Editorial: Fossil Fuel Divestment is a Diversion from Real Solutions

on December 16, 2014 at 10:00 AM

Demonstrators Gather in Brisbane Ahead of the G20 Leaders Summit

Many people believe fossil fuels cause climate change. The science of that issue is not settled and, as an economist, I am not qualified to address multi-decade climatology. However, for those who believe public policy should address the matter, the strategy of attacking fossil fuel companies is profoundly wrong. As a part of the campaign, climate change activists have been lobbying for divestment of fossil fuel producing company stocks from portfolios.

Divesting from fossil fuels when the world depends on these resources for affordable sources of energy does not effectively address the issue of climate change. Fossil fuel divestment campaigns across American colleges and universities are symbolic gestures that have no impact on the climate or the targeted companies. Instead, they threaten the stability of endowments.

Switching from fossil fuels to renewable sources of energy is more difficult and expensive than just flipping a switch. As Texas A&M University School of Law Dean Andrew Morriss wrote in the Wall Street Journal in November, “carbon fuels are the source of more than 80% of U.S. energy, and virtually everything we make and consume has energy embedded in it.” Eliminating carbon use and replacing it with renewables would require investments from private industry and government of an unimaginable magnitude.

Furthermore, U.S. action alone would not stop climate change. As Morriss noted, “No feasible reduction by the U.S. can have a meaningful impact on global greenhouse-gas levels without the participation of the European Union and China, where rapid economic growth has dramatically increased emissions.” If the Unites States slashed carbon by 25 percent, global emissions would decline by less than 4 percent. In the meantime, China, India, and other poor countries rapidly expand carbon use in an effort to enjoy a better life.

Simply divesting from fossil fuels would have a miniscule effect. As Tulane University president Scott Cowen wrote in a 2014 letter, “In our view, the divestiture of fossil fuel companies in our endowment will not have any significant impact on mitigating global warming, especially in comparison to more meaningful actions that can be taken to address the myriad causes of climate change.”

Colleges and universities are aware that they rely on fossil fuels and that divestment campaigns are disingenuous. In a May 2014 New York Times article, UCLA professor of finance and economics Ivo Welch correctly noted that fossil fuel companies are “supplying a market demand, one that for the time being cannot be met by other fuel sources.”

Harvard President Drew Faust agrees. “Given our pervasive dependence on these companies for the energy to heat and light our buildings, to fuel our transportation, and to run our computers and appliances, it is hard for me to reconcile that reliance with a refusal to countenance any relationship with these companies through our investment,” she said in an October 2013 statement.

Instead of advancing a competent response to climate change, fossil fuel divestment puts college and university endowments at risk by having a portfolio controlled for political ends. More than 90 percent of the University of Tennessee’s endowment is used to support scholarships, instruction, and research. “Eliminating a broad segment of the market from investment,” the student newspaper reported in January 2014, “could hinder future funding of these endeavors.”

It’s a similar story here in Texas. In the fiscal year that ended August 31st, the $17.4 billion Permanent University Fund (PUF), whose investment income is shared by the University of Texas and Texas A&M University Systems, returned 15.1 percent. This was 6.3 percent higher than the 2013 fiscal year return.

A significant portion of the PUF’s 220,000 acres of land produce oil and gas, and the PUF has accrued a total of $6.44 billion from oil and gas royalties since its creation in 1876. Divesting the Fund’s fossil fuel assets would put universities across Texas at a financial disadvantage, thereby likely leading to further increases in tuition to make up for lost revenue.

Fossil fuel divestment is not a solution to global warming, but a diversion. Resources would be better spent strategizing a global response to climate change that substantially reduces emissions. Real problems require real action, not symbolism.

Dr. Roger Meiners is a professor of law and economics at the University of Texas at Arlington.