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Winton Capital sets up climate change prediction market

People walk down a flooded street as they evacuate their homes after the area was flooded from Hurricane Harvey on August 27, 2017 in Houston, Texas.
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One of Europe's largest hedge funds is looking to move into the gambling industry in the UK, as it sets up a new venue where players can bet on the effects of climate change.

The new "climate prediction market" is the brainchild of Winton Capital, founded by David Harding, and is aimed at finding a market consensus on the levels of carbon dioxide in the atmosphere and global temperature rises in the future.

The not-for-profit project, which is being funded out of Winton's philanthropic budget, is hoping to tempt climate scientists to put their money where their models are, and to provide a clear benchmark of the academic consensus at a time of intense interest in man-made climate change.

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News of the project comes as the UN General Assembly meeting in New York focuses on the theme of a sustainable planet. Climate change also continues to dominate the political agenda around the world, after President Donald Trump declared he will withdraw the US from the Paris climate accord and roll back regulations on the production of coal.

"With a prediction market, getting the information is the primary objective," said Mark Roulston, a scientist at Winton who is overseeing the project. "There's not necessarily a consensus on all the implications of climate change. The idea is to have a benchmark which could track any emerging consensus."

Under the plan, scientists and experts from around the world will be able to trade contracts based on the atmospheric concentration of carbon dioxide and how far temperatures increase, going decades into the future. Winton will act as a market maker and subsidise trading, rather than taking a cut or skewing the odds in its favour.

Winton's market, which will be based in the UK, will be one of only a few prediction markets and is believed to be the first dedicated to climate issues. Such markets are mostly barred in the US because of more restrictive gambling laws; one exception is at the University of Iowa, which has developed a political futures market run for research and teaching.

If the Winton market is successful, Mr Roulston envisions it being a source to show how experts believe world events — such as the US withdrawing from the climate accord — could impact climate change.

Robin Hanson, a professor of economics at George Mason University who helped pioneer the use of prediction markets, said there is little incentive for anyone to try to manipulate the market, because that will only make the potential profits bigger for those who predict CO2 concentration and temperature correctly.

"There are lots of betting markets, and there are lots of ways to predict climate, like through weather futures," said Prof Hanson. "The difference here is you're creating a market for the purpose of finding out about something, rather than just to make some money or have fun."

On Winton's market, bets will settle every year, using temperature data from the UK's Hadley Centre, and the annual average of the concentration of atmospheric carbon dioxide as measured by the National Oceanic and Atmospheric Administration monitoring station on Mauna Loa, Hawaii.

The hedge fund will initially target professionals in the climate field to participate, though it will be open to anyone in the UK. It is being run internally at Winton, with employees able to place notional bets rather than using real money. Mr Roulston said they are hoping to launch it externally later this year to universities, and will open it to the public sometime next year.

Mark Boslough, a physicist and adjunct professor at the University of New Mexico, said he hopes Winton's climate prediction market will lay the groundwork for a more developed way of betting on the future of the environment.

Mr Boslough says that the problem with prediction markets is that they may not get enough people participating consistently to truly show a consensus, and there needs to be "big money" in it.

He has advocated for the creation of a climate futures market on the Chicago Mercantile Exchange, where companies in industries affected by climate change, such as insurance and reinsurance companies, could use them as a way of hedging.

"If it's just for trying to get the consensus, I don't think it'll work because it'll be too thin," he said. "Climate markets have to be embraced by people with big money who will look at it as an actual big investment. If it's thought of in those terms, money will flow in and it will work. Ultimately it's got to have liquidity."

Mr Roulston said it was necessary to have a financial incentive for predictions to ensure participants remain engaged and bet accurately.

He envisages eventually expanding to include other markets, which could include sea level rises, extreme weather events and pollution levels.

Mr Harding, who founded Winton in 1997, has donated money to a range of causes, from the Science Museum's new mathematics wing in London to the creation of the Winton Centre for Risk and Evidence Communication in Cambridge.

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