January 2010 Archives

Investing in global warming

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There is still substantial and vigorous debate within the scientific community about global climate change.  --Not really on whether or not it's occurring, nor really about the general importance of carbon dioxide and other contributions by humans.  Rather, the debate has more to do with the particulars.  For example, why does the Arctic appear to be melting faster than forecasted?  Which species will be the winners and losers as the climate changes?  How will sea-level-rise impact beach barrier systems?  These, and hundreds of other questions, comprise the scientific dialogue.

On the flip side is the public perception of climate change.  This arena is a mix of scientific information, political agendas, sensationalism, ideology, fund raising, personal experience, and charismatic megafauna.  Naturally, we can't expect the entire populace to always listen to and give due respect to scientific discipline.  (That only happens when we're designing weapons.)  There are so many sources of information that must be filtered--the scientific literature is only one such source.

For those looking for new lenses through which to view the topic of climate change, I'd like to draw attention to futures markets, or prediction markets.  A futures market is one in which investors can buy or sell shares in the outcome of a certain event, such as an election.  If your prediction turns out to be accurate, you get a return on your investment. The idea is to tap into what is known as the "wisdom of crowds," as well as people's desire to make money.  These markets turn out to often be excellent tools for predicting future events.

Futures markets are now being used to try to predict the consequences of climate change.  It's a way of getting people to put their money where there mouth is when it comes to global warming.  A nice discussion of this idea can be found here.  I'll just include this image, swiped from www.intrade.com, that shows one such market in action.

Here, the prediction is: "Average Global Temperatures for 2009 to be among five warmest years on record".  The graph shows how the price of this prediction has increased from early 2009, eventually showing almost a consensus among investors.  The intrade website also has markets attempting to predict 2010 - 2014.

There are certainly drawbacks to futures markets, which I will leave it to the reader to research.  But to a first approximation, I think of this as capitalism weighing in on climate change.

By the way, here is the National Oceanic and Atmospheric Administration's take on 2009:

"NOAA scientists project 2009 will be one of the 10 warmest years of the global surface temperature record, and likely finish as the fourth, fifth or sixth warmest year on record."

(Note that if 2009 is merely the sixth warmest year on record, these investors will lose their bet.)

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