Impact of environmental regulation and the 2011 earthquake on the Japanese electricity industry

Abstract

Environmental regulations may erode competition owing to additional costs of compliance. To investigate the impact of such regulations in the Japanese electricity market, we analyze the effects of the environmental quality threshold set for public sector procurement. Using data on electricity procurement auctions from 2005 to 2012, we employ an endogenous switching regression model. We show that the environmental quality threshold lowers the participation of new power suppliers in auctions but does not increase their winning bids as long as competition is maintained. In fact, compliance with the quality threshold has made new power suppliers competitive in green auctions. By contrast, electricity utilities have suffered increased compliance costs since the Great East Japan Earthquake in 2011 owing to the shutdown of nuclear power plants and increased reliance on fossil fuels.