External Impacts of Local Energy Policy: The Case of Renewable Portfolio Standards

Abstract

Renewable portfolio standards (RPSs) are state level policies that require in-state electricity providers to procure a minimum percentage of electricity sales from renewable sources. Using theoretical and empirical models, we show how RPSs induce out-of-state emissions reductions through interstate trade of the credits used for RPS compliance. When one state passes an RPS, it increases demand for credits sold by firms in other (potentially non-RPS) states. We find evidence that increasing a state's RPS decreases coal generation and increases wind generation in outside states through this tradable credit channel. We perform a welfare simulation to evaluate the aggregate benefits of the reductions in local coal-fired pollutants induced by RPSs. Our estimates suggest that a 1 percentage point increase a state's RPS results in up to $100 million in gross benefits towards the United States as a whole. However, there is substantial heterogeneity in the total benefits caused by increases in different states' RPSs.

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