Does Climate Change Affect Firm Output? Identifying Supply Effects

Abstract

We estimate the supply-side effects of climate change on firm output by exploiting variation in local average temperature across suppliers of the same client in the United States. A 1°C increase in temperature decreases annual sales by 2.5%. This effect is non-linear, peaking among suppliers located in regions with the largest increases in temperature and in cooler regions. Manufacturing and heat-sensitive industries are more affected, consistent with a reduction in labor productivity and labor supply when temperatures are higher. Non-diversified and financially constrained firms are also more affected, supporting the importance of operational and financial flexibility in adapting to climate change.

Keywords: Climate change, Climate finance, Real activity, Firm output, Production networks, Productivity, Financial constraints

JEL Classification: G31, G32, L11, L14, Q54