The Cost of Net Zero

Abstract

Renewable Portfolio Standards (RPS) are increasingly adopted worldwide to accelerate the transition to renewable energy and net zero carbon emissions. Exploiting their staggered implementation in 32 U.S. states, we find that RPS explain higher bond yields and lower credit ratings. However, we observe opposite results when states introduce clean energy targets that include diverse energy sources. Consistent with our theoretical model, we find stronger effects in areas with political preferences for renewables. These results are robust in primary and secondary markets and extend to local municipalities. Our findings quantify the fiscal trade-offs facing taxpayers as governments administer the energy transition.

Keywords: Municipal finance, Energy transition, State funding, Net zero, Renewable energy

JEL Classification: G1, G2, H2, H7, Q4, Q5