Cash Cow

ILLUSTRATION FOR TIME BY C.J. BURTON

In finance, as in climate change, sometimes there are tipping points. In 2004, the Chicago Mercantile Exchange (CME) traded a modest $2.2 billion in weather futures — obscure derivatives that are linked to temperatures in 29 cities worldwide and that enable traders to bet on hot or cold spells. But the weather was unusually volatile in 2005: drought and floods in Europe, record heat in Australia and an active storm season capped by Hurricane Katrina in the U.S. By the end of the year, CME had traded $36 billion in weather futures.

Since then, the boom in bets...

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