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

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