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Chris F. Masse March 20th, 2008

Climate scientist James Annan:

What odds a hot 2008

About 20%, if you just want the executive summary (at least, that is the market “consensus”). If you want the details, read on…

Via Chris Masse at Midas Oracle, I see that Intrade has a betting market on 2008 global mean temperature being in the top 5 hottest years. As Chris [Caveat Bettor, actually ] observes, the contract is perhaps a bit vague but for the purpose of this post I will assume they will use the global land-ocean index analysis of NASA GISS, meaning the contract pays for a Jan-Dec mean of 0.55 or more.

The current price of the contract is $20 per $100 (bid-offer spread of $15-$25), ie an implied odds of 20%. At first glance, that felt cheap to me, so I had a closer look. 8 years out of the last 10 have satisfied the “top 5″ test, which is not too surprising given the overall warming trend. However, temperatures are now in for Jan and Feb 2008, and they are very cold, at +0.12 and +0.26 respectively (note how “very cold” is still well above the 1951-1980 baseline). So it will require a mean anomaly of 0.62 for the remaining 10 months to trigger the payout. That has happened precisely once before, in 2005. Clearly it is not impossible, but it can’t be considered likely. We can do a little more analysis to look at the persistence of monthly anomalies. After detrending, the typical e-folding decorrelation time scale of anomalies looks like 4 months or so, suggesting that the relatively cold temperatures will persist for some time to come. That means the latter part of the year will have to really heat up to bring the average up to the top 5 threshold. I’d be more tempted to sell than buy on the contract at the current price, although I’ve not actually checked the seasonal predictions of modelling centres which could influence my attitude.

Meanwhile, in a parallel universe, some people are making noises about “falsifying global warming” by looking at the last few years of temperature data. I suppose one could perhaps ask what observations would falsify gravity (and for that matter, such observations have been made, although AIUI the interpretation is still disputed). Observations of all LW radiation passing straight through CO2 with no absorption would certainly falsify the theory, but I don’t expect to see that any time soon. More seriously, the IPCC explicitly predicted a trend of about 0.2C per decade over the next 30 years, if the trend is substantially different from that then (in the absence of some strong external factor) certainly we’ll need to revise some aspects of our calculations. But readers may recall that the Hadley Centre have already explicitly predicted a couple more below-trend years before a continuation of the general warming trend, so I wouldn’t get too excited about a few “cold” years, especially when “cold” actually mean “far warmer than most of the historical record, albeit not breaking any global records”.

What I like in the man is that he is a serious scientist… but he always manages to stuff some British humor (or “humour”, as they spell it) in his blog posts (or e-mails to me). I got my biggest laughs online thanks to James Annan.

James Annan’s blog

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[Note to InTrade's John Delaney: Couldn't you make use of James Annan BEFORE launching the contracts, man???]

Tags: climate change, Earth, event derivative markets, event derivatives, global warming, James Annan, oceans, prediction markets, temperature

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