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, October 2012.

Abstract:

 

Prices of natural gas in the US have recently experienced substantial variation due to a ramp up in shale gas production. Without sufficient export options, gas prices have dropped precipitously in the short term. Unusually low gas prices combined with relatively constant coal prices have led to a decreasing cost differential between gas and coal electricity generators. While coal generators have typically enjoyed a significant marginal cost advantage, they are now finding themselves undercut by their gas-fired counterparts. This has led to substitution between the technologies much like we might observe if firms had to pay for carbon emissions. In this paper, we exploit variation in the cost of natural gas to identify 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.