Originally appeared in MasterResource, a free-market energy blog, on May 21, 2015.
Part I of this article explained how market incentives can address environmental issues, including the believed-to-be negatives of climate change. Prices of inputs and outputs, utilizing resources even if they are subject to the tragedy of the commons, incorporate dynamic environmental changes. Markets, in other words, offer the potential for dynamic responses.
If climate change reduces the productivity of land for wheat production, for example, the price of land will be high relative to its productivity. This generates an incentive for wheat farmers to seek new places for wheat production where land prices are lower. Hence, the 2012 Bloomberg news headline, “Corn Belt Shifts North With Climate as Kansas Crop Dies.” Therefore even if the atmosphere as a GHG sink and GHG emissions themselves are not priced, prices correlated with the effects of climate change will induce adaptation.
This is McKenzie Funk’s thesis in his book titled, Windfall: The Booming Business of Global Warming (2014). Changes in the arctic sea ice–“the Melt”—changes in water supplies—“the Drought”—and changes in coastal flooding—“the Deluge”—are the three central categories into which Funk pigeon holes entrepreneurial responses to climate opportunities. He asserts that his book is an answer to the increasingly urgent question: “What are we doing about climate change?” (Funk 2014, 11).
To be slightly more colorful, climate entrepreneurs aren’t just talking about the weather; they are doing something about it.
Consider the following examples:
- Vintner Matthieu Elzinga moved from his vineyard in the Loire Valley of France to an emerging wine region in southern England. Such a move is consistent with the findings of a Conservation International and National Academy of Sciences study predicting that areas suitable for viticulture will decrease “25% to 73% in major wine producing regions by 2050” (Hannah et al. 2013). Reporting on the study, Bay Area: BizTalk’s 2013 headline read: “Wine from Wyoming? How Yellowstone and Yukon will Steal Napa’s Crown.” Adaptation at its finest.
- John Dickerson, founder and CEO of Summit Global Management and its subsidiary, Summit Water Development Group, is positioning his company for more frequent water shortages, extreme weather events, flooding, and shifts in growing seasons, water markets are beginning to flourish. In a conversation with Funk, Dickerson noted that “We still have the exact same amount [of water] in our ecosphere,” so “the ultimate effect of global warming is that the percentage that is freshwater is getting smaller, the percentage that is salt water is getting larger, and the maldistribution of freshwater is getting much more severe” (As cited in Funk 2014, 119). Because these conditions inevitably will lead to higher prices of water in areas receiving less rainfall, Dickerson has positioned himself well in the water market by purchasing water rights in Australia and the American West.
- Hedge fund managers are using derivatives to deal with climate variation. Ski resorts, for example, can purchase snow derivatives to hedge against low snow falls. The resort essentially bets against other investors, with the ski resort being paid if snow levels fall below a level specified in the contract or pay if it is above. This helps spread the risk associated with climate uncertainty.
- Astute environmental entrepreneurs—enviropreneurs—are finding innovative ways to achieve their conservation goals in the face of climate variation. For example, the Fresh Water Trust in Oregon (see chapter 6) uses option contracts to lower the cost of restoring and preserving stream flows and fish habitat. When there is an abundance of runoff, it has nothing to worry about, but when there is little rain or snow in the mountains, it must compete with irrigators to keep the streams flowing. In some cases it simply purchases water rights and halts irrigation, but in others, it purchases options from farmers. When stream flows are low, the trust exercises its option and pays the farmer to stop irrigating, leaving the water for fish.
None of this is to say that entrepreneurs will succeed is solving every resource conflict. But to the extent that the market believes that future conditions are based on solid science, entrepreneurs will take note.
Read Part I here.