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

Author

Listed:
  • Joseph A. Cullen
  • Erin T. Mansur

Abstract

This paper examines how carbon pricing would reduce emissions in the electricity sector. Both carbon prices and cheap natural gas reduce the historic cost advantage of coal plants. The shale revolution resulted in unprecedented variation in natural gas prices that we use to estimate the potential near-term effects of carbon prices. Estimates imply that a price of $20 ($70) per ton of CO2 would reduce emissions by 5 (10) percent. Carbon prices are most effective at reducing emissions when natural gas prices are low, but have negligible effects when gas prices are at levels seen prior to the shale revolution.

Suggested Citation

  • 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, American Economic Association, vol. 9(3), pages 106-133, August.
    • Handle: RePEc:aea:aejpol:v:9:y:2017:i:3:p:106-33
    Note: DOI: 10.1257/pol.20150388
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    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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