A recent IZA discussion paper by Nicola Gagliardi, Elena Grinza and François Rycx highlights the significant productivity challenges European firms face due to global warming. The authors analyzed firm-level data from 14 European countries, revealing that rising temperatures adversely affect Total Factor Productivity (TFP), primarily through declines in labor productivity.
The study utilized a comprehensive dataset combining detailed firm-level information with high-resolution temperature data. This approach enabled the assessment of temperature anomalies—deviations from historical average temperatures—and their impact on productivity. By employing fixed-effects models, the researchers isolated the effects of temperature changes on productivity, accounting for various firm-specific factors such as size, sector, and geographic location. This robust methodology identified temperature-induced productivity losses, particularly in sectors more sensitive to climate variations.
Key findings indicate that a 1°C increase in temperature anomaly leads to a 0.3% to 0.4% decrease in TFP, with more severe effects observed when anomalies exceed 1.5°C—a threshold linked to the Paris Agreement targets. The impact is especially pronounced in firms engaged in outdoor activities, such as agriculture and construction, as well as in manufacturing sectors with high capital intensity and a large proportion of blue-collar workers.
Regional and firm-size disparities
Geographically, firms in temperate and Mediterranean climates are more adversely affected, highlighting regional disparities in the economic impact of climate change. Smaller firms, particularly micro and small enterprises, are also more vulnerable to the effects of rising temperatures.
The study underscores the urgent need for targeted climate policies and adaptation strategies that address the specific needs of different sectors and regions to mitigate the economic risks associated with global warming. The authors call for a stronger policy response to curb the potential adverse implications of climate change on European productivity and economic growth.