How Does Climate Change Affect Firm Sales? Identifying Supply Effects

Abstract

We estimate the supply side effect of climate change on firm sales by exploiting variation in local temperature across suppliers of the same client. We find that suppliers experiencing a 1°C increase in average daily temperature decrease their sales by 2%. In addition, extreme hot and cold weather events lead to larger drops in sales. The effect is more pronounced among suppliers in manufacturing and heat-sensitive industries, which is consistent with lower labor productivity and labor supply when temperatures are higher. Financially constrained suppliers are more affected due to their lack of financial flexibility to adapt to changes in temperatures.

Keywords: Climate change, Climate finance, Economic costs, Firm sales, Production networks, Productivity, Financial constraints

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