Effects of rising and extreme temperatures on production factor efficiency: Evidence from China's cities

Abstract

Cities are the main drivers of climate change; they are also more vulnerable to it than rural areas. Improving the utilization efficiency of various production factors is an important way for cities to fight climate change. Using observations from across 36 large and medium-sized Chinese cities, this study finds that most cities experienced temperature rises in the past half century, with average increases of 0.5 °C. Based on the city-level production possibility set, this study constructs a factor-specific efficiency model of the directional distance function version. Using data from Chinese prefectures and above-level cities with a population of more than 1 million, we calculated three factor efficiencies: labor, energy, and environment. The econometric analysis revealed that the rising temperatures had a positive effect on all three efficiencies. This finding may be related to China's geographical location within a temperate zone; consequently, the increase in temperature moved its temperatures to an optimal level. However, extreme temperatures had a negative impact on the efficiency of three factors. Further analysis found that rising temperatures brought more benefits to cities dominated by tertiary industries, while extreme temperatures brought more harm to cities dominated by secondary industries. As part of China's urbanization process, large central cities often support tertiary industries with various resources, thereby moving secondary industries to the surrounding small cities. Our results suggest that as global warming intensifies, new economic inequalities may arise between cities with different industrial structures.