A New Estimator for Marginal Emissions

Stephen P. Holland, Erin T. Mansur, Valentin Verdier, and Andrew J. Yates

Journal of Political Economy Microeconomics, Forthcoming.
Working Paper, March 2024 (Results).
NBER Working Paper 32065, January 2024.

Abstract:

Environmental policy is increasingly concerned with measuring emissions resulting from local changes to electricity consumption. These marginal emissions are challenging to measure because electricity grids encompass multiple locations and the information available to identify the effect of each location's consumption on grid-wide emissions is limited. We formalize this as a high- dimensional aggregation problem: The effect of electricity consumption on emissions can be estimated precisely for each electricity generating unit (generator), but not precisely enough to obtain reliable estimates of marginal emissions by summing these effects across all generators in a grid. We study how two economic constraints can address this problem: electricity supply equals demand and an assumption of monotonicity. We show that these constraints can be used to formulate a 'naturally regularized' estimator, which implements an implicit penalization that does not need to be directly tuned. We evaluate this new estimator both theoretically and empirically.