The market is betting on climate change

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The view of traders in financial markets lines up almost perfectly with leading academic research

AMERICAN PUBLIC opinion has been catching up to the scientific consensus on climate change, but still has a long way to go. In a poll conducted by the Pew Research Centre in 2016, just 48% of respondents said they believed that the Earth was warming because of human activity. One likely reason for such widespread ignorance is that most people do not incur any penalty for being wrong.

A new paper by Wolfram Schlenker and Charles Taylor of Columbia University studied the relationship between mathematical climate models and prices for contracts at the Chicago Mercantile Exchange, which have allowed traders to place bets on the monthly total of days that are hotter or colder than average since 2001. The authors assessed the match between the two sources’ predictions. The yardstick they used was “heating and cooling degree-days” per season.

It is hardly surprising that traders make use of scientific models when making investment decisions. Real money is at stake. What is noteworthy, however, is that the correlation between the two sets of forecasts is so close that it suggests that they base their choices almost exclusively on these models. That does not mean that statisticians have perfected climate forecasting: in fact, the errors their models produce are still large.

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So we can't expect more influence of environmental factors on human's behavior?

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