Adaptation mitigates the negative effect of temperature shocks on household consumption

Abstract

Consumption plays an important role in economic growth, but little is known about its response to weather extremes. This paper examines the effect of temperature shocks on consumption using high-frequency and fine-scale data from the world's largest payment network. Our analysis shows that excessive heat and cold have a direct and immediate negative effect on various consumption activities in the short run, leading to an inverted U-shaped relationship between temperature and consumption. Consumption sensitivity varies by climate region, with cold regions being more sensitive to excessive heat. The long-run projections show that without adaptation, climate change would reduce aggregate consumption under both moderate and aggressive scenarios by the end of the century. However, no evidence of consumption reduction arises once adaptation is accounted for. The findings highlight the importance of incorporating the moderating role of adaptation in understanding consumption responses to climate change.