This was created in partnership with Environment for Development .
This paper uses year-to-year fluctuations in temperature within counties to identify its effects on economic outcomes of Chinese manufacturing firms. We find four primary results. First, profit exhibits nonlinear responses to temperature. Profit decreases with higher summer temperatures and increases with higher winter temperatures. With temperature bins as temperature variables, profit increases with temperature up to 12-15°C, and then declines at higher temperatures. Second, higher temperatures have wide-ranging effects – raising labor costs, hurting innovation activity, and reducing industrial output by decreasing TFP, investment and capital stock. Third, these temperature effects differ across regions, ownership types and industries. Lastly, if no additional adaptation is undertaken, the total profit of Chinese manufacturing firms is projected to decline annually by 2.5-9.2% during the mid-21st century, equivalent to a loss of CNY 29.5-108.6 billion in 2007 values.