Navigating the Low-Carbon Shift: Balancing Municipal Finances Amid the Energy Transition

71 Pages Posted: 3 Oct 2024 Last revised: 7 Feb 2025

See all articles by Marcelo Ochoa

Marcelo Ochoa

Board of Governors of the Federal Reserve System

Andreas C. Rapp

Board of Governors of the Federal Reserve System

Date Written: March 26, 2024

Abstract

This paper examines the consequences of transitioning away from carbon-intensive energy sources on the sustainability of municipal finances, using the rise of hydraulic fracturing as a quasi-natural experiment. Analyzing data from coal-producing U.S. counties, we present three key findings. First, declining coal mining activity worsens municipal debt capacity. Second, investors demand higher bond yields in counties experiencing reduced coal mining. Third, investors view the decline in coal as a long-term structural shift, effectively transforming once-valuable coal reserves into stranded assets. These results inform debates on the transition from fossil fuels and its fiscal implications for local governments dependent on them.

Keywords: debt sustainability, energy transition, climate finance, coal, municipal bonds, hydraulic fracturing, transition risks, stranded assets

JEL Classification: G12, G18, G38, Q31, Q41, Q51, Q58

Suggested Citation

Ochoa, Marcelo and Rapp, Andreas C., Navigating the Low-Carbon Shift: Balancing Municipal Finances Amid the Energy Transition (March 26, 2024). Available at SSRN: https://ssrn.com/abstract=4955515 or http://dx.doi.org/10.2139/ssrn.4955515

Marcelo Ochoa

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andreas C. Rapp (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://https://www.federalreserve.gov/econres/andreas-c-rapp.htm

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