Adaptation Mitigates the Negative Effect of Temperature Shocks on Household Consumption

<strong>Abstract: </strong> 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 excess 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 regions: excess heat has the largest effect in cold regions but the smallest in hot regions. 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. <strong>Data and Code</strong> The credit and debit card transactions data that support the findings of this study are from UnionPay and are confidential. We cannot disclose the data to the public under our nondisclosure agreement. Interested researcher can contact UnionPay Advisors at 86-21-61005911, or [e-mail]. Air pollution and weather data for this analysis are from public sources (https://www.ecmwf.int/en/forecasts/datasets/reanalysisdatasets/era-interim and https://air.cnemc.cn:18014/). The data are also available from Zenodo (https://zenodo.org/). The file “download.py” contains the codes which download the temperature data from European Centre for Medium-Range Weather Forecasts (ECMWF). The file "analysis.do" contains codes for producing Figure 1-Figure 6 and Extended Data Figure 3-Figure 6. STATA 16.0 or above is recommended in running the do-file.