Extended Abstract (232K)14.4
Evaluating the cost of protecting against global climate change: options pricing theory and weather derivatives
Harvey Stern, Bureau of Meteorology, Melbourne, Vic., Australia
In a 1992 paper presented to the 5th International Meeting on Statistical Climatology, the author introduced a methodology for calculating the cost of protecting against the onset of global warming.
The paper, 'The likelihood of climate change: A methodology to assess the risk and the appropriate defence', was presented to the meeting held in Toronto, Canada, and under the auspices of the American Meteorological Society.
In this first application of what later was to become known as 'weather derivatives', the methodology used options pricing theory from the financial markets to evaluate hedging and speculative instruments that may be applied to climate fluctuations.
Use of these financial instruments leads to those concerned being compensated provided they are on the correct side of the contract. Conversely, those on the wrong side of the contract would have to provide that compensation.
The methodology provided a tool whereby the cost of the risk faced can be evaluated (whether it is the case of determining that risk on a global scale, or on a company specific scale).
Published data from the Carbon Dioxide Information Analysis Center were used in the evaluation.
Since the early 1990s, the global mean temperature appears to have risen, and the methodology is 'revisited' with a view to recalculating the cost taking into account the additional, more recent, data.
The same examples are used as were used in the 1992 study, namely:
(1) Protecting against the risk of diminishing industrial output associated with global warming; and,
(2) Protecting against the risk of decreasing value of a company likely to be adversely affected by global warming (e.g. a manufacturer of ski equipment).
It is shown that the cost of protection has risen since 1992.
Supplementary URL: http://www.weather-climate.com/ams2005cc.html
Session 14, Climate Services (parallel with Joint Session 3)
Thursday, 13 January 2005, 11:00 AM-12:00 PM
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