A Market-based Measure of Climate Risk for Cities

Abstract

We use information from financial markets to construct a comprehensive measure of cities’ economic exposure to climate-related risks. Studying a large sample of municipal bonds issued by U.S. cities, we document substantial variation in how municipal bond prices respond to innovations in climate news. This variation provides a useful and holistic measure of cities’ economic exposure to a wide array of manifestations of climate risk, and influences cities’ cost of borrowing. We then show how our measure of climate risk exposure relates to city characteristics, such as geography, poverty, and local attitudes toward climate change science.