28 Jul 2016

Making a safe bet on dangerous climate change

by | posted in: Uncategorized | 43

The record warmth of 2015 just made me £1,334 richer. While the extra cash is a nice bonus, it sadly demonstrates that the atmospheric dice remain loaded towards increasing climate change.

So, how did I turn increasing temperatures into cash? About five years ago I was at a conference in Cambridge where most of the participants were sceptical about the influence of humans on the climate. I took the microphone and asked if any of them would care to make a £1,000 bet with me about whether 2015 would be hotter than 2008. Two brave souls, Ian Plimer and Sir Alan Rudge, agreed.

As we now know, 2015 broke all records for global mean temperature. I won the bets. So why am I not £2000 richer? And why write about it now, in July?

I’m not a professional gambler. I do know a bit about risk, and how to manage it – my integrated assessment model of climate change, PAGE, allows people to assess the likelihood of different things happening depending on the action they take now. And I knew that climate scientist James Annan had made similar bets. So I asked him what odds he would give me. In 2011, he was confident enough in the reality of climate change to offer me odds of 5 to 1 against 2015 being cooler than 2008. We agreed a wager where I would pay him £666 if 2015 were warmer than 2008, and he would pay me £3333 if it were cooler. Why those slightly strange looking amounts? Because now I was perfectly hedged: I would win £1,333 if 2015 were cooler than 2008, and £1,334 if it were warmer.

Provided I could get paid.

That’s why I haven’t been able to write about this until now. Sir Alan Rudge behaved impeccably. He contacted me in late January, as soon as the temperature for 2015 was confirmed, and paid me £1,000 a few days later. I paid James Annan the £666 I owed him at the same time. For geographical and personal reasons, Ian Plimer took a little longer. It has taken him until this month to pay me, but he now has, in full.

I’m not writing this to crow about my win. There are some serious lessons to be learnt from this.

There is a big opportunity to develop these kinds of voluntary deals that suit both parties. If everyone agreed on the reality and likely scale of climate change, that opportunity would not exist. But over half the US population thinks that climate change is a natural phenomenon that happens from time to time. So do over 40% of those in the UK, Australia, France, and the world as a whole.

If you think climate change isn’t driven by human activity, you presumably think it is going to go into reverse sometime soon. So you could make some money out of those people, like James Annan, who are convinced it’s going to continue. You just need a mechanism for doing it.

Making individual bets with people holding different views is not the mechanism. My experience has shown me that it takes a great deal of effort to make contact, agree the terms of the bet, have it witnessed, determine who has won and ensure you get paid. As economists would say, the transaction costs are just too high.

One possibility would be for an established firm like Betfair to offer a market in global mean temperature in future years. People with different views could back or lay bets on the global mean temperature rise exceeding 1.0, 1.5, 2.0 degC in any future year. Those who think the climate will continue to warm would be able to match up directly with those who think it will start to cool again, and make money from each other without a third party, like me, becoming involved to capture most of the value in the bet.

Another way to do this would be for a trusted firm to offer conditional climate bonds which pay out if the global mean temperature rise exceeds 1.0, 1.5, 2.0 degC in a specified future year. Businesses or individuals likely to be harmed by climate change would buy the bonds to hedge their losses. The funds to issue the bonds could come from those who think climate change unlikely to continue.

I don’t know whether either of these mechanisms, or others that could be devised, would generate enough cash to hedge against dangerous climate change impacts, which could amount to trillions of dollars. But they could offer a financial incentive for people who disagree about the likelihood of climate change to carefully assess the risks, instead of just shouting their disagreement across the void.

If we do nothing, all the signs are that dangerous climate change is one of the safest bets around.

Amended on 1 August 2016 to give the correct value describing the odds of my wager with James Annan. The cash values were correctly described and have not been altered.

43 Responses

  1. Alberto Zaragoza Comendador
    | Reply

    Logic fail: title mentions ‘dangerous’ climate change, text talks about warming without mentioning even one impact thereof (whether dangerous or not). Well, you do cite one paper – written by yourself, and which deals with an IAM without mentioning any specific ‘impact’ of warming.

    Here’s six possible bets, which are probably more relevant for the planet than a meaningless temperature figure.

    I bet crop yields will be higher every decade than the previous, until we’re both dead (and thereafter probably, but we won’t be there to see it).

    I bet weather disasters will continue to decline as a share of GDP.

    I bet not a single town over 10,000 will be abandoned due to sea level rise before 2100.

    I bet not a single island over 1,000 will suffer that fate, again in the XXI century.

    I bet the world’s green mass will be higher every decade than the previous, again indefinitely.

    I bet verified species extinctions this century will be less than in the XIX or XX centuries.

    I bet on those things no matter how much carbon we end up emitting, how much of that carbon remains in the atmosphere, or how much we warm up.

    There are many ways to look at these bets: what baseline period is used and so on. If you believe actually bad stuff is going to happen due to warming, we can hammer out the specifics.

    If you don’t want to bet, well, I don’t need to spell it out for readers to figure out where you stand.

  5. Ari Pekka
    | Reply

    But, but, …. I like it warm. I’m from Finland, and it’s generally waaaay to cold here. A little warming is a welcome change.

  7. Windchasers
    | Reply

    Alberto, I’m not even sure how we could hammer out the specifics for some of those. How do you tell if a town is abandoned due to sea level rise, versus for some other reason? Think about regions where the sea can be held back with dikes; the struggle becomes about the economics. If a recession hits and a city no longer have the money to afford new dikes in the face of rising seas, which is to blame? The economics, or nature? (Both, of course.)

    I’d take those bets if I could get them figured out. But, neither of us is likely to be alive in 2100 anyway, so it’s a moot point.

    If you don’t want to bet, well, I don’t need to spell it out for readers to figure out where you stand.

    Ooooh, a gibe.

    But.. how does not taking these bets point out where he stands? The only bets that you presented that are really related to the costliness of climate change is the weather disasters (which ignores opportunity cost, btw), and the sea level one, which is too long-term. So.. both of these are not great proxies for one’s stance on the economics of climate change.

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