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Inferring Carbon Abatement Costs in Electricity Markets: A Revealed Preference Approach using the Shale Revolution

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  • Joseph A. Cullen
  • Erin T. Mansur

Abstract

This paper examines how much carbon emissions from the electricity industry would decrease in response to a carbon price. We show how both carbon prices and cheap natural gas reduce, in a nearly identical manner, the historic cost advantage of coal-fired power plants. The shale revolution has resulted in unprecedented variation in natural gas prices that we use to estimate the short-run price elasticity of abatement. Our estimates imply that a price of $10 ($60) per ton of carbon dioxide would reduce emissions by 4% (10%). Furthermore, carbon prices are much more effective at reducing emissions when natural gas prices are low. In contrast, modest carbon prices have negligible effects when gas prices are at levels seen prior to the shale revolution.

Suggested Citation

  • Joseph A. Cullen & Erin T. Mansur, 2014. "Inferring Carbon Abatement Costs in Electricity Markets: A Revealed Preference Approach using the Shale Revolution," NBER Working Papers 20795, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20795
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    More about this item

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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