CRUCIAL White Paper

Executive Summary

What? Information markets use market-like mechanisms to elicit and aggregate information. Information markets are not designed to transfer ownership or risk but to exploit the proven ability of markets to discover and synthesize information. Information markets can solve the problems of aggregating diverse climate expertise and aligning the incentives of providers. They could become the primary mechanism for obtaining forward-looking expertise about climate-related risks.

Why? Climate change is recognised as an important source of risk. Regulators now believe that climate-related risks pose, not only a threat to individual firms, but possibly to the stability of the financial system. In 2017 the G20’s Task Force on Climate-Related Financial Disclosures (TCFD) published recommendations that firms should disclose forward-looking information about physical and transition climate-related risks. More than two thousand companies have voluntarily signed-up to these recommendations. Regulators and exchanges in many countries plan to make climate-related disclosures mandatory. These trends have created a demand for forward-looking information about climate, such as emissions pathways and changes in physical climate risks. Companies requiring this information are a nascent source of funding for applied climate research. They are particularly interested in the efficiency with which distributed information can be aggregated and communicated for use in decision making and risk management. The marketplace for climate information is diverse and fragmented. Relevant expertise exists in public agencies, academia, think tanks, as well as an emerging class of private companies known as climate service providers (CSPs). Given the long horizons involved, few providers have established track records, so it is difficult for users to evaluate their skill. Furthermore, most forecasts are offered with no warranty. This creates a situation in which bad forecasts can drive out good ones; a situation reminiscent of credit ratings for mortgage-backed securities in the run-up to the subprime crisis.

How? We propose a climate information exchange that hosts markets predicting climate-related variables. These variables will include high-level ones, such as global greenhouse gas concentrations, and more granular ones like sea-level rise in specific locations. Market participants will include individuals and institutions with expertise across the range of disciplines relevant to climate forecasting, including meteorology, climatology, economics, social sciences, and policy. Participants will use on-platform credits representing a claim on a proportion of research funds distributed through the exchange. These funds will come from public, private, and philanthropic sources interested in effective altruism. The exchange will use AGORA, developed by Hivemind Technologies Ltd. AGORA has been used to run expert information markets for seasonal forecasts, El Niño events, Atlantic hurricane activity, and crop yields. AGORA solves several problems that have afflicted previous attempts to create information markets for climate: an automated market maker guarantees liquidity allowing markets to function in the absence of uninformed “noise” traders. AGORA supports very large outcome spaces, enabling consensus probability distributions to be extracted, not just probabilities for binary events.

Where? Many of the markets will have horizons of more than a decade. The consensus forecasts generated will be a public good, to be distributed for free. There is a strong case for the exchange to be hosted by a university, which will become a hub for international climate expertise.