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It seems to me that carbon futures and trading are
getting
at completely the wrong problem.
The thing we truly care about, and that will affect us
directly, is not the level of carbon, nor even the
temperature, but it is the water level in 10, 50, 100
years and so on.
Therefore, it is
this water level that should be traded
directly. Thus, shrewd energy companies that secretly
believe in global warming can hedge themselves by
buying
such futures, and such moneys to be used to ameliorate
the effects of the rising waters.
Similarly, water level alarmists (or their grandchildren)
can
make sufficient billions to live well above current water
levels by taking money from the stubborn deniers and
winning this bet.
[link]
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This doesn't sound like a financial instrument so much
as a plain old bet. So what's the idea? |
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Yes, many people seem to believe water levels are rising dangerously. Islands disapearing and such. And yet my government told us a couple of years back that there was nothing to worry about. |
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Since then there was nothing in our media about it. |
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I live in the netherlands so it is rather important to us seeing as roughly half of our country is below sea level and we have had terrible flooding in the past. |
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So, drown poor or dry millionair. |
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Ytk, future markets are betting, but they also serve
a function of managing risk. |
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What better ways for people on both sides of the
debate to put their money where their mouth is? |
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This is a long market, & long markets have huge
problems. |
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For instance, I'd like to bet $100k that the sea level
will rise globally an average of >1.5 meters by 2050. |
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However, to place that bet, I'd have to park 100k for
36 years! The opportunity cost is high (in interest,
as well as liquidity for life's changes). |
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And, even worse, it's bad to bet on chaos (& flooding
most major coastal cities is indeed chaos) for 3 big
reasons: |
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Can you really expect promises to be kept during
infrastructure & social chaos? "Sorry, the system
can't be supported". |
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When a culture is unsustainable, it often doesn't
gradually get sustainable, but rather goes off the
cliff. As the crisis gets more painful, the entrenched
players get more entrenched, until the whole thing
collapses. To get your reward, you'd have to cash in
just as it's free-falling. Because, up until 11:59PM of
the impending doom, everyone will still be betting
against you, so you can't resell your future. |
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For those who do believe that the sea level will rise,
it creates a perverse incentive to encourage that to
happen. |
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For example, if 1,000,000 people believe the sea
level will rise, & place financial "bets" to that effect,
then that takes 1,000,000 people "off the table".
Meaning, those 1,000,000 people, over the next 10
years, may have produced many clever ideas to help,
but dismissed those thoughts when they were small,
as the thought that would hurt their finances. |
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//future markets are betting// |
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Not exactly. A “future” represents a promise to
deliver some asset or
commodity. If I buy pork belly futures, I'm purchasing
the right to
have some specified amount of pork bellies available
to me at a certain
location at a specified time. Now, as an investor, it's
highly unlikely
that I actually want that much pork, but I can take
those pork
futures and resell them, either to other investors or,
ultimately, to a
pork processor who really does want that meat to
convert into
bacon. Of course, I'm hoping the price of pork goes
up between now
and when I sell the futures. But whether it does or
not, I've got to
make sure to get rid of my futures before the
contract comes due,
or else I have to figure out what to do with 47 pallets
of hog bellies
that's currently sitting in a warehouse in Nebraska. |
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A “bet”, on the other hand, isn't backed by anything
except a
promise to pay if certain conditions are met. If your
card is higher
than my card, I'll pay you five dollars. If Green Bay
wins against the
49ers, you'll make 3-to-1. Or, in this case, if the sea
level rises
above a certain height, I'll pay you $X, and if it
doesn't, you pay me. |
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In order for it to be a “future”, it has to represent
some commodity
that can be bought and sold on the open market. The
sea level isn't
such a commodity. So this idea boils down to “bet on
something”.
Well, okay, but how is that a novel idea? You could
substitute
anything you wanted for “water level” and
theoretically have a
completely different idea. |
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ytk, thanks for that informative explanation, I
truly enjoyed the aspects of the futures market I
was not aware of as yet, this despite having
worked on Wall St. from 1983 through 2004. |
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Carbon futures, and pollution variants thereof,
perhaps you've heard of these? They were
instituted to combat global warming, and, at the
time at least, were a novel idea, despite being
somewhat abstract This idea, though somewhat
derivative of that idea, is nevertheless both new,
and (in my opinion) useful, as it gets at the crux of
the issue -- how to make those that don't believe
pay, and how to create an ability for those that do
believe to protect themselves, both sides thus
creating a market. |
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//I truly enjoyed the aspects of the futures market I was not aware of as yet,
this despite having worked on Wall St. from 1983 through 2004.// |
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And I'm sure the hot dogs you sold were delicious. |
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//Carbon futures, and pollution variants thereof, perhaps you've heard of
these?// |
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Sure. There's nothing abstract about them at all. You're purchasing the right to create a certain amount of
additional
pollution from a company that has reduced its own pollution, thus creating a
financial incentive for reducing pollution and a penalty for failing to do so. The
right to emit pollution is the tradable asset in this case. What are you proposing
to back your “Water Level Futures”? The right to raise the sea level by a
certain amount? That makes no sense whatsoever. How do you even measure
that, or enforce regulations regarding how much an individual company has
raised the level of the ocean? |
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It can't be a futures market without some underlying asset. What is the asset
here? What specific benefit does owning one of these “futures” confer, other
than a potential payout if certain conditions are met? If there aren't any, then
it's either an insurance policy or a straight up gamble (though it's arguable that
there's not any difference between the two), not a future. |
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you're right, [bigsleep], in fact one of the most
puzzling aspects of the certainly of climate change
has been the refusal of insurance rates to go up. |
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