Climate Change and Firm Performance: Evidence from Wildfire Smoke
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This paper examines whether and how climate change impact U.S. firm performance.
What comes to mind when you think about the effects of climate change?
The direct effects of climate disasters and extreme weather events include loss of properties and productivity due to regional extreme temperatures, flooding, rising sea levels and wildfires. These events are destructive but affect only a limited geographic range. Firms that operate in regions with a high risk of these events may be well positioned to mitigate the effects of climate disasters through geographic diversification, supply-chain flexibility, insurance, and other risk management strategies (Painter, 2020). For example, eight cities in the U.S. could disappear by 2100 because of rising sea-levels (Bendix, 2020). Most affected firms will be able to relocate major operations to cities inland. However, the same may not be true of firms subject to the indirect effects of distant climate disasters. For example, smoke from the California wildfires can travel as far as the East Coast (Calfas, 2018); damage to aquatic ecosystems caused by flooding affects water quality in communities throughout the entire watershed (Hrdinka et al., 2012; Miller and Hutchins, 2017); and greenhouse gas emissions have been shown to reduce soil quality and increase plant pathogens globally (Gregory et al., 2008). However, these indirect effects often receive less media attention than the direct effects despite the former’s wide geographic coverage and significant economic implications. Consequently, the causal link between climate change and such incremental and widespread degradation in air, water, and soil quality is not as apparent to the public as is the connection between climate change and forest fires.
This figure plots the fire and smoke in the contiguous U.S. on April 10th, 2018. The red triangles represent wildfires and the grey shades represent smoke. This plot shows that fire-related smoke can travel far away. This feature allows me to separate the impact of wildfire smoke from direct fire damages.
In this paper, I focus on wildfire smoke’s impact on firm performance. While the most visible harms from fires and other climate disasters are immediate and localized, the indirect effects of wildfires are diffuse, far-reaching, and, therefore, hard to predict. Smoke significantly increases the concentration of particulate matter many miles away from the originating wildfire, even when such smoke events are invisible to the human eye (Borgschult, Molitor, and Zou, 2020).
How can wildfire smoke impact firm performance?
The main pollutant in wildfire smoke is fine particulate matter (PM2.5), one of six major air pollutants and a known health hazard. With a diameter of smaller than 2.5 micrometers, fine particulate matter can easily enter indoor spaces. PM2.5 bypasses the lungs and enters the bloodstream, causing irritations in the nose, throat, lungs, headaches, and heart diseases (Pope, 2000; Sorenson et al., 2003). Extant empirical research finds a significant health impact of PM2.5 on individuals. High levels of PM2.5 reduce employee productivity and cognitive performance (Chang et al., 2016; Chen et al., 2017), and the adverse effects on cognition are the largest for employees under fifty and for problem-solving tasks (La Nauze and Severnini, 2021).
What do I find?
![This figure plots the coefficient estimates of smoke exposure’s impact on operating income. Relative to the baseline group ([0, 3] days of smoke exposure), I find that firms’ operating income decrease monotonically when the days of smoke exposure in…](https://images.squarespace-cdn.com/content/v1/60d924778b120f30bfdfd25d/1625250802076-TS4E357BW7G5Y38QJ2KX/Capture1.PNG)
This figure plots the coefficient estimates of smoke exposure’s impact on operating income. Relative to the baseline group ([0, 3] days of smoke exposure), I find that firms’ operating income decrease monotonically when the days of smoke exposure increase.
On average, smoke exposure significantly reduces operating performance. A one-day increase in annual smoke exposure decreases operating income divided by the book value of assets by 4.7 basis points or 1.9 times the average daily operating income. This corresponds to a $5.6 million loss for a one-standard-deviation (16 days) increase in annual smoke exposure for the average firm.