Will Carbon Prices Reduce Emissions in the US Electricity Industry?
Evidence from the Shale Gas Experience

 

Joseph A. Cullen and Erin T. Mansur


Working paper, March 2014.

Abstract:

 

This paper uses the unprecedented variation in US natural gas prices arising from new shale gas production to examine how the electricity industry could respond to carbon policy. Because of limited intercontinental export options in the short term, gas prices dropped as much as 75 percent in the past six years, while coal prices remained stable. As a result, the historic marginal cost advantage of coal-fired electricity generators has eroded. The substitution between the technologies is much like we might observe if firms had to pay for carbon emissions. This paper measures the emission response of the grid to the cost differential between gas and coal inputs. We argue that the low cost differentials we observe mimic the differentials we would see under carbon pricing with typical input prices. This allows us to identify emissions reductions we could expect to see from pricing carbon given the current state of technology in the electricity industry.