Legal Commentary

Shorting Climate Change?

By Kenneth Anderson

Okay, I?ll bite on Fen?s comment in my previous post on opinion polls and climate change.

Suppose that you wanted, at the retail investor level, the cheapest and most efficient ways to go short on climate change policies, carbon regimes, whatever you think is relevant.  (In general, I?m a believer in sort-of efficient markets, despite all ... however, in matters political, I don?t think they are necessarily efficient even in the sense of predicting and pricing in political actions and policy.  I think there are exploitable inefficiencies arising from politicized markets.  Correct or not, go with the assumption.)  So, what?s your short strategy?  Not limited to stocks ? tell me about bonds and credit instruments if you like, options and other strategies.  Or, for that matter, is it ultimately unshortable because it is driven, or eventually will be driven, by taxes across the board?

However, tell me how you would do it at the level of the small retail middle class investor, and in addition, what hedges you would include even in a generally short strategy?  Or is this kind of political risk ? regulatory arbitrage bet too risky for small retail investors?  Get thee to thy index funds, etc.?

(I understand, by the way, if you think the question merely a provocation.  It is.  But not completely.  Speaking not politically, but as corporate finance professor, I would ordinarily advise someone that if you want to ensure that you truly understand your own financing strategy ? at least if it involves public companies and instruments ? you should be able to state clearly how you would go about shorting it and hedging it, and what the attendant costs and risks would be.)

Full post as published by The Volokh Conspiracy on December 18, 2009 (boomark / email).