Fiscal Decentralization and Nature-Based Adaptation Financing : A New Perspective on Sovereign Bond Yields

This study investigates the impact of the urban heat island effect (UHI) and urban forest cover on sovereign bond yields for 68 countries, adding to the climate finance literature. UHI poses significant economic risks to cities. While urban forest cover is recognized as an effective UHI mitigation strategy, its non-revenue-generating nature presents financing challenges. As a novel contribution, we reveal a positive and significant association between UHI and bond yields, in- dicating increased credit risk. Conversely, urban forest cover effectively reduces sovereign bond yields, providing a viable financing model for such measure. Additionally, we explore the role of fiscal decentralization and find that it enhances the effectiveness of urban forest cover as an adaptation strategy, offering policymakers a crucial avenue for promoting sustainable urban de- velopment amidst climate change. Prioritizing nature-based adaptations and considering fiscal decentralization mechanisms emerge as vital components of climate finance strategies, encour- aging investment in non-revenue adaptation projects