Using electricity prices to curb industrial pollution

Peer Reviewed
1 January 2019

In this study, we show that changes in electricity prices in China have significant environmental consequences through its effect on industrial pollution emissions concentrations. To investigate this relationship, we pair a novel dataset of hourly smokestack-level pollutant emissions of industrial plants in Anhui, China with changes in hourly electricity prices. Using a difference-in-differences (DID) regression model, we find that pollution emissions from these plants have an inverse relationship with electricity prices. This relationship is most prominent for firms in the highly competitive and energy-intensive sectors of metals and cement production. On average, we find that a 1% decrease in electricity price leads to around 1%–5.8% increase in sulfur dioxide and particulate matters emissions concentrations. Similarly, we also found impacts on the number of hours in which emissions were observed. These results suggest that electricity prices could be an effective policy tool for managing air pollution – a challenge currently faced by many low- and middle-income countries. More generally, policymakers need to be cognizant that electricity sector-related policies could generate unintended consequences for the environment.

Publication | 17 July 2019