Pricing climate risks: Evidence from wildfires and municipal bonds

How are public finances affected by climate-driven changes in wildfire risk? Using high-resolution meteorological forecasts, land use data, and US municipal bond spreads, we find that municipalities facing greater future wildfire exposure already incur higher borrowing costs: A one standard deviation increase in future wildfire risk is associated with a 7 (8) basis point rise in primary (secondary) market spreads—over 15% of the sample mean. Impacts appear larger in areas with higher minority populations and greater reliance on local revenue. Our study contributes to the broader literature by introducing a new approach to evaluating the capitalization of evolving physical climate risks.