Strained Silver and strange predictions on climate

It's not the usual lopsided intellectual battle we discuss here at Eli's.  This is Michael Mann criticizing Nate Silver's somewhat skeptical take of climate prediction capability in Silver's new book:

It's not that Nate revealed himself to be a climate change denier; he accepts that human-caused climate change is real, and that it represents a challenge and potential threat. But he falls victim to a fallacy that has become all too common among those who view the issue through the prism of economics rather than science. Nate conflates problems of prediction in the realm of human behavior -- where there are no fundamental governing 'laws' and any "predictions" are potentially laden with subjective and untestable assumptions -- with problems such as climate change, which are governed by laws of physics, like the greenhouse effect, that are true whether or not you choose to believe them.

As usual, I'll leave the heavy lifting to someone else, Mann in this case.  Also as usual, I haven't read Silver's book, so maybe there's more to it.  What I can add, however, is that it's helpful to look at climate predictions by Silver himself and by a denialist he credulously supports.

Three years ago, Nate offered to bet climate denialists on a monthly basis over whether the temperature in their hometown was one degree above or below the historical average.  As I said at the link, this was a somewhat aggressive bet offer that could've been vulnerable to letting his opponents rely on a short-term seasonal prediction of colder temps to game the system against him.  It would be interesting to see if he discusses his past bet offer and why he's critical of predictions that are much less affected by random noise.

Second is Silver's enthusiasm for the discredited Scott Armstrong, a crackpot climate denier.  In that case, there was a prediction and a betting market created by Armstrong's fans at InTrade, a skewed and unfair prediction that they still managed to lose spectacularly (link goes to a series of posts on Armstrong and the bet).

Like Mann, I'm a Fan of Nate, but he whiffed on this one.

One more thing:  Nate apparently wrote something about Gavin Schmidt (no relation) and his unwillingness to get involved in betting over climate models.  As someone who is willing to bet over climate, here's my response about climate denialists who won't bet over their predictions:

Of course any particular skeptic might honestly not be interested in betting, but the widespread lack of interest tells you something.

There's a difference between an individual's disinterest in betting versus the widespread disinterest among denialists as a community (with honorable skeptic exceptions) in putting their money where their mouths are.

Yet another market signal about climate change, but it'll take work to get the answer

Yesterday was about the commodities market and a global warming index, today is about equities. KLD, an investment research firm heavily involved with socially responsible investment, has had a "climate solutions" stock index and last month, it partnered with a financial management firm to allow people to invest in the index.

The GC100 is based on the concept of the climate solutions value chain. Companies in the climate solutions value chain are positioned to benefit from increasing constraints on carbon, high fossil-fuel prices, rising energy demand and a growing acknowledgement of climate risk. The index is constructed to form a basket of companies that provides exposure to companies providing climate solutions.

Their methodology:

The Global Climate 100 Index includes a mix of 100 global companies that will provide near-term solutions to global warming....Constituents are selected from the global universe of companies for their involvement in the following themes: Renewable Energies, Future Fuels, and Clean Technology and Efficiency.....The leading companies in each category are included on the Index....The Index seeks companies representing a range of corporate responses to climate change, including a group of large-, mid-, and small-cap companies representing sectors ranging from energy and utilities to industrials and consumer products. As a result, the Index is more broadly diversified than a traditional energy sector index.

Neither the current price of this index nor its change over time will show a market signal about climate change directly. But there's more - the price-to-earnings ratio, relative to P/E ratios for comparable businesses not investing in climate solutions, should partially reflect whether the market believes climate change will force business changes. Companies can have high stock prices relative to their annual earnings if the market believes the companies will grow rapidly. If the market believes in climate change, the P/E for these companies should exceed the industry average. The companies are here, starting on page 4. All someone has to do is compare the companies to the appropriate sector of the market (which might be a little tricky, but seems doable). Pretty good business school student project, I would think.

Of course there are confounding factors and noise in the signal - people might invest in these companies in anticipation of peak oil or energy security needs; the market will be influenced by government underreaction or overreaction to climate change; and the index depends partly on the skill and P/E preference of the index selectors.

Still, it would be interesting to see what the result is of a P/E comparison. I bet the index managers actually know that, although I don't know if they'd give that information out.

Promising start for a "Global" Warming Index

James and William have more info on UBS-GWI, a composite index of 15 American weather futures markets. It will certainly have to expand geographically to be "global", but it seems like a good start.

I do have two concerns: first, it's unclear to me whether the index will be weighted by the level of trading in the particular submarkets. While that could well make sense to an energy trader, it biases the information from a straight-science perspective. Second, it will necessarily be an Urban Heat Island index, I think. That doesn't validate the worn-out skeptic argument of cool rural temperature stations transforming into warmer urban heat islands, but it does mean, for once, that land use will be an important factor for purposes of the index. For example, the highly laudable movement towards green rooftops and higher-albedo building and paving materials will affect the index without affecting global temps.

Regardless, a very promising start. I've sent some questions off to UBS, and we'll see if they respond.