The (Hidden) Costs of Destroying Nature: Wetland Loss and Municipal Bond Yields

Abstract

This paper shows that wetland loss significantly impacts municipal bond markets. Using exogenous geographic variation in wetland changes, I find that wetland loss is associated with an increase in municipal bond credit spreads, driven by increased flood uncertainty and downside risk. The wetland loss premium becomes economically and statistically significant after a flood, likely due to the salience of increased flood damage. This premium is more pronounced for bonds issued in areas more reliant on local tax revenue, lacking climate adaptation plans, and for longer-maturity bonds. These findings highlight one of the financial costs of human-driven natural capital destruction.

Keywords: Climate change, municipal bonds, wetlands, biodiversity, extreme weather

JEL Classification: G14, H74, Q54, Q56