The trouble with divestment

First, I’d like to applaud the passion of the students and philanthropists behind the divestment movement. The scientific evidence is clear: our climate is changing, and strong evidence indicates that a large portion of this change is due to fossil fuel emissions. Divestment leaders have realized that serious action must be taken in order to avert crisis. However, we should seriously question the moral basis, efficacy and opportunity cost of their actions.

Much of the moral standing behind the divestment movement rests on the assumption that fossil fuels are, for lack of a better term, “bad,” and that we should not financially support their negative impact on society. Yet the divestment movement does not explain this relationship clearly. Are fossil fuel companies evil? I do not believe the answer to this question is very clear. Yes, fossil fuels damage our environment. Yes, many fossil fuel companies have highly questionable geo-political ethics. However, they provide an extremely important service to society. For example, fossil fuels largely supply the electricity we depend on to power our computers, classrooms and hospitals. 

It is not clear that we can take strong moral stance on the supposed immorality of fossil fuel companies. Why get angry with the fossil fuel companies and not the consumers?

The economics behind the movement can be summarized as follows. If colleges, universities and large charitable organizations with substantial endowments divest from fossil fuel companies, those companies will see a decrease in market capitalization (economic value). With lower market capitalization, these companies will invest less and explore fewer projects, and as a result the movement would lower carbon emissions. Divestment may also produce a stigmatizing effect on the fossil fuel industry and lower subsequent investment in that sector. 

However, the efficacy of divestment is highly questionable. First, it is unclear whether the combined effect of divestment by colleges and universities will have any significant effect on the market capitalizations of these companies. The market for purchasing stock in fossil fuel companies is huge, with millions of investors supplying hundreds of billions of dollars of investment capital. Colleges invest only a small portion of their endowments in fossil fuel stocks. If educational or other financial institutions decrease their investment, someone else in that very large market could very easily buy a valuable stock at a cheaper price.

Assuming that divestment succeeds in having the cascading affect of stigmatizing public markets and the vast majority of investors refuse to invest, private investors are sure to swoop in and buy these cash-rich companies at below market value. Why? Because divestment does not change the underlying business of fossil fuel companies and does not change consumption or demand for the goods.

However, some believe that efficacy is secondary to the symbolic gesture of the mobilization of Divest Williams. We should agree that the symbolism of thousands of college students and top-level charitable funds around the country mobilizing for the greater environmental good is hugely important. However, why are we unable to achieve both symbolism and efficacy?

Divestment neglects to address the underlying issue: the market’s failure to properly price carbon emissions. Carbon emissions are a global problem that requires a national solution. If we wish to lower carbon emission, we need only to raise the price of fossil fuels. With higher fossil fuel costs, there will be lower levels of consumption along with correspondingly lower levels of emissions. Further, higher fuel prices will make greener alternatives more economically attractive to consumers and will spur the expansion and innovation of that sector. A carbon tax would be an effective policy to accomplish these goals.

Lobbying for a carbon tax would be both effective and symbolic. If the divestment movement were to refocus its efforts on promoting a carbon tax, it could take the necessary steps to ensure that its efforts do not end in vain. A carbon tax makes sense not only from an environmental point of view, but also from a market-liberal one. The environment is a public good. Any pollution in our environment is an infringement on our property rights and as such, those who are harmed by pollution should be duly compensated.

Instead of making symbolic statements, why not write to your congressperson? It could also be a good idea to go to your local gas stations and set up a program where customers can purchase carbon offsets whenever they fill up their tank. Instead of protesting colleges, why not protest the federal government? Further, one can also raise funds to lobby Congress. Instead of colleges and universities building “sustainable buildings” and taking the financial hit from emissions caps and divestment, why not spin off a 501(c)(4) (a non-profit that can lobby) and divert alumni contributions for “sustainable” initiatives into that fund? For the price it costs to build sustainable buildings, colleges and universities could have acquired enough political capital to actually implement a carbon tax.

Despite my criticisms, I believe the divestment movement has been very effective at bringing extremely important discussions about the environment to the forefront. Demanding divestment has been an essential first step. For a brighter future, however, we need the proactive, intelligent, creative and passionate students and administrators behind fossil fuel divestment to refocus their efforts on more effective measures for protecting our environment. The people behind the divestment movement are the leaders in promoting a more sustainable future. To overcome the immense hurdles to greater sustainability, our environmental leaders must take the most effective measures possible.

David Gaines ’14 is a history and economics double major from Tenafly, N.J. He lives in Dodd.

  • Steve Kaagan, Wms ’65 ,

    I respect the serious attention David Gaines has paid to the issue of divestment. Unfortunately he is misinformed about the central purposes of the divestment movement in the context of the multi-faceted approach necessary to mitigate the disastrous effects of climate change.
    First the context – it will take a monumental worldwide effort on several fronts to keep global temperature from rising by 2 degrees C by 2100. The world has a “budget” of one trillion tons of carbon emissions to “spend” by 2100 to stay within the 2 degree threshold. We are presently on track to exceed that budget by about 2045.
    Even if we cut global consumption (by achieving steady state population growth and tightening our belts), dramatically decrease combustion of fossil fuels and increase renewables, achieve greater energy efficiencies, curb destructive land use and agriculture practices, AND add on top of these a carbon tax in all major polluting countries, we will still struggle to stay within the 2 degree threshold.
    The principal purpose of the divestment movement is to provoke the fossil fuel companies into changing their business model by exerting moral and political leverage. One effect of such a change would be to get them to stop inhibiting the development of renewables through misleading lobbying practices and false advertising. As Gaines notes it is dubious that withdrawing endowment investments would have much of a negative financial impact on those companies. But that is not the purpose of divestment.
    Another purpose is to impel leading cultural and educational institutions into taking a leadership stance on behalf of the long term welfare of the planet and its inhabitants. Fossil fuel companies exist to produce fossil fuels and meet shareholder expectations. One would think colleges and universities have a different mission.

  • Steve Kaagan, Wms ’65 ,

    I respect the serious attention David Gaines has paid to the issue of divestment. Unfortunately he is misinformed about the central purposes of the divestment movement in the context of the multi-faceted approach necessary to mitigate the disastrous effects of climate change.
    First the context – it will take a monumental worldwide effort on several fronts to keep global temperature from rising by 2 degrees C by 2100. The world has a “budget” of one trillion tons of carbon emissions to “spend” by 2100 to stay within the 2 degree threshold. We are presently on track to exceed that budget by about 2045.
    Even if we cut global consumption (by achieving steady state population growth and tightening our belts), dramatically decrease combustion of fossil fuels and increase renewables, achieve greater energy efficiencies, curb destructive land use and agriculture practices, AND add on top of these a carbon tax in all major polluting countries, we will still struggle to stay within the 2 degree threshold.
    The principal purpose of the divestment movement is to provoke the fossil fuel companies into changing their business model by exerting moral and political leverage. One effect of such a change would be to get them to stop inhibiting the development of renewables through misleading lobbying practices and false advertising. As Gaines notes it is dubious that withdrawing endowment investments would have much of a negative financial impact on those companies. But that is not the purpose of divestment.
    Another purpose is to impel leading cultural and educational institutions into taking a leadership stance on behalf of the long term welfare of the planet and its inhabitants. Fossil fuel companies exist to produce fossil fuels and meet shareholder expectations. One would think colleges and universities have a different mission.