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


Joseph A. Cullen and Erin T. Mansur

Working paper, June 2015.
NBER Working Paper 20795, December 2014, Revised May 2015.
NBER Digest Summary, June 2015



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 $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.