Common Tragedies

Thoughts on Environmental Economics

Betting on climate policy

Posted by Daniel Hall on December 13, 2007

Ralf Martin writes at VoxEU that there is now a prediction market for climate policy outcomes:

Last week,, the Irish prediction market company, started trading in a range of financial contracts whose payoff depends on specific outcomes of a post-Kyoto climate change agreement. The contracts, which were designed together with the Centre for Economic Performance (CEP) at the London School of Economics, capture which countries will participate in a post-Kyoto agreement as well as how stringent any pollution reduction targets might be.

The article does a great job of explaining the basics of how a prediction market works. It looks from the Intrade site as if the early returns indicate a 20% chance that the U.S. will agree to a 10% cut in 2025 emissions, relative to 1990, by the end of 2009. Of course, as Free Exchange pointed out, there have been very few trades so far, and since prediction markets need liquidity to function well (i.e., generate reliable predictions), it’s hard to put much stock in the numbers. I therefore join with the Free Exchange blogger in encouraging economists and others with an interest in improving public knowledge to get on these markets and start subsidizing them by wagering your monies. And if you’re not willing to risk your funds, I’m willing to risk them for you — contact me for details.

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