The sources of regulated productivity in Chinese power plants: An estimation of the restricted cost function combined with DEA approach

Abstract

China's fossil fuel electric power industry, a traditionally energy- intensive industry, is the focus of recent environmental regulation. In this paper, we propose a framework to measure the effect of environmental regulation on power plants. First, we use the non-parametric distance function to construct the regulatory stringency index with DEA for specific fossil fuel electric power plants. Second, we incorporate the proposed regulatory stringency index into the restricted cost function, to estimate the environmental regulation effect on power plants, including the effect on productivity and elasticities of substitution. This approach allows us to overcome the problem of the data unavailability. Results indicate that there is an approximate U-shaped effect of environmental regulation on productivity growth. Productivity growth is mainly driven by technological progress. The substitution possibility between capital and energy is a good sign for Porter hypothesis in China. These findings provide policy implications for power plants to carry out environmental regulation and improve production performance.