Page 101 - Carbon Capitalism and Communication Confronting Climate Crisis

7 BIG DATA, OPEN DATA AND THE CLIMATE RISK MARKET 87

(Dischel 2002). Rather than insuring against a specific observable loss,
payouts on weather derivative contracts are instead triggered when par-
ticular meteorological conditions, e.g., the average temperature over a
month, are detected in vast indexes of weather observation data. Key actors
in the markets include businesses and governments wanting to hedge
against climate risk, re-insurance firms, institutional investors, and
exchanges such as the Chicago Mercantile Exchange (CME).
Much of the primary market trading in weather derivatives occurs in the
over-the-counter (OTC) market, through which bespoke contracts are
negotiated in private between buyers and sellers (Speedwell Weather n.d.).
Buyers typically are firms in sectors such as energy, agriculture and con-
struction; while sellers tend to be re-insurance firms such as SwissRe. There
is also a secondary market in weather derivatives that trades primarily
through the CME (SCOR Global 2012). In this secondary market, pri-
mary market contracts are traded in order to manage risk. While many
buyers in the primary markets have traditionally been aiming to hedge
against climate related risks, a new class of speculative investor in climate
risk has emerged post-financial crash. In 2013, the largest source of new
trades in the market was from hedge funds speculating on average monthly
temperatures (Thind 2014), which essentially means using data-driven
techniques in order to speculate, and ultimately profit, on climatic
uncertainty.
Weather derivatives were developed within the US energy industry by
Enron, Koch Industries and Aquila in the late 1990s when Enron found
insurance companies unwilling to insure the company against non-extreme
weather events such as the company experienced during a period of mild
US winters from 1997 to 1999 (WRMA n.d. (a); Dischel 2002, p. 3). The
deregulation of the US energy market had resulted in lower, more com-
petitive energy prices in the US, a situation which aggravated the problem
by restricting energy suppliers’ ability to extract a surplus from consumers
in order to cover periods of unexpected weather conditions (Dischel 2002,
p. 3). In order to overcome this barrier, Enron created its own financial
product—the weather derivative—taking inspiration from the energy
futures markets in which it was involved. The development of the product
as a derivative (and therefore a financial, rather than insurance, product)
allowed Enron to avoid the regulatory constraints placed on energy
companies’ use of insurance products (Randalls 2010).
While weather derivative contracts are traded across all forms of weather
event, by far the most popular contracts have been based on temperature