The impacts of carbon pricing on the electricity market in Japan

To achieve carbon neutrality by 2050, Japan should speed up reducing fossil fuel reliance on production, especially for energy-intensive sectors. One way is by implementing a carbon pricing system, converting emissions from fossil fuels to costs of production and consumption. This study focuses on the correlation between the price of wholesale electricity spot market and carbon cost of nine regions in Japan through carbon cost pass-through rate. This paper applies polynomial OLS regression with degree two through machine learning technics to better fit the relationship between electricity price and demand and also applies a generalized additive model to capture the nonlinear relationship between fuel spread and carbon cost and test the robustness of estimated CPTR. The results show that Hokuriku, Kyushu, Shikoku, Tohoku, and Tokyo have a lower value carbon cost pass-through rate while Kansai, Chubu, and Chugoku have a higher rate of carbon cost pass-through. There is a special case in Hokkaido as the negative relationship between electricity price and carbon cost. Those findings are also crucial in supporting future policy adjustments.