Heterogeneous effects of weather shocks on firm economic performance

This paper estimates the economic damage induced by temperature shocks at the firm level. Leveraging European firm-level data, the study investigates how damage varies across characteristics of firms overlooked in other, aggregate analyses.

The analysis consistently highlights negative impacts on the least productive firms and positive impacts on those that are most productive. Evidence on firm size reveals negative impacts on small firms located in warmer areas. Industry-specific effects indicate different susceptibilities across sectors to weather shocks.

Key points for decision-makers

• Estimating the costs of historical weather and climate events in conjunction with projecting future temperatures helps quantify future climate change losses and where these will fall, thus enabling policymakers to design targeted adaptation policies effectively.
• The author conducts a firm-level analysis to explore the complex impact of weather shocks on the performance of European firms, investigating the economic drivers of varying impact.
• The study reveals that in general, high-productive firms appear to be better shielded from weather shocks than low-productive firms. The marginal effect of an additional 1°C is either positive or not statistically significant for these firms. In contrast, low-productive firms consistently experience negative impacts from rising temperature (with some exceptions), which is likely to decrease their competitiveness.
• Firm size also has some impact, with smaller firms tending to be more vulnerable to higher temperature when located in relatively warmer areas compared with the specific country-level distribution.
• Certain sectors are particularly vulnerable to weather shocks, while other seem to benefit from higher temperatures. Those that are more vulnerable include industry (excluding construction), wholesale, retail, transport, accommodation and food, information and communication for firms located in warmer areas. Those that benefit include agriculture for firms located in warmer areas and wholesale, retail, transport, accommodation and food, information and communication for firms located in colder areas.
• The heterogeneity of impacts across firms highlights the distributional effects of climate change, and emphasises the need for tailored climate policies (e.g. differential application of taxation strategies) and productivity-boosting policies.