Climate change, firms, and aggregate productivity

Working paper

This paper develops a general equilibrium framework to study how temperature affects firm-level demand, productivity, and input allocation, and uses it to derive an aggregate damage function for climate change. Using matched data for Italian firms and climate variation, we find that extreme temperatures reduce both productivity and the marginal product of capital. Our model estimates aggregate productivity losses from local temperature fluctuations ranging from 1.6% to 17.8%, depending on adaptation and scenario. For a given scenario, these losses are about four times larger than in representative-firm models, which overlook frictions and heterogeneity. Embedding our framework into Integrated Assessment Models would revise upward the economic costs of climate change.

Authors: Caggese, A; Chiavari, A; Singh Goraya, S; Villegas-Sanchez, C

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Place of publication: Oxford
• Publication date: 2025-12-15
• Paper number: 1096
• Language: English
• Keywords: allocative efficiency; aggregate productivity; climate change; firms