During mid-summer, it can be very hot in direct sunlight but becomes cooler while a cloud passes overhead. On a midwinter night with a clear sky without cloud cover, it is also cool due to radiative cooling. The Earth's temperature is determined by the balance between the incoming radiant energy from the Sun and the outgoing radiant energy from the Earth. This balance is called the Earth's radiation budget. Clouds can either cool and warm and can considerably affect the radiation balance.

How do clouds form and grow in the first place? The raw materials (sources) of clouds are water vapor (i.e., gaseous water) and particles (aerosols) suspended in the atmosphere. When water vapor is lifted and cooled by updrafts, an aerosol forms a nucleus around which water vapor condenses, although at very low temperatures (below -40 ºC), ice particles may form directly from water vapor. Small cloud particles grow as they take in surrounding water vapor until they grow to a certain size, then fall under their own weight, growing larger, incorporating slower-falling particles, and becoming precipitation particles.

Thus, clouds are the ultimate source of precipitation, and the occurrence of typhoons and extreme rainstorms is closely related to the cloud growth mechanism. Phenomena such as droughts and other extreme rainfall events are also related to cloud generation and growth.

Thus, clouds affect the Earth's radiation budget and condense precipitation from water vapor, which forms part of the Earth's water cycle. The radiation budget and water cycle are not independently affected by clouds but interact through clouds to influence the Earth's climate.

As mentioned above, the global temperature is determined by the energy balance (radiation budget) between the radiation from the sun incident striking the Earth (solar radiation) and the radiation emitted by heat from the Earth to space (Earth radiation).

Clouds have both a parasol (cooling) effect that reduces the energy reaching the Earth's surface by reflecting solar radiation back to space, and a blanketing (greenhouse) effect that stores energy in the Earth's atmosphere by preventing the radiation of heat from the Earth's surface to space.

The degree to which either effect operates is not simple and is greatly influenced by the height of the clouds, the way they overlap, and the optical properties of each cloud.

In addition to acting on the Earth's energy budget, aerosols can change the overall energy budget of the atmosphere, depending on whether they are above or below clouds.

Aerosols change the Earth's energy budget by scattering and absorbing sunlight. Whether the atmosphere is heated or cooled depends on the type and composition of the aerosol. For example, sulfate particles scatter sunlight well and have a cooling effect, while black carbon (graphite) particles absorb sunlight and heat the atmosphere.

There is a deep connection between aerosols and cloud formation, as the presence of aerosols can promote the development and dissipation of clouds and maintain them over a long period of time.