Climate Change Futures Markets

2009-11-26

in Economics, Geek stuff, Science, The environment

Over at FiveThirtyEight – a website that leapt to fame on the basis of statistical analysis of the 2008 US election – there is a discussion of futures markets for climate change. The idea is to let people place bets on what will happen, and the hope is that the sum of opinions backed up with money will provide reasonably high quality information on what is likely and what is not:

Personally, I’d envision a robust series of contracts on temperature, CO2 emissions, precipitation, and perhaps tropical storms that expired at various intervals along the lines of those used for US Treasury bonds — say at 3, 5, 7, 10, 20, and 30 years. I’d encourage the use of options and perhaps derivatives, which can be helpful in pricing not just the mean estimates of temperature or precipitation but also the uncertainty surrounding these estimates. I’d run the markets through a major, cross-national platform such as the United Nations, IMF or World Bank, so as to encourage participation and create liquidity. And I’d make them open to as many people as possible with few legal restrictions or transaction costs.

This is similar to the idea of using such markets to predict the outcome of elections. While implementing the idea is bound to produce some problems, it could be a good thing to try. For one thing, it could help create mechanisms through which additional insurance could be provided for climatic risks, whether of extreme weather, crop failure, or other phenomena.

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