Long-term hopes for long-term climate predictions

(Going to try something different with the pix and go a little more visuals-heavy. We’ll see how it goes.)

StockMarket

Credit: Flickr/rednuht

David Jeffrey at Oikos points to a MarketWatch story on the rise of futures markets in weather, and wonders whether this presages a market in climate-change predictions. MarketWatch:

For example, golf courses lose business on rainy days, while ski resorts see their bottom lines hit by unseasonably warm winters. The contracts are tailored to meet a business’s particular needs and based on temperature and precipitation levels, and they can range in duration from one day to six months.

One example would be a golf course purchasing a contract to be compensated based on the total number of rainy days over a given period. A golf club in Louisville, Ky., for instance, could buy a contract to be paid $2,000 every day it rains at least half an inch during the peak season.

Futures markets in weather were something Enron got into, shortly before the end, and that’s been used (in The Smartest Guys in the Room, for instance) as symbolic of how ridiculous the company got before it collapsed. Here’s how NPR mentions it:

Besides buying and selling gas and electricity futures, [Enron] created whole new markets for such oddball “commodities” as broadcast time for advertisers, weather futures, and Internet bandwidth.

Now, the idea doesn’t seem so silly, with so many businesses directly weather dependent. If you can find somebody to sign the other end of that golf-course contract, for instance, it’s probably a good idea to do it — you’ll shave off a little bit from the top of the maximum possible profit you might make in ideal weather conditions to drastically reduce the costs you’ll pay if things go horribly wrong and it rains cats and dogs.

The trick is finding either a speculator willing to make the bet, or someone who stands to make a lot of money if it rains like that and wants to hedge in the opposite direction. And indeed that seems to be the challenge for the post-Enron pioneers (think of Enron as the Donner Party) in this area. Says MarketWatch:

[T]he real challenge is not in designing and listing a contract but in creating opportunities to trade the products, he said, because it normally takes some time to develop an even, two-sided order flow.

“You have natural hedges looking to buy insurance against the risk, but (the demand) doesn’t correspond with speculators willing to take the other side of a trade,” Andersson said. “We listed our hurricane contracts knowing the big reinsurance companies wouldn’t be trading them on Day One.”

For the same reason, I’m doubtful that Jeffrey’s hope, that a direct market in climate-change futures, will ever come to fruition in anything other than toy-miniature form. We’re talking about an extremely long-term question, or set of questions (what will the temperature be in 2028? what will sea levels be at such-and-such a spot on the New Zealand coast in 2040?) that you’d almost certainly be better off anticipating the possibilities in the operations of your business rather than buying a futures contract to hedge against a particularly bad outcome.

Here’s a question: Are there any commonly traded futures contracts already out that extend that far into the future?

Anyway, none of this is to say that toy-miniature markets couldn’t work. They work pretty well for elections, even though the participants are generally playing because they’re political junkies, not because they’re trying to hedge against specific personal or business risks. But, pending Jeffrey’s further research, I’m not seeing it as an actual functioning part of the business world.

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