Betting on Climate Change

Did you notice the stock market rising sharply after President Trump announced he would pull out of the Paris Climate Accord and – according to CNN – destroy the entire planet? Markets are irrational, but still, it’s hard to reconcile a decision to destroy civilization with a rise in investor confidence.

What should I make of the fact so many citizens say global warming is an existential danger while the people who have money are (apparently) betting against it? How does that make sense?

One way it makes sense is that markets move for lots of different reasons. But in my experience, a sharp move in the markets timed to a political action is like an instant vote of thumbs-up or thumbs-down on the decision. Apparently, leaving the Paris Accord was a thumbs-up for investors.

And so I give you this hypothesis: There is social pressure to say you side with the majority of climate scientists. To do otherwise would make many people feel like ignoramuses. So they craft their personalities around a belief in climate change doom because they are people who respect science. It fits their identity preference.

Until you ask them to invest their money.

Then people bet against it.

Here I’m not talking about every person. I’m talking about a tendency for some members of a group to be frictionless-only members. As soon as you give them friction – such as a financial risk – some (not all) climate alarmists might become climate skeptics. 

That’s just a hypothesis. 

Another hypothesis is that markets are short-sighted. But how much short-term benefit does the entire economy get from leaving the Paris Accords? I haven’t seen the argument for it helping directly in the next quarter or two, except in terms of optimism for the long-term.

And yet another hypothesis is that the people who have extra money to invest have a different view of climate risks than people who don’t have money. And that could be because the investor class is either smarter or dumber on this topic, on average, than non-investors. 

All of this makes me wonder why there isn’t a more robust betting market for climate change predictions. Folks could bet on sea level changes and temperature averages using some agreed standard for measurement. That way, the climate alarmists can hedge against the economic catastrophe they see coming, at least for their own families. Given the certainty of climate scientists, I would think the people betting on their side would be making easy money. Those winnings could help offset the higher expenses caused by climate disruption. 

Apparently, bad versions of the betting market idea already exist, or did exist at one time. I’m sure you’ll tell me about others. But the lack of a big-time betting market in this space tells me there wouldn’t be enough bets on one side of the topic to make a market.

I wonder which side that would be.

Disclosure: My current view on climate science is that the climate scientists are probably right on the basic science, and their climate models are probably directionally right too. But no one has created a credible economic model around climate change. Until you have a long-term economic model that you can trust, you have no way to know what to do about climate change or when to do it. The climate science models don’t tell you any of that. They aren’t designed for that. If you want to make rational decisions about climate change economic risks, you need credible long-term economic models, not climate models.

On a related note, there’s no such thing as a credible long-term economic model. It isn’t a thing.

You might enjoy reading my book because the alternative is drowning in iceberg water and polar bear tears.

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