The 'Climate Change' Casino—and the Risks Thereof

There's a lot of risk involved in "global warming." The first and most basic is whether it will occur at all according to the model put forward by the United Nations IPCC. The public can actually wager on whether it's unfolding as officially predicted. "Last week, MyBookie unveiled odds on global warming. Yes, you can bet on the Earth’s 2020 global land/ocean temperature index being greater than or less than 2019’s 0.99 degrees Celsius. Right now, the “no” is a surprising favorite at -700. A “yes” gets you +400."

A more sophisticated version of theory verification uses long-short equity funds.  "The concept is simple: Investment research turns up expected winners and losers, so why not bet on both? Take long positions in the winners as collateral to finance short positions in the losers." If climate change really exists then those who follow the model will do better than the deniers and one can make money wagering in contrasting pairs. According to an investor document seen by Bloomberg:

[Finance veteran] Carrasquillo and her former CPPIB colleague Savironi Chet have joined AllianceBernstein Holding to start a hedge fund called 1.5 Degrees, named after scientists’ warning that the Earth could warm by that much within the next two decades. The long/short equities fund is expected to start trading this quarter... '1.5 Degrees' aims to make high single digit returns by focusing on climate change opportunities and companies benefitting or losing out from events such as rising sea levels, shifting consumer preferences and increased greenhouse gas emissions.

You can't win if you don't play!

Still another approach is to utilize weather risk contracts of the sort traded at the Chicago Mercantile Exchange (CME) to hedge against definite outcomes. "The use of derivative markets for hedging climate-related risk has been around for over 25 years... By indexing CME Weather futures and options, it makes it possible to trade weather in a way comparable to trading other index products such as stock indexes." (A hedge is an investment that is made with the intention of reducing the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting or opposite position in a related security).

A more general measure of climate fear is the level of property and casualty insurance that people, not just activists, buy. Although McKinsey recommends buying insurance they can't even put a number on it. "McKinsey research shows that the value at stake from climate-induced hazards could, conservatively, increase from about 2 percent of global GDP to more than 4 percent of global GDP in 2050. And the risks associated with climate change are multiplying..."

This is disconcertingly vague. In the absence of definite projections so much insurance may be required to protect against the nebulous magnitudes of climate change that some observers fear the whole industry may collapse.

As companies and investors get to grips with the risks of rising global temperatures, climate stress testing is becoming more commonplace across many parts of the world — with eye-opening results for insurers. France’s central bank, for example, released the first results of its climate stress tests earlier in 2021: It found that natural disaster-related insurance claims could increase up to five-fold in the nation’s most affected regions. That would cause premiums to surge as much as 200 percent over 30 years.

In fact preparing against "global warming" creates other risks associated with wind and solar power under-production,  principally the higher likelihood of blackouts. To hedge against crippling outages, provision for keeping dirty fossil-fuel backup generator sets must be made. Moreover there are independent risks inherent to renewables themselves. They are often dependent on exotic material like rare earths (much of it controlled by China) without which green technology could rapidly grind to a halt. They can cause environmental damage by their operation. Solar panel arrays are toxic unless disposed of carefully and wind farms generate a continuous low-level hum that can cause multiple health problems including ruined sleep, headaches, dizziness, vertigo, nausea, depression, irritability, and panic episodes.

What risk? The science is settled!

Renewable energy devices are also prone to damage from weather events. Windmills are torn apart by high winds, acres of solar panels are toasted by brush fire.  The answer? Insure it. There is insurance against the sun not shining.  There is insurance against the wind not blowing. Would there were insurance against the public going broke. There is in a way: as Brits face a massive increase in energy bills, largely as a result of wind power shortfalls, Labour wants BP and Shell to pay for the no-show of renewables:

The UK government is coming under mounting pressure to increase taxes on oil and gas companies, including BP and Shell. The aim: to help British households cope with skyrocketing energy bills. The main opposition Labour Party this weekend called on Prime Minister Boris Johnson to impose a windfall tax on companies pumping oil and gas from the North Sea, saying that the money raised could be used to cut roughly £200 ($272) from soaring household bills.

That there are risks everywhere is not surprising, except to those who regard the climate future as exact, settled science. Risk is in fact another way of expressing our lack of knowledge about the exact probability of each outcome of or whether we have actually anticipated all possible outcomes. Indeed it would be impossible to create all the bookie bets and insurance policies associated with risk management cited here were it not for the presence of uncertainty. A market for bets requires something which isn't completely known, hence the odds as an incentive to bet.

Far from being a sure thing, there is much that is unsettled about the way the earth's climate works. Although these knowledge gaps may be denied by governments and many in the media, they are tacitly admitted by the risk management instruments contrived to deal with them. These force us to quantify climate prediction in specifics that show up the uncertainties lurking behind the bureaucratic façade of infallibility. The official global warming forecasts are neither as definite nor precise as they are made out to be, and though officials have gone to great lengths to conceal doubt, they have not been able to hide risk, which is the shadow of doubt.