Environmental Violations in the Power Sector: Accountability and Community Welfare

Abstract

This study tackles a critical issue in business ethics: how firms respond after their plants violate environmental regulations. Our stacked difference-in-differences (DiD) analysis shows that non-compliant plants significantly reduce air pollution and electricity output while implementing long-term strategies to prevent future violations. These changes are driven by the utility firms' organizational structure, which fosters economies of scale, supported by government subsidies and environmental enforcement efforts. We observe significant post-violation increases in total assets, capital expenditures, long-term debt, revenues, expenses, and electricity prices. Despite these rising costs and revenues, operating income remains steady. While these measures are crucial for mitigating environmental harm, the shifting of compliance costs to communities raises serious concerns about social welfare.

Keywords: Environmental Violations, Stakeholder Theory, Electricity Prices, Community Welfare

JEL Classification: K32, Q48, Q50, D60, H23