Markets Aren’t Buying Denial on Climate Change


(Bloomberg Opinion) -- How big of a threat do Americans think climate change is? On the political left, and increasingly in the center, almost everyone now agrees that it represents a significant danger to the American way of life. On the right, skepticism remains, as evidenced by the committee President Donald Trump has proposed setting up to assess the threat. The Presidential Committee on Climate Security will be headed by William Happer, a physicist who argues that worry over global warming is unfounded. One policy adviser for the Heartland Institute, a conservative think tank, crowed that the panel would rebut “the dishonest/know-nothing climate bedwetters.”

Moreover, even among those who do recognize the threat, doubts may remain as to its severity. Supporters of the Green New Deal, as well as many of those who have proposed alternative plans, believe that the danger is so great that it warrants a transformation of much of the world’s economy and industry. However, a recent poll by the Associated Press and the University of Chicago found that just 16 percent of Americans would be willing to pay $100 a month to fight climate change. If the average American paid that amount, it would total only $390 billion a year -- much less than the $1 trillion or more needed annually to shift  to carbon-free energy, industry and agriculture.

But poll responses can be tricky. People may not have a good idea of how much they’d really pay, and opinions on highly politicized issues like climate change can be driven by partisan identity. Experiments have shown that when people are paid to get factual questions right, partisan gaps decrease substantially. So in order to assess real beliefs about climate change -- which is an important task for both messaging and policy making -- it helps to look at financial markets, which force people to put their money where their mouth is.

In May 2015, I noted a study by three economists showing that houses exposed to sea level rise are consistently priced at a discount. The discount is small -- about 7 percent less than other houses near the sea that are less vulnerable. But it represented some hard evidence that markets believe that climate change will have major consequences in the upcoming years.

Now, a new paper by economists Wolfram Schlenker and Charles Taylor provides some more evidence. Instead of sea level rise, they looked at temperature. Since 1999, the Chicago Mercantile Exchange has allowed people to trade futures based on the weather. The most common contracts allow investors to bet on the number of hot and cold days in a month in various cities in and outside of the U.S. The prices on these futures give a measurement of investors’ temperature predictions.

The authors found that the futures prices tended to be very accurate in terms of predicting the weather, especially the number of cold days. They then compared the futures prices to the predictions of climate scientists themselves, as measured by a database called CMIP5. They found that the futures prices followed the same warming trend that the scientific models predicted a decade in advance.

This agreement between markets and models is important, because it means that investors either believe what the models say, or rely on other data to draw the same conclusion. By refusing to bet that recent warm years were an anomaly that will revert to the mean, market participants are basically ignoring conservative claims that climate scientists have misled the public to exaggerate the threat of warming. When forced to bet, investors bet on warming.

But this doesn’t necessarily mean that markets believe that the impact of climate change will be as severe as many predict. First, futures markets tend to measure expectations about the near future -- the prices Schlenker and Taylor analyzed were from 30 to 10 days in advance. Investors might recognize the warming trend as it happens, but fail to believe in the more extreme long-term scenarios climate scientists predict.

Second, as blogger Jeff Colgan notes, more indirect measures of market expectations suggest that investors still don’t believe the threat will be severe enough to force a sweeping reorganization of modern economies. Most importantly, shares of fossil fuel companies have generally fared well:

Markets Aren’t Buying Denial on Climate Change

This might reflect investor pessimism about humanity’s response to climate change, or it might reflect a belief that the warming trend won’t be a world-changing disaster.

So although it’s hard to draw firm conclusions, market expectations seem to be backing up the story told by recent polls. Apart from politically motivated denialist holdouts, Americans now believe in climate change. But they don’t yet seem convinced that the danger is great enough to require a broad or immediate push to transform the economy.

That’s could be bad news. If the public has to wait for climate disasters to become even more severe than they already are in order to believe that scientists’ dire warnings are real, it may already be too late to act.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

©2019 Bloomberg L.P.

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