The impact of climate risk on local government financing costs: A mediation and threshold model analysis

As global climate change intensifies, climate risk has become a key factor influencing local government financing costs. This study examines the impacts of climate risk, fiscal capacity, and environmental regulation on local government financing costs by constructing a comprehensive climate risk index using data from 30 provinces, municipalities, and autonomous regions in China between 2016 and 2022. The findings reveal that a one-unit increase in climate risk raises local government financing costs by an average of 0.773 percentage points. Climate risk increases financing costs by weakening fiscal capacity, with this mediating effect accounting for 42.14 % of the total effect. Both command-and-control and market-incentivized environmental regulations mitigate the negative impact of climate risk, with market-incentivized regulations exhibiting a stronger moderating effect. Furthermore, fiscal capacity, command-and-control environmental regulation, and market incentive environmental regulation all pass threshold tests at various significance levels, indicating their potential impact on financing costs. These findings provide a theoretical basis and empirical insights for local governments to manage climate risk, optimize financing structures, and formulate environmental policies.