coal infrastructure nor transportation costs. 3) The change in the cost of production is assumed to result from change in thermal energy cost, other cost items being equal. Comparing this scenario, the baseline scenario (domestic natural gas prices at $6/MBTU), or the first scenario (imported natural gas price at $12 /MBTU), using coal is cheaper, as source of energy, relative to natural gas. The table below shows that the cost of production is the lowest for importing coal. Compared to the baseline scenario, the cost of production of cement, ceramic and steel, in the first scenario will by 41%, 32%, 19%, respectively. However in the second scenario, the cost of production will decrease by 7%, 6% and 3%, respectively. If the producers reduced their product prices by the same decrease of the production cost in the importing coal scenario, the product prices would be relatively competitive compared to the other two scenarios.

11 Table (1): The comparison of the production cost of selected energy intensive industries in the three scenarios Values: L.E/ton Baseline (reference) Imported NG Percentage change in production cost (1) Imported coal Cement % 301-7% Steel % % Percentage change in production cost (2) Ceramic % % Source: Prepared by the researcher. (1) and (2) are calculated with respect to the baseline scenario On the profitability side, the imported coal scenario shows the highest profit margin for the three industries, while the imported natural gas scenario shows the lowest profits as shown below. Figure (8): The profit margin of selected energy intensive industries under the three scenarios Baseline Imported NG Imported Coal Baseline Imported NG Imported Coal Baseline Imported NG Cement Steel Ceramic Source: Prepared by the researcher based on table (1) and table (2) in the appendix. Imported Coal 4.3. The effect of including social costs on energy intensive industries (Case study: cement industry): The expected scenario of importing coal and using it in Egypt's energy has raised many fears concerning its environmental impacts and social costs 7. A study by the World Bank (WB, 2002) points out that the damage cost of environmental degradation 8 in Egypt in 1999 was estimated at L.E10-19 billion per year, or % of GDP, with a mean estimate of L.E14.5 billion or 4.8% of GDP. In 2011, the environmental

12 $ / MBTU Proceedings of Paris Economics, Finance and Business Conference costs of CO 2 emissions reached L.E89 9 billion that accounted for 6.4% 10 of GDP, (CAPMAS, 2014);WB database). Table (2): Social costs of natural gas Vs coal used in cement industry in Egypt Social cost items Coal Natural gas Health and Environment ($/MBTU) Carbon emissions ($/MBTU) Total ($/MBTU) Source: (Mowafy, 2014). The above costs are to be added to the market price of either natural gas or coal to reflect the true cost of using it. As shown in the figure (9) below, the price of coal after adding the social costs is $22.7 /MBTU compared to its import price of $5/MBTU only. On the other hand, even though the market price of natural gas in either the baseline scenario or the imported scenario is relatively higher than coal, its price becomes lower after adding the social costs in both scenarios. Figure (9): Total costs of coal and natural gas in cement industry in Egypt Baseline Imported NG Imported Coal Market prices Health & Environment costs Carbon emissions costs Source: Prepared by the author based on data from (Mowafy, 2014). Based on the above estimates of social costs, the author re-estimates the effect of using either natural gas or coal by adding their social costs on the profitability of cement industry. The following figure shows that cement industry achieve the highest profit margin and the lowest energy cost by using coal than natural gas. However, taking social costs into consideration, coal leads to the highest energy cost and the lowest profit margin compared to natural gas either at domestic price or imported one. Therefore, from financial point of view, coal is considered the cheapest source of energy to be used by energy intensive industries. However, taking into consideration the economic or social costs, we found that coal would be the most expensive source of energy as applied on cement industry

13 L.E /ton Percentage % Proceedings of Paris Economics, Finance and Business Conference Figure (10): The effect of different energy scenarios on cement industry in Egypt Baseline Baseline with Social Costs Imported NG Imported NG with Social Costs Importes Coal Imported Coal with Social Costs 0 Energy cost Source: Prepared by the author based on table (3) in the appendix. 5. Summary and Conclusions: Profit margin One of the main critiques of the energy sector in Egypt is its high level of subsidies. As a result, the Egyptian government has started a plan to phase out energy subsidies gradually. According to the ministerial decrees issued by the government, natural gas prices have d from $1.25/MBTU to $4/MBTU for steel and fertilizer industries, and to $6/MBTU for cement industry. Also electricity prices have d from L.E0.134 /KWH to L.E0.3 /KWH. These decrees don t have a significant effect on the selected industries cost of production and their profit margins. Generally, the findings of the study came in consistence with finding of other previous studies, (IDSC, 2005b, Khattab, 2007); that raising energy prices (mainly natural gas and electricity) can be absorbed by most of the energy intensive industries in Egypt without raising the prices of their products by the same percentage. High profit margins of these industries enable them to tolerate more in energy prices. Raising energy prices has relatively large impact on the fertilizer industry, mainly due to the fact that natural gas constitutes large proportion of its cost of production (30 % - 40%). Nitrogen fertilizers' domestic prices are far below the international prices, which conserve their competitive position. However, high natural gas prices might harm the domestic companies that direct all their production to satisfy the domestic demand. These companies are restricted in setting their prices by limits imposed by the agriculture development bank in Egypt, (IDSC, 2004). However, free zone companies, that export most of their production, are able to tolerate the in natural gas prices due to the gap between both local and international prices, and therefore can keep reasonable profit margin. Most of the energy intensive industries in Egypt are having an oligopoly market; the fact that allow to raise their product prices more than the in energy inputs, to keep high profit margins. The main two industries that have witnessed large

14 in their prices during the period ( ) were cement and steel industries. Higher cement, steel and ceramic prices will trigger higher costs for the construction sector that could affect the household negatively. The high carbon emissions associated with using coal will reduce the Egyptian national competitiveness, where the significant health impacts of using coal would affect the productivity of labour that affect nations' competitiveness. Also using coal will affect export opportunities negatively, where the world is currently in a trend of using carbon footprint as a measure for evaluating goods and services. Comparing natural gas and coal, as sources of energy, should not be done from financial perspective only; as this would lead to irrational decisions concerning the energy future map in Egypt. Ignoring the social costs of using fossil fuels will accelerate their depletion and distort decisions to invest in renewable energy. End-notes: 1 Malaysia- Indonesia Ghana Zimbabwe - Colombia and Turkey. 2 ABARES stands for Australian Bureau of Agricultural and Resource Economics and Sciences. 3 GTEM is a multiregional, multisector, dynamic general equilibrium model of the world economy developed to address global change policy issues. 4 One of the important elements of the EU climate strategy is the European Union Emission Trading Scheme (ETS). The ETS scheme is a market-based mechanism that creates an incentive for energy-intensive industries to reduce their emission of greenhouse gasses such as CO 2. 5 $ 1 = L.E 6.87 (World Bank Database). 6 Ceramic cost of production is L.E/m 2 7 Social costs are those costs borne by the society and not reflected in the market price. Damages to human health caused by air pollution and damages from climate change, associated with the high emissions of greenhouse gases from fossil fuels are examples of social costs. 8 The environmental degradation include: water, land (that include damages to both agricultural land and forests), air, waste and coast. 9 CO 2 emissions in 2011 (188 m tons) * $80 * ER of year 2011(5.93) =89 billion L.E. 10 Calculated as: [CO 2 emissions costs / GDP] in References: 1. ALDY, J. E. & PIZER, W. A The competitiveness impacts of climate change mitigation policies. National Bureau of Economic Research.

15 2. CAPMAS The subsidy system in Egypt. 3. CAPMAS Egypt in figures. 4. CBE different issues. Monthly statistical bulletin. Central Bank of Egypt. 5. EEHC The electricty sector vision of using coal. Ministry of Electricty and Energy, Egypt The Egyptian Electricty Holding Company. 6. EEHC different issues annual report. Egyptian Electricity Holding Company. 7. EGYPTERA 2011/12. The cost of producing, transporting and distributing electricity Egyptian Electric Utility and Consumer Protection Regulatory Agency. 8. ESCWA 2005b. Improved energy efficiency and the uses of cleaner fossil fuels in selected sectors in certain ESCWA member countries, Part I: Improved energy efficiency in energy-intensive industries (In Arabic), UN. 9. HOPE, E. & SINGH, B Energy price s in developing countries. Policy Research Paper, ICF international Analysis of the economic impact of energy product prices on competitiveness of the energy and manufacturing sectors in the EU: Comparison between EU & US. 11. IDA 2012 Industrial sectors technical database. 12. IDSC The economics of price liberalization for the nitrogen fertilizer industry (in Arabic).. Cairo, Egypt: Information and Decision Support Center (IDSC). 13. IDSC 2005b. The impact of price liberalization of the cement industry inputs on the industry and final consumer (in Arabic). Cairo, Egypt Information and Decision Suppor Center (IDSC). 14. JAFFE, A. B., PETERSON, S. R., PORTNEY, P. R. & STAVINS, R. N Environmental regulation and the competitiveness of US manufacturing: what does the evidence tell us? Journal of Economic literature, KHATTAB, A. S The impact of reducing energy subsidies on energy intensive industries in Egypt. 16. MCKINSEY & ECOFYS Report on International Competitiveness. EU-ETS Review, Report for the European Commission. 17. MOF Monthly Publications Ministry of Finance, Egypt. 18. MORGENSTERN, R., ALDY, J. E., HERRNSTADT, E. M., HO, M. & PIZER, W. A Competitiveness impacts of carbon dioxide pricing policies on manufacturing. Assessing US Climate Policy Options. Resources for the Future, Washington DC (USA).

16 19. MOWAFY, S. A Environmetal and health effect of using fossil fuel energy in Egypt :" Social costs of both fossil fuels and renewable energy".. Ministry of State for Environmental Affairs Egyptian Environmental Affairs Agency. 20. REINAUD, J Industrial competitiveness under the European Union emissions trading scheme, International Energy Agency Paris. 21. SAUNDERS, M. & SCHNEIDER, K Removing energy subsidies in developing and transition economies, ABARE. 22. WB Arab Republic of Egypt Cost Assessment of Environmetal Degradation.

17 Appendix Table (1): The effect of raising energy prices on energy intensive industries in Egypt Before 2007 Cement Iron & Steel N. Fertilizers (Urea) Aluminium Ceramic After 2013 Before 2007 After 2013 Before 2007 After 2013 Before 2007 After 2013 Before 2007 After 2013 Average thermal energy (MBTU/ ton ) Prices of NG ($/MBTU) Cost of NG ($/ton) Cost of NG (L.E/ton) Annual in NG cost (L.E /ton) Average consumption of electricity (KWH/ton) Electricity prices (L.E/KWH) Electricity cost (L.E/ton) Annual in electricity cost (L.E/ton) Total energy cost (L.E/ton) Annual in energy cost (L.E/ton) Average cost of production (L.E/ton) Domestic price (L.E/ton ) Profit margin (%) Source : Prepared by the author based on data from (CBE, different issues, IDA, 2012, EEHC, different issues ) 17

18 Table (2): The effect of importing natural gas on energy intensive industries in Egypt Industry Cement Iron & Steel N -Fertilizers Ceramic Average thermal energy (MBTU/ton) Before After import Before import After import Before import After import Before import After import import Prices of NG ($/ MBTU) Cost of NG ($/ton) Cost of NG (L.E/ton) Increase in NG cost (L.E/ton) Electricity cost (L.E/ton) Total energy cost (L.E/ton) Average cost of production (L.E/ton) Domestic price (L.E/ton) Profit margin % (52) Source: Prepared by the author based on table (1) in the appendix and (EEHC, 2013).

19 Table (3): The effect of including social costs on the cement industry in Egypt Baseline Imported NG Imported Coal Average thermal energy (MBTU /ton) Market Price of NG/Coal ($/MBTU) Social costs ($/MBTU) Thermal energy cost ($/MBTU) Thermal energy cost (L.E/ton) Without Social Costs With Social Costs Without Social Costs With Social Costs Electricity cost (L.E/ton) Without Social Costs Total energy cost (L.E/ton) With Social Costs Average cost of production (L.E/ton) Without Social Costs With Social Costs Domestic price of cement (L.E/ton) Profit margin (%) Without Social Costs With Social Costs Source: Prepared by the author based on table (9) and table (1) in the appendix. 19