Climate Change and Corporate Investments: Evidence from Planned Power Plants

How does global warming affect firms’ activities? We consider this issue from the perspective of the
electricity producing industry. Warmer temperatures increase the demand for air conditioning, the use of which fluctuates substantially over time, making investments in “flexible” power plants that can be turned on quickly and at low cost more valuable. Using an international sample of planned power plants, we estimate that hotter weather in a region leads utilities to increase their investments in flexible power plants. This effect appears to be driven by long-term changes in climate rather than abnormally high temperatures that occur over a short period. While these results are specific to the electricity industry, it is likely that climate change will require similar adjustments of firms’ assets in other industries as well.