The Impact of Global Warming on Small and Micro European Firms

Abstract

With comprehensive financial data from Bureau van Dijk and gridded weather data from E-OBS, we estimate the impact of temperature shocks on small and micro firm performance across Europe. Our study contributes to the limited economic climate literature outside the US market and is the first study to systematically examine climate risk for the small-business sector. We find that mean temperature and extremely hot days have a significant negative impact on firm performance. On average, a firm’s operating income decreases by 6.8% when the yearly mean temperature increases by 1°C. Micro and financially constrained firms are more likely to suffer due to rising temperatures. We also document heterogeneous weather effects across different ownership structures and industries.

Keywords: Temperature shocks, small and micro firms, climate risk, firm performance

JEL Classification: G30, G32