From ‘Wind Trading’ to Weather Futures: Derivatives Markets and the Commodification of Climate

• In Event: Markets & the Environment I: The Environmental Logics of Finance

Abstract

How does natural environmental risk create opportunities for new types of Capitalist exchange? This paper argues that derivatives trading broke apart and flipped the relationship between environmental and economic instability by creating a means of insuring against or profiting off the variability of climate and ecology. Derivatives are abstract financial objects that represent guesses about future commodity prices, and they have become some of the most important things in the political economy of global Capitalism. At the end of 2017, the notional value of all derivatives contracts outstanding on organized exchanges was $532 trillion USD, or $71,000 for every person on earth. The environmental role of derivatives is the key to their historical success. First this paper explores the booms and busts of eighteenth- and nineteenth-century grain derivatives in Japan and the United States over their profitable but dangerous abstraction of natural processes. Second the paper explores the development of ‘hedging’ models as a way to eliminate environmental risk for farmers and their spectacular mobilization in the twentieth century across new commodities, including livestock, energy, and manufactured goods. Finally, the paper examines the most recent revolution in derivatives trading for an era of global climate change: the literal commodification of variable temperature and precipitation. The Chicago Mercantile Exchange now offers trading in twenty-four place-based climates in North America, Europe, and Asia. Finance Capitalism thus grew with environmental change in any direction. Unlike other financial objects, derivatives are not supposed to play any direct role in the real world, but their wresting of markets from nature has ultimately incentivized environmental instability and catastrophe by making them the most profitable.

Author

• Tim Paulson, Simon Fraser University