Purchase or generate? An analysis of energy consumption, co-generation and substitution possibilities in energy intensive manufacturing plants under the Japanese Feed-in-Tariff

To foster domestic electricity production, Japan introduced a Feed-in-Tariff policy in 2012, financed by a renewable levy. This paper examines the impact of this tax on industrial, energy intensive (EI) sectors using plant data from 2005 to 2018. We explore whether the introduction of the levy encouraged plants to substitute electricity purchased from the market with electricity generated on site and whether changes in energy consumption patterns triggered by the levy resulted in additional CO2 emissions from the plants. Our results show that a 1% increase in the levy rate results in a decrease in energy consumption, estimated to be around 3,800 tCO2e per plant on average. However, we also showed that the tax increase also leads to a rise in 0.03pp in the share of electricity generated on site, reflecting a marginal level of substitution between the two energy sources. We identify plants from the chemical sector as those with substitution capacity, and that the substitution leads to increased coal and gas consumption. Our results shed light on the effects of electricity taxes, and highlight the need for carbon pricing. Our paper also contributes to explaining mechanisms behind inter-fuel substitution in the EI sector, with a special focus on electricity and fossil fuel through cogeneration.