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

Joseph A. Cullen, Erin T. Mansur

NBER Working Paper No. 20795
Issued in December 2014, Revised in May 2015
NBER Program(s):Environment and Energy Economics

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.

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Document Object Identifier (DOI): 10.3386/w20795

Published: Joseph A. Cullen & Erin T. Mansur, 2017. "Inferring Carbon Abatement Costs in Electricity Markets: A Revealed Preference Approach Using the Shale Revolution," American Economic Journal: Economic Policy, vol 9(3), pages 106-133.

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