If he can murder the Paladin he can certainly murder the local Lord and other powers-that-be.
The powers-that-be didn't get there by being wimps, especially in a D&D setting. This threat -- the loose cannon PC opening a evil portal to attack the town and then killing a paladin -- just needs to die. No BS about charging higher prices or whatnot -- the powers-that-be need to crush this threat before it comes after them.
The only question is whether the powers-that-be use:
1) the law (because they are confident enough in their power to do so),
2) a bounty hunter/another party of adventurers to do their dirty work (beyond the power of their full time staff, but not beyond the power of their ability to reward hired guns),
3) a sneaky assassination (asymmetric warfare, as the expression goes for how the weaker strike at the stronger),
4) the unsurvivable mission approach (which goes back to the Old Testament as a way to rid yourself of unwanted rivals)
I'd go with a poisoning of the PC's as the default, since the powers-that-be may be weaker -- and the PC's usually assume they are untouchably powerful, so play it like they are, except play dirtier than the PC's.
And as Machiavelli will tell you, ALL the PC's need to die, not just the offending one, or else his comrades will get the power-that-be.
So TPK 'em, or at least have the powers-that-be go for that goal, with everything they have.
"Men ought either to be well treated or crushed, because they can avenge themselves of lighter injuries, of more serious ones they cannot; therefore the injury that is to be done to a man ought to be of such a kind that one does not stand in fear of revenge." -- Machiavelli, The Prince
"A state is a human community that successfully claims the monopoly of the legitimate use of physical force within a given territory" -- Max Weber, 1918
"Power comes out of the mouth of a gun." -- Mao Zedong
"The use of unnecessary violence in the apprehension of the Blues Brothers HAS been approved." -- Illinois State Police dispatcher in "The Blues Brothers"