A few years ago, I was talking to some oil producers in North Dakota about hedging and in conversation asked if they had seen climate change effects in the area… One guy said, “Yeah, the farmers are growing corn!”….
Wolfram Schlenker and Charles Taylor look at climate model expectations and CME weather futures, here… Some takeaways:
“When money is at stake, agents are accurately anticipating warming trends in line with the scientific consensus of climate models.”
“In our recent paper (Schlenker and Taylor 2019), we look at weather derivatives in financial markets to assess beliefs about climate. We find that traders have been pricing in a warming trend that is closely aligned with the projections of scientific climate models, as well as the observed weather outcomes during that time.
Our data come from the Chicago Mercantile Exchange, which offers monthly futures contracts for eight cities on two main weather products – cooling degree days, which measure how much cooling is necessary during hot temperatures in summer months, and heating degree days, which measure how much heating is required during cold temperatures in winter months. The contracts are indexed to 65°F, a common standard for utility companies because cooling and heating systems tend to be turned on above and below that level, respectively. For example, a mean daily temperature of 85°F degrees would count as 20 cooling degree days. These daily degree days are then summed over the course of a month or season.”
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