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

Abstract:

This paper examines how carbon pricing would reduce emissions in the electricity sector. 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 potential effect of a carbon price. Our estimates imply that a price of $20 ($70) per ton of carbon dioxide would reduce emissions by 5% (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.