Weather Derivatives and Climate Policy
This project was led by Dr Sam Randalls who left ECI in August 2007. He now works for Imperial College and can be contacted there.
Since 1997 a financial market based on weather indices has emerged that protects companies from the adverse economic impacts of day-to-day (non-extreme) weather. This weather derivatives market has grown to become a $45.2 billion market in 2005/6 and poses interesting questions about the way companies analyze and attempt to mitigate weather risk. Whilst long-term contracts are not currently available, the weather derivatives market arguably has implications for climate policy.
The research project examines the potential for weather derivatives to influence corporate understandings of weather/climate risk, enable companies to take steps to manage these risks and focus attention on issues surrounding climate change. Other implications of weather derivatives include their potential use to adapt to future climate changes, the ability to stabilize renewable energy revenues and the relationship with the EU emissions trading scheme.