Marginal Revolution: How are markets adjusting to climate change?

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How are markets adjusting to climate change?

A loyal MR reader asks:

Are the markets adapting to the warmer world?...

# Are the prices of real estate in cooler areas of the world going up at the expense of the prices in warmer areas of the world?
# Is R&D money being invested in cheaper and more efficient cooling systems for buildings, cars, individual people?
# Are the shares of wine producers in the UK or Germany going up? As the south of the UK gets warmer, the quality of the wine should increase. What is happening to wines from regions where grapes won't grow in the future?
# How about ski resorts? Would you start a new one now?

It is hard to specify the relevant comparison or "event study" (what should the price of a UK winery be?), but I haven't heard of significant market price adjustments in secondary assets. This NYT article, about real estate price effects, is mostly speculative. Corn and ethanol prices are way up, so why not Canadian real estate? Most of all, the time horizon of many pending global climate changes might be thirty years or more, maybe a century. The claim of Nicholas Stern is that "we," standing in for the social welfare function, should care about the future more than markets do; evaluating that view, here are my posts on the social discount rate.

A few of you asked for posts on carbon taxes but that has been covered already. A carbon tax will work only with some probability, mostly because international cooperation may not be forthcoming. That means it is best to sub in a carbon tax for some other tax, in balanced budget fashion. Here is a more general post on global warming.

#This counts for at least two more in a series of 50. I'll say I'm up to 30.

Addendum: Glen Whitman links to David Friedman.

Posted by Tyler Cowen on March 18, 2007 at 03:55 AM in Economics | Permalink

Comments

In a recent debate within a British political party, there was a discussion over hypothecated carbon tax on air flights. My intuition suggested that this would be bad thing, mainly because cause and effects to do with climate mitigation and adaptation are weakly linked, as well as hypothecation being a rather inefficient way to use taxes. That said, consensus was "Hey, what a great idea hypothecation is!" Ach well.

Stern claims in his LSE lecture that R&D spending in energy is half of what it was in the 1970s, due to privatisation and cheap energy. See http://www.bbc.co.uk/mediaselector/check/player/nol/newsid_6130000/newsid_6133500?redirect=6133578.stm&news=1&nbram=1&bbwm=1&bbram=1&nbwm=1 for more.

Posted by: Naadir Jeewa at Mar 18, 2007 5:43:47 AM

My understanding of how the recent uptick (past 100 years or so) in warming has been distributed is that the changes have been virtually all closer to the polar regions. The closer you get to the equator you get there is no warming.

I suppose this may change a century or more from now, but I'd hold off selling your LA home for a move to Michigan if I were you.

Also, according to the IPCC report summary froma couple of months back, the best estimates for global sea rise over the next century is about 1 foot or 1 1/2 feet rise. Over a century.

I see absolutely no reason whatsoever for real estate in warmer climes to lose value relative to colder climes any time soon.

All the changes listed will take place at a pace slow enough to make it irrelevant to take into account over the next couple of generations. This is one reason why emissions mitigation is such a problem getting implemented, in their daily life everyone rationally wants to use a high discount rate.

Posted by: happyjuggler0 at Mar 18, 2007 11:52:02 AM

Your loyal reader suffers from a common global warming fallacy. There's no reason to expect that warmer places will get enough warmer to drive people away and make them go to cooler places. The changes we're talking about are a few degrees increase in global average temperature. This will likely result in some places becoming much hotter and some places becoming much cooler (much more than a few degrees!), but there's no telling where most of these places are, yet!

Posted by: billb at Mar 18, 2007 11:53:24 AM

"Are the shares of wine producers in the UK or Germany going up? "

Well not since I dont think any are listed.

At first blanch the stats
http://www.englishwineproducers.com/stats.htm#yield

show a pretty eratic picture - production and quality jump around pretty significantly, as might be expected in a producer on the edge of the marginal zone.

That said, the top quality stuff is undoubtably on the up with wines such as Nyetimber regularly winnning awards.

http://www.englishwineproducers.com/CompetitionresultsIWSC2006.htm

Of course Nyetimber is run by a couple of americans. If may be that its not necessary that the climate is getting better, just that american and australian wine producers think it is and so invest their expertise in the english wine industry?

Posted by: Giles at Mar 18, 2007 11:55:19 AM

"global warming" doesn't even spread its effects evenly and make everywhere warmer. instead: a change of 1 degree in average global temperature might actually be a more significant warming in one area and a slight cooling in another. either area might shift enough to change wind patterns, which effect other areas significantly. a ski resort might be a great idea in an area whose climate changes to 10 degrees cooler in winter as a result of global warming. that's why it is more properly known as "global climate change."

Posted by: Dave McDougall at Mar 18, 2007 12:34:27 PM

i think the point is that, if the market doesn't care (yet), society shouldn't either. why wouldn't we trust that those with real money at stake will make the best decision about how worried we should be (which is not much).

Posted by: dj superflat at Mar 18, 2007 2:18:09 PM

The papers tell us the Champagne producers have been buying vineyard acreage in the south of England on land that shares Champagne's geology.

Posted by: dearieme at Mar 18, 2007 2:21:16 PM

David Friedman's take is the definitive one for me. The ocean will rise a foot in 100 years? I think we could find something more important to talk about.

Posted by: Bill at Mar 18, 2007 2:52:00 PM

If climate change and the impact it has is much quicker than what is being told to us via MSM then what we are facing is more then how do I survive financially or what the markets are doing, but how do I or any of us survive .

Below is well worth considering.

http://www.signs-of-the-times.org/articles/show/125454-Fire+and+Ice%3A+The+Day+After+Tomorrow

Posted by: PatL at Mar 18, 2007 5:00:25 PM

"Are the markets adapting to the warmer world?..."

I expect to see the price of salmon and crab going up, given the fact that Alaska's harbors are still iced in past the usual start of the fishing season.

Posted by: triticale at Mar 18, 2007 6:36:36 PM

R&D money is certainly being invested into cooling in the UK and probably other EU countries - certainly within the fields of engineering and architecture. This is a likely result of greater regulation, as the 2005 Building Regulations are quite strict on efficiency, asking for a minimum SAP rating of 80, where 100 is considered 100% energy efficient for heating and cooling. Some very desirable new builds and conversions are exceeding SAP ratings of 100 by incorporating community CHP (Combined Heat & Power) for example.

Posted by: Naadir Jeewa at Mar 18, 2007 6:55:22 PM

I got a copy of An Inconvenient Truth [the book, not the movie]. I was hugely disappointed.

I get it that movies don't have footnotes, but books that purport to be documentries usually do. There's no way I can check any of the stuff Al Gore is saying to come to an informed decision as to whether we as a country should spend trillions of dollars doing what he wants us to do.

-dk

Posted by: Dick King at Mar 19, 2007 12:25:39 AM

There was a terrific post on this topic in Naked Capitlism right before the IPCC report was released (I saw it at Selves and Others).

http://www.nakedcapitalism.com/2007/01/thinking-unthinkable-global-warming.html
Here are some excerpts from the beginning. The whole post is very much worth reading (it goes through a back-of-the-envelope analysis). And the site has other posts on financial markets participants' reactions to climate change.

"What a difference a year makes. Global warming had been dismissed in the business press as the creation of tree-huggers, liberals, and other enemies of free enterprise. Suddenly, it's a hot cause (no pun intended)....

The odd thing, given the high profile it has gotten in the mainstream media and now among politicians, is how little global warming is acknowledged by financial analysts and investors. Oh, to be sure, oil has gone in a remarkably short period of time from $77 a barrel to just over $50 due to weirdly warm winter weather. Alternative energy funds are in vogue (although the dramatic decline in oil prices has dimmed enthusiasm for them)....

But I haven't seen much in the way of serious thinking as to what climate change could mean for commerce in the long term, say ten to thirty years.....

Let's consider, on a gross, crude level, what global warming could do to the world economy. Mind you, I did not go looking for the best data, I merely chose some facts from the popular media that seemed to be representative and came from credible sources....."

Posted by: Marshal Manning at Mar 19, 2007 1:38:11 AM

The really interesting thing about the global warming foofaraw is how much traction it's developed how quickly. Why does such a marginal dubious phenomenon suddenly become a religious truth about inevitable disaster, sin and guilt? How do people's minds latch onto such a moronic message so emotionally? Quite the lesson in mass psychology.

Posted by: Robert Speirs at Mar 19, 2007 9:55:24 AM

Meltdown

Unstoppable Global Warming Every 1500 Years

and

The Politically Incorrect Guide to Global Warming

Just for balance.

Posted by: Sandy P at Mar 19, 2007 11:48:39 AM

- There's no need to move anywhere yet, the effects of global warming occur on the scale of generations, and also aren't necessarily problematic for everyone (non-agricultural economies with no significant coastline and a large water supply won't be directly affected). What you'd expect to see is people from agricultural economies that undergo desertification moving to other areas (but no necessarily to work in agriculture). To measure this effect you'd need to separate it from agricultural workers migrating for other socioeconomic conditions. I am not aware of anyone who has seriously tried to answer this question and am too lazy to search. The other class of climate induced migration is for regions suffering from sea level rises but most of those are low population islands in the Pacific with populations not large enough to cause a significant change in economic conditions at their destination, wait until Bangladesh starts to flood though...

- Money is being invested in more efficient cooling, but there's always money invested in more efficient cooling for the sake of efficiency regardless of global climate change. Note that local cooling systems really only transfer heat between the medium being cooled and the local environment, exacerbating the problem of keeping a room cool because the outside is now hotter. This is one aspect of the urban heat island effect, change in albedo being the other.

- Articles have appeared positing Southern England as a potential significant wine producing region in the near future. I don't know much about Germany but I suspect the north is too industrialized to be a good winemaking region.

- Ski resorts in the Eastern US and Alpine Europe are probably going to vanish. If I insisted on investing in ski resorts I'd invest in resorts in regions likely to survive expected warming: the Rockies and Himalayas (maybe too tall?) which would have to pick up the slack in supplu.

Posted by: Ssezi at Mar 19, 2007 4:50:51 PM

I don’t think that climate change will affect real estate price. In the mountains you have cold weather which attracts people who like the snow and skiing which proves that at a cold climate that real estate is expensive due to ski resorts. Then at the beach where it is warm it attracts people who like the ocean and living near the ocean isn’t cheap. There are many places where the people evolve around the climate and is not an issue or the price of real estate.

Posted by: a-town at Mar 19, 2007 8:13:19 PM

As AB 32 in California only became law this year, I think it's premature to see a lot of market action yet. The Air Resources Board has until the beginning of next year to issue a regulatory framework. Since everyone expects that cap-and-trade will be a major part of implementing the legislation, I expect to see an explosion in various kinds of carbon credit markets by early '08.

It's worth noting that the Chicago Merc already has a carbon trading exchange.

Posted by: Francis at Mar 19, 2007 9:18:41 PM

I think the climate change will effect the economy in certain ways in the next 50 to 100 years. I think things like the price of UK winerys and and different building materials and cooling and heating systems will be a small part of the impact. I think energy use will increase with the change in the climate and this could definitely pose a problem with the issues with energy we already have. I don't think real estate will be majorly effected due to climate change though.

Posted by: T-rav at May 2, 2007 12:11:56 AM

Frankly, I think most people have their heads in the sand on this issue. The changes are all around us, already occurring. Shorter winters, hotter summers, melting glaciers - the data is not really in doubt. Read "Winds of Change", a great study of probable historical events affected by climate change (a much more correct term than Global Warming) like the familiar Vikings crossing the Atlantic and abandoning their cities in the face of the ice. Interestingly, the rising seas, changing climatic regions, etc. are all quite serious, and those who have commented that they may be quite slow are correct... but it won't change that people will be less and less comfortable - and regions will become less capable, economically speaking, of sustaining life as these changes occur.

Something no one has mentioned is that, long before the Oceans rise and we are getting sunburns here in London, we'll run out of clean drinking water in many parts of the earth. This, to me is a critical environmental issue - and one not nearly as sexy today as oil/political debates or electric cars.

Richard Titus
Executive Producer of Who Killed the Electric Car?

Posted by: R. Titus at May 10, 2007 4:10:56 AM

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