Against Fossil Fuel Divestment with Pierre Desrochers

Pierre Desrochers returns to the podcast to discuss the fossil fuel divestment movement in higher education. He recently co-authored a paper titled "Blowing Hot Air on the Wrong Target? A Critique of the Fossil Fuel Divestment Movement in Higher Education" with Hiroko Shimizu.

The fossil fuel divestment movement seeks to combat the environmental damage done by the fossil fuel industry by preventing university endowments from investing in fossil fuel stocks. More than 1,000 universities have divested themselves of fossil fuel stocks because of this movement's influence. There are a number of problems with this approach:

1. University endowments can't budge stock prices unilaterally.

University endowments are small potatoes in the world economy. Even if they could affect the stock prices of oil companies, they would just create an arbitrage opportunity for other investors to buy those stocks at discounted prices. This more than anything makes divestment an exercise in futility.

Camerer (1998) tried to influence prices in a horse betting market by placing large bets and then pulling them out at the last minute. He found that he was unable to budge prices even little. Divestment activists are trying to do what Camerer was trying to do, and they won't have any more success.

Some activists have internalized this criticism, and instead argue that divestment is important for symbolic moral reasons.

2. Universities will face higher risk if they choose to divest.

If university endowments divest themselves of fossil fuel stocks, they will be less diversified. Having a wide range of different (and uncorrelated) stocks allows a university endowment to hedge itself against risk.

Since oil stocks haven't given particularly high returns in recent years, activists have been able to argue that divestment makes sense from an investment perspective. But you can't predict future returns based on past ones. The prices of these stocks reflect the expected value investors place on them, so to the extent that the future profitability of oil companies can be predicted, the prices already reflect those trends.

Furthermore, if student activists are allowed to direct universities' investment activities, it may be difficult for universities to hire the most talented fund managers.

3. The movement is hypocritical.

While activists can't affect fossil fuel production by manipulating stock prices, they could affect it by demanding less fossil fuels themselves. And yet they attend their anti-petroleum protests in kayaks made from petroleum.

Activists want change without personal sacrifice. A round-trip flight from New York to Europe releases between 2 and 3 tons of carbon into the atmosphere, but few environmental activists are willing to skip their exotic vacations in favour of less carbon-intensive activities.

4. The alternatives to fossil fuels are not so great.

There's a lot of focus on solar and wind power as replacements for fossil fuels. But an electrical grid needs to work even when it is neither windy nor sunny, and storing power is costly. You need other sources of power to take up the slack when wind and solar can't deliver.

In a misguided attempt to appease environmentalists, Germany shut down many of its nuclear plants to replace them with wind and solar power plants. In order to keep consistent power, Germany has had to burn coal. But what would they do if they couldn't use coal to produce power when the sun and wind aren't working?

The UK's solution has been to burn wood pellets, which is arguably worse than petroleum for producing power.

An advantage of fossil fuels is that humans have been able to substitute them for energy that would have, in the past, been produced on the surface of the Earth. The more we extract from underground, the less of the Earth's surface needs to be dedicated to producing for humans. Indeed, global forestation has been increasing, not decreasing, over the past few decades.

5. The global transportation system depends on fossil fuels.

Fossil fuels offer a highly concentrated form of energy that is vital to transportation. While electric cars have made great advances in recent years, even the best can't travel nearly as far as a gas-burning car with a full tank. Electric cars are also prohibitively expensive for most people, and must be subsidized to compete with cheaper-to-produce gas-powered cars.

And of course, we drive around on asphalt, which is itself a petroleum product.

The advantage of having a well-functioning global transportation system powered by fossil fuels is that it allows regions to specialize in what they're good at producing. Pierre's book, The Locavore's Dilemma, deals with issues of food security. If you can produce tomatoes in fertile Mexico and ship them to frigid Canada, you don't have to expend the energy of building and heating greenhouses in places where tomatoes wouldn't grow naturally.

Works Cited

Camerer, C. F. (1998). Can asset markets be manipulated? A field experiment with racetrack betting. Journal of Political Economy, 106(3), 457-482.

Desrochers, P., & Shimizu, H. (2012). The locavore's dilemma: in praise of the 10,000-mile diet. PublicAffairs.

Desrochers, P., & Shimizu, H. (2016). Blowing hot air on the wrong target? A critique of the fossil fuel divestment movement in higher education. Frontier Centre in Public Policy.