Inferring Carbon Abatement Costs in Electricity Markets: A Revealed Preference Approach using the Shale Revolution
NBER Working Paper No. 20795
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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This paper was revised on May 27, 2015
Document Object Identifier (DOI): 10.3386/w20795
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