Long-term effects of climate change on the corporate sector: The case of Italy
Climate change is one of the main structural challenges facing the global economy today (Blanchard and Tirole 2022), and economists are scrambling to investigate its multifaceted implications (eg Weder at Mauro 2021). In particular, high temperatures substantially reduce economic activity and growth, especially in poor countries (see Kolstad and Moore 2020 for a recent review); developed economies are not immune, with recent evidence documenting that unexpected temperature shocks can also have aggregate consequences for the US economy (Natoli 2022). As climate-induced extreme events such as high temperatures are expected to occur more frequently without appropriate emission reduction policies, one key question in current debate is how climate change may ultimately shape, at the aggregate level, a country’s productive sector.
This issue has been investigated from different angles. One of them explores the geographical dimensions of global warming. Climatic phenomena may have heterogeneous impacts across space, possibly causing migration to low-risk areas, as investigated in a recent special issue of the Journal of Economic Geography (Peri and Robert-Nicoud 2021) and in Albert et al. (2021). Another aspect relates to the direct implications of hot temperatures on firms (eg Addoum et al. 2020, Pankratz and Schiller 2021, Somanathan et al. 2021). During a heat wave, incomes can fall because workers in heat-exposed jobs can be less productive or more absent on hot days or, more generally, because high temperatures increase production costs. Over a longer span of time, these effects can stimulate technological progress for some firms and dissipate, while they can accumulate and become persistent for others, increasing the likelihood of exiting the market.
Despite having a potential effect on aggregate market structure, these possible divergent pathways have not received much attention in the literature. In a recent paper (Cascarano et al. 2022), we address this issue by analyzing the long-term impact of temperature on the Italian corporate sector. We performed two analyses. First, using administrative data covering the entire Italian corporate sector, we explore how the extreme heat affects local company demographics i.e., entry, exit and relocation of firms across Italy’s local labor market (i.e. areas that are internally homogeneous in terms of travel flows). work) . Second, firm-level balance sheet data are used to provide evidence on how temperature can affect firm performance for those who stay in the market for years.
Enter and exit the local labor market
Demographic analysis made use of the Infocamere dataset, which contains administrative data for more than 2 million companies per year (the universe does not include single-person companies) between 2005 and 2019. We examine the impact of temperature on the determinants of growth rates of active firms in the local labor market. : entry of newly born companies, exit of companies discontinuing their business and relocation of companies (within Italy or abroad). We distinguish temperature impacts across geographic dimensions associated with climate zones – the warmer Mediterranean region, which includes most of the coastal zone, and cooler climates (see panel (a) of Figure 1) – as well as across industry. For the heatwave proxy, we adopted a commonly used measure of the number of days in a year with maximum temperatures above 30°C, taking temperatures from the JRC MARS Meteorological Database. Since market dynamics are usually slow-moving, we separately examine the effects of accumulated temperature over a three-year time span.
The heat map in panel (b) displays the results, with the red boxes showing the positive effect of temperature, the blue boxes being negative and the white boxes being zero (not significant). Overall, very high temperatures lead, in the medium term, to a decrease in entry rates and, to a lesser extent, an increase in firms’ exit rates from the local labor market. Most of the action takes place in the Mediterranean zone, where the impact extends beyond agriculture (whose effects are widespread across the country). The only sector that has benefited from the high temperatures in the Mediterranean zone is the electricity sector, perhaps because the high temperatures spur the demand for electricity for air conditioning. Relocation to areas with more favorable climates (not shown in Figure 1) played a minor role: temperature impacts were negligible or insignificant in almost all cases. In addition, the lack of a clear sector-level correspondence between higher exits (or missing entries) in the Mediterranean region and higher entries in temperate climates suggests that other forms of climate-induced corporate mobility – such as cessation of activity in one place and reopenings elsewhere – in Italy’s case, at least not very important.
The effect of extreme temperatures on market structure is quantitatively relevant. As the number of days with a maximum temperature above 30°C permanently increased by ten in a year, the growth rate of active enterprises fell by 0.13 percentage points, nearly a tenth of the average growth rate in the sample, largely due to a reduction in entry rates. Using local temperature forecasts as in the central ETHZ CLM scenario, our estimates imply an accumulated reduction in the corporate sector growth rate in the current decade by 0.22 percentage points.
Figure 1 Effect of high temperatures on inlet and outlet rates in the Mediterranean and temperate regions
Notes: Panel (a) displays the local labor market, classified into the temperate and Mediterranean climate zones according to the Istat classification. Panel (b) displays the impact of an increase in 10 days of extreme temperatures over a 9 year period; red box: positive impact; blue box: negative impact; white box: no impact. The rows of the matrix show the sectors according to the Nace Rev. classification. 2: A. Agriculture, Forestry and Fisheries; B. Mining and Quarrying; C. Manufacturing; D. Provision of Electricity, Gas, Steam, and Air Conditioning; E. Water Supply, Sewerage, Waste Management and Remediation Activities; F. Construction; G. Wholesale and Retail Trade, Repair of Motor Vehicles and Motorcycles; H. Transportation and Storage; I. Accommodation and Food Service Activities; J. Information and Communication; K. Financial and Insurance Activities; L. Real Estate Activities; M. Professional, Scientific and Technical Activities; N. Administrative and Supporting Service Activities.
To investigate the impact of temperature on corporate results, we relied on nearly 10 million firm-year balance sheet observations from the Cerved data set. We divide firms into four size classes according to Eurostat’s definition and explore the effect of temperature on total assets, firm equity, net income, production value, and number of employees. The results, shown in Figure 2, are quite striking. Over the medium term, firms in three of the four size classes demonstrated a positive effect of temperature, suggesting that sizable firms have the ability to adapt to climate change and increase their profitability. In contrast, micro-enterprises are shrinking in size – in terms of net income, production value, and number of employees – underscoring their inability to adapt by investing in green technology (Acetturo et al. 2022). Obviously, the investigated sample refers only to firms that remain active in the market during the overall observation period. Nonetheless, the analysis highlights a clear dichotomy in resilience to climate change, which appears to be particularly detrimental to very small companies.
Figure 2 Firm-level effects across firm size classes
Overall, our findings suggest that global warming will weigh on the corporate sector not only in terms of size but also composition. Higher temperatures could reinforce the divergent growth paths that already exist between small and large companies, stimulating a recomposition of the business sector in terms of value-added creation. This may not be important for aggregate productivity growth.
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