Tag Archives: climate change

Delusional Investing in a Post-Growth World (And a Possible Alternative)

The internet certainly has its faults, but one can’t but admire how it has democratised information. It is now possible to get access to a multitude of private-sector reports that would only have been available to investment professionals a mere 10 years ago.

One example, with a high degree of quality, is the Credit Suisse Global Investment Returns Yearbook. You can get a pdf of the 2013 report here. Within its pages is a wealth of information on cash, bond and equity returns. Critically, the report chronicles a recent revolution in the prospects for investments. Moreover, the ‘new normal’ savers face gives off some telling signals with respect to future economic growth and, unexpectedly, provides some good news for the economics of sustainability projects.

The three authors behind the report—all from London Business School—provide a short introduction that doesn’t pull any punches in its message to the investment community:

To assume that savers can expect that the investment conditions of the 1990s will return is delusional. Many investors seem to be in denial, hoping markets will soon revert to “normal”.

The report covers cash, bonds and stocks, and all three have seen a collapse in expected returns. Let’s take a closer look at bonds, since they dominate pension-related savings in most countries. You can plainly to see that nominal yields have slumped (click for larger image):

Average Yields on Long Bond jpeg

But once we take inflation into account, things are far worse. In the chart below (taken from the full report), the authors have used inflation-protected bonds starting from the year 2000 (or equivalent where such bonds are not issued by a particular country) to see what kind of real returns investors are prepared to accept (click for larger image).

Real Yields jpeg

This kind of chart always shocks me. Continue reading

Flood Risk in the U.K.: What Does Mr. Market Think? (Part 2 An Actuary’s Nightmare)

In my previous post, I noted that strange things were happening in the flood insurance market. In short, the insurance industry no longer wants to extend the status quo (here):

The current agreement under which insurers continue to offer flood insurance to their existing customers will expire on 30 June 2013. The insurance industry has proposed a new a scheme to ensure customers can still buy affordable flood insurance, after this date. We are currently in talks with the Government about taking this forward.

In truth, they want to move some flood risk from one actor in the market to another. But before I look at that issue, I want to ask the question “why do they want to change the status quo?”

To do this, we need to take a quick detour through the theory of insurance. There is a nice little eight-minute youtube video that explains the theory of insurance here:

The core message in the video is the same as the core message of this blog: risk is the probability of an event times the cost of the event. Continue reading

Data Watch: Atmospheric CO2 February 2013

Atmospheric CO2 concentration is the world’s leading risk indicator. Every month, the National Oceanic and Atmospheric Administration (NOAA), a U.S. government federal agency, releases data on the concentration of atmospheric CO2 as measured by the Mauna Loa Observatory in Hawaii. The official NOAA CO2 data source can be found here.

This is the longest continuous monthly measurement of CO2 and dates back to March 1958, when 315.71 parts per million (ppm) of CO2 was recorded.

The Intergovernmental Panel on Climate Change (IPCC) uses the year 1750 as the pre-industrialisation reference point, at which date the atmospheric concentration of CO2 was approximately 280 ppm according to ice core measurements.

Key numbers relating to NOAA’s March 5th release of February 2013 mean monthly CO2 concentration are as follows:

  • February 2013 = 396.80 ppm, +3.26 ppm year-on-year
  • Twelve Month Average = 394.2 ppm, +2.36 ppm year-on-year
  • Twelve month average over pre–industrial level = +40.8%

Decadal CO2 Change jpg

Continue reading

Data Watch: US Natural Gas Monthly Production December 2012

The U.S. government agency The Energy Information Administration (EIA) issues data on U.S. natural gas production, including shale gas, on a monthly basis with a lag of roughly two months. The latest data release was made on February 28 and covers the period up until December 2012.

Data is reported in billion cubic feet (bcf). Key points:

  • December 2012 natural gas dry production: 2,041 bcf, +0.3% year-on-year
  • Average monthly production for the 12 months to December 2012: 2,004 bcf, +5.0% over the same period the previous year

Since the end of 2011, the rate of production increase has levelled off (click chart above for larger image).

US Dry Gas Production Dec 12 jpg

Continue reading

Permafrost, Chimpanzees, the Savanna and Risk

In my  weekend links, I highlighted a new study published in Science. It is behind a pay wall, but has been well covered by Climate Central and Climate Progress. The study provides us with a good excuse to revisit the whole topic of climate risk.

The paper in question is an empirical study of past permafrost thaw at different temperatures. To summarise the conclusion, stalactite and stalagmite growth in Siberian caves suggests that significant permafrost thaw took place 400,000 years ago when the global mean temperature was around 1.5 degrees Celsius higher than it is today. This level of specificity is new, and is important for not being model based. Incidentally, we have an accurate temperature record going back around 800,000 years through the study of ice cores.

When such studies come through, I think it always useful to place them within a risk component analysis framework. As a reminder, risk is best defined as probability times effect—or  more specifically probability times net harmful effect. It is also worth recalling that we should not get sidetracked by the accusation that such studies lack certainty. The human condition is one of decision-making under uncertainty. As individuals, the only real certainty we have in our lives is death.

Keeping these points in mind, climate change can be viewed as a chain of risk components, each of which has its own probability distribution. We move from emissions, through atmospheric concentrations (the study of the airborne fraction that I blogged about here), to climate sensitivity, until finally we arrive at the net harmful effects on both individuals and societies.

Continue reading

Canada: The Laid-Back Uncle Who Joined the Tea Party

So what happened to Canada? I have followed the country’s politics only intermittently over the  years (despite being an international relations and politics junky and having relatives there). The Quebec secessionist movement was a newsmaker in my youth, but since that time I have seen Canada as like a rather laid-back (but a little bit boring) good-intentioned uncle, contrasting sharply with the schizophrenic one across the border.

Canada? To outsiders the country is the home of an efficiently functioning health service, sensible gun control, a well-regulated financial system and decent public education that covers the vast majority of its citizens. A veritable Switzerland set at the top of North America.

But then we come to climate change—and Mr and Mrs Common Sense metamorphosize into Sarah Palin-loving red necks screaming ‘drill baby drill’. How much of this can be put down solely to the lead of the government headed by Stephen Harper? Wikiepedia gives the gory details. And this article, via Skeptical Science, shows how the government’s tone has soured the usually sensible Canadian organs of state.

But what of the man or woman in the Canadian street? Have they been sneaking out the house surreptitiously to join a Tea Party-type gathering down the road? Continue reading

Climate Change: I Didn’t Do It My Way

When new acquaintances learn of my interest in climate change, most try to change the subject; but when they learn that I used to be very active in financial markets, they often become engaged in the conversation and ask  questions on economics or investment. Why should the reaction be so different?

For such people, the logic with respect to financial markets appears to go something like this: “I have no idea if this guy is full of bullshit or not, but he seems to know something about investment so let’s find out what he has to say.” But for global warming I find the following reaction: “I have no idea if this guy is full of bullshit or not, but he seems to know something about climate change so let’s find a way to change the conversation because it is making me feel uncomfortable.”

I have always been fascinated about the psychology behind financial markets, a field of study that was given the economics profession seal of approval when Daniel Kahneman won the Nobel Memorial Prize in Economics in 2002 (for the best business/economics book of 2012 read his Thinking Fast and Slow). Psychology helps explain why individuals, or groups of individuals, frequently act in certain ways that is different from the profit-maximising model underpinning neo-classical economics.

Similarly, my suspicion has been that psychology lies behind the reason why climate change has failed to engage the general public, even though they should be engaged for reasons of self-interest if nothing else.

The other day I stumbled across the blog of George Marshall, the founder of the charity Climate Outreach Information Network (COIN) who has been developing the same line of thinking for far longer than myself. The introduction to his blog contains a question:

This blog explores the topic of the psychology of climate change denial – with observations and anecdotes about our weird and disturbed response to the problem. It seeks to answer a question that has puzzled me for years: why, when the evidence is so strong, and so many agree that this is our greatest problem, are we doing so little about climate change?

I encourage you to go through some of Marshall’s posts. They are not only insightful in trying to understand the apathy, indifference and denial that surrounds climate change but also sympathetic to the soft denialists (the vast majority of the population).

I will just pick up one theme that runs through the blog: narrative. Continue reading