Firm-level temperature shocks raise aggregate productivity damages

The working paper by Andrea Caggese, Andrea Chiavari, Sampreet Singh Goraya, and Carolina Villegas-Sanchez (published as an ECB Working Paper) provides a micro-to-macro framework quantifying how temperature affects firm-level productivity and aggregates to national productivity losses.

• Main result & methodology: Using matched Italian firm-level data (Orbis, 1999–2013) and high-resolution climate data (Copernicus E-OBS, ~11x11 km grid), the paper estimates inverted U-shaped effects of temperature on firm sales and finds strong capital-adjustment frictions; under a 2°C uniform warming scenario aggregate productivity (Solow residual) falls 1.68% (technology: 0.81%, allocative efficiency: 0.87%), rising to 6.82% under 4°C warming. The authors use estimated firm semielasticities, input-specific wedges, and a closed-form aggregation to generate counterfactuals and compare with IAM/DICE calibrations.

• Data, adaptation and concrete figures: Key inputs include Orbis firm panel (~4.3M observations, ~1M firms), Copernicus E-OBS daily max temperatures and rainfall (1950–2020) aggregated to annual temperature-bin counts; adaptation reduces projected losses by ~20–30%; estimated GDP-equivalent losses reported (e.g., ~35.37 billion USD for 2°C and ~143.88 billion USD for 4°C under their baseline conversions). The paper stresses that indirect effects (misallocation/capital frictions) account for roughly half of aggregate damages and that representative-firm aggregations substantially understate aggregate losses.