Thursday, August 23, 2007

Can markets predict global warming?

It's been a little quiet at Oikos lately, as work has been particularly busy. I've also started researching for my thesis on whether prediction markets could effectively predict climate change and its impacts - something I've previously talked about. Could a well-functioning market in future temperatures or sea level rises be set up, and how might its predictions compare with the consensus forecasts from the Intergovernmental Panel on Climate Change (IPCC)?


According to an article today on MSN, companies are starting to look at precisely such markets:


Farmers have for generations used futures contracts on commodities such as corn and grain to provide insurance against poor weather and crops. But now financial exchanges are developing products that provide companies and investors with a way to hedge Mother Nature herself.

As hurricanes and variable weather make a more noticeable dent on businesses' bottom lines, financial institutions are stepping up to give individuals greater protection against the perceived risks associated with weather changes. Seen as an outgrowth of the traditional futures markets, these new weather-related contracts may help curb the financial disruption caused by climate change...

"There is great acceptance that companies need to manage weather risk," said Felix Carabello, the director of alternative investment products at the Chicago Merc. A more variable climate equals more uncertainty about profits, he said. "You can't predict the weather, but with some of these contracts you can dampen the volatility in earnings due to erratic weather," Carabello said, adding that reinsurance and energy companies have been big early adopters, while hedge funds and banks are increasingly exploring hurricane- and other weather-related risks...

HedgeStreet, a regulated online exchange, also trades hurricane futures and is looking into more potential products that would allow individuals to play global warming... Russell Andersson, HedgeStreet's vice president of instrument origination and a co-founder of the exchange, said other weather-related contracts in the future could be tied to rising ocean levels. "The risk has to be able to be measured in an index for a derivative product to become a candidate," Andersson said. An example would be precipitation or temperature.



It's a topic I'll be discussing more as my research progresses...

Related posts:

Should carbon taxes be linked to global temperatures?

Could long-term weather markets help us understand the risks of climate change?

More on weather markets and climate change

4 comments:

BHUVAN CHAND said...

Over the 10-year period as a whole, climate continues to warm and 2014 is likely to be 0.3 deg C warmer than 2004. The overall trend in warming is driven by greenhouse gas emissions but this warming effect will be broadly cancelled out over the next few years by the changing patterns of the ocean temperatures. Want more information click on www.LifeOfEarth.Blogspot.com

Anonymous said...

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luis said...

Great post!

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Anonymous said...

Nice post. How do you feel about the discussion relate to Global Warming? Is it mainsream enough now to allow different approaches. See this example : www.goshout.com.au/hot
It's a video mocking the effects of global warming but in some way gets the message across, particularly to a certain demographic.
Would like to hear your comments.
Cheers,
Sam.