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

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 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 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 avoided damage from RPS-induced reductions in local coal-fired pollutants. Our estimates suggest that a 1 percentage point increase in a state’s RPS results in up to $100 million in avoided damages over the United States from reduced pollution. We also find substantial heterogeneity in aggregate avoided damages caused by increases in different states’ RPSs.