The Pragmatic Case for Fossil Fuel Divestment to Address Climate Change

Yves here. College students and faculty members have started organizing to press college endowments, cities and states, and religious institutions to divest their holdings in fossil fuel companies. Harvard professor Naomi Oreskes describes below why divestment is a way to put pressure on energy producers to stop funding climate change denialism and start focusing on clean energy initiatives. Bear in mind that divestment may not have much impact on securities prices. But as the example of the South African divestment movement shows, it is a powerful means for galvanizing media attention and political pressure.

By Naomi Oreskes, a geologist, author, and Professor of the History of Science at Harvard University. Her books include Merchants of Doubt, which discusses in accessible terms the origins of climate change denial, and The Collapse of Western Civilization: A View From the Future, just out from Columbia University Press.

With the academic year wrapped up, campus discussions of divestment from fossil fuel corporations are taking a rest. But with Stanford having announced at the end of the year that they would divest from the coal industry, as a step towards addressing climate change, and students around the country planning for new actions in the fall, it’s is a good time to review the case for divestment.

The Argument for Divestment

The central argument for divestment is a moral one: that it is wrong for a university—dedicated to civic good—to rely on profits from an industry that is doing enormous social injury. Enormous quantities of scientific evidence—as well as, increasingly, our own daily experiences—demonstrate that global warming is underway: exacerbating droughts, hurricanes, floods and fires; damaging forests and crops. In California, as former Governor Arnold Schwarzenegger recently noted, we no longer have a fire season; we have fires all year round. Business as usual is catapulting us far past the “two degree” target that scientists have identified as the limit at which truly dangerous impacts are almost certain to kick in. The latest scientific projections show that if things continue as they are, the world is heading towards 4 degrees of warming, or more.

Even if human trafficking were legal, we would recoil from investing in it. Prostitution and gambling are legal in Nevada, but most universities do not invest in those activities, either. Many of the arguments against fossil fuel divestment avoid confronting this issue, and sound like not much more than excuses.

An additional argument, especially pertinent for educational institutions, is how the fossil fuel industry has responded to the scientific evidence of the dangers of continued use of fossil fuels: with denial, deceit, and obfuscation . Both directly and indirectly through “third party allies,” the industry has systematically tried to undermine the evidence of the reality and danger of anthropogenic climate change. These activities continue, in different ways, even today.

But…the World Needs Energy

Given the parallels between how the oil and gas industry has responded to the evidence of dangerous climate change and how the tobacco industry responded to the evidence of the harms of tobacco, it’s tempting to see the oil and gas industry as bad actors. And given the ways in which the American tobacco industry has moved its operations overseas in response to tobacco control at home, it’s hard not to think that the world would be a better place had the industry been driven out of business. But that’s where the analogy breaks down. The world does not need tobacco, and there was never any plausible argument that the tobacco industry could help to solve the problems that it had caused. But we do need energy. In fact, we need more, and there is a plausible argument that the fossil fuel industry can help solve the problem of climate change.

Americans could live well on a good deal less energy, so the argument for needing more is not about the United States; it is about the rest of the world. One point on which the industry and its critics can agree is that two billion people around the globe currently live without much of anything; these people would certainly be better off with more access to energy and the diverse benefits it can bring. The fossil fuel industry has a century of experience finding energy sources and bringing it to people. We should want to harness that experience to good effect. This could be done if the industry changed its business model to transform itself from a (dirty) fossil fuel industry to a (clean) energy industry.

But it has no plans to do that. Industry is sitting on trillions of dollars worth of fossil fuel reserves, and understandably, they don’t want these assets to be stranded. Less understandably, the industry is moving in the wrong direction. Chevron recently announced plans to eliminate its renewables division—not because it was losing money, but because it was not as profitable as its core activities in oil and gas. All the major oil and gas companies are continuing to explore aggressively for new fossil fuel resources, including tar sands, shale gas, and oil in hard-to–reach places. Yet it is well established that even the use of existing reserves of oil, gas, and coal will push the global climate well past the 2-degree target that would protect us from serious harm. Expansion of fossil fuel usage promises to push us past 4 degrees, towards potentially truly awful outcomes.

What could the industry do instead? Two things. First, they could begin to develop serious commitments to renewable energy, either by developing in-house expertise or by purchasing existing companies. Much of the recent development of shale gas in North America has (for better or worse) been driven by majors buying gas plays from small operators. In the mining industry, there’s a long history of big companies buying smaller ones. The industry knows how to do this, at a profit.

Carbon Capture and Storage

There’s a second thing oil and gas companies can do: invest seriously in carbon capture and storage (CCS). Scientists are divided about CCS, but many believe that it could play a significant role in permitting us to continue to use at least some of the world’s available fossil fuels supply. At minimum it could buy us time to transition to renewables, and at maximum it could solve the problem of stranded assets. Carbon capture and storage means putting carbon dioxide back into the ground—and this is something the oil and gas industry already does. It’s called secondary recovery, and it’s a well-established practice. As oil fields become depleted, fluids are pumped into the ground to flush out the remaining resource. The scale on which we would need to store carbon dioxide to prevent further disruptive climate change is vastly greater than what companies do in secondary recovery, but the principle is the same. And because oil and fields have been storing gas for millions of years—and there are natural CO2 gas fields—we know that the Earth has the capacity to store gas for long periods of time.

Why isn’t the industry doing this? Because there’s no incentive. Gas, oil, and coal continue to be extremely profitable commodities. As long as there’s no reason to stop finding, extracting, and selling them, companies will continue to do so. There’s just no reason for them to do something less profitable than what they are already doing, very successfully. So we have to give them a reason. That’s where divestment comes in. It sends the message that individual and institutional investors are no longer willing to invest in business as usual. It says that it is time to change the way we do business.

Conditional Divestment as Social Leverage

Large institutional investors have social leverage, and so, especially, do universities like Stanford and Harvard, which are repositories of intellectual and cultural leadership. So here’s what I believe institutional investors should do: announce a deadline, of say 1-2 years, by which companies should develop, and begin to implement, a serious and credible strategy of energy diversification coupled to major investment in carbon capture and storage capacity. Companies should also call on the government to fund the research, at universities, the National Laboratories, and the U.S. Geological Survey to identify geologically suitable sites around the nation for carbon storage pilot projects. Investors should also call on corporations to stop funding disinformation and misleading advertisements. Since a good deal disinformation is channeled through non-profit organizations, investors should also call on industry to open its books to independent accountants to ensure that its “philanthropic” contributions are not in fact misanthropic.

Climate change began as an economic failure, because the price of energy did not reflect its true cost. It has become a political failure, as our political institutions have been unable to deal effectively with the problem. Let’s not let it become a social failure, too. Investors have leverage. It’s time to use it.

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  1. tomk

    “Even if human trafficking were legal, we would recoil from investing in it. Prostitution and gambling are legal in Nevada, but most universities do not invest in those activities, either.”

    The article makes some good suggestions, but these two sentences are distracting in their silliness and naivete. There probably aren’t too many investment possibilities in prostitution and I’d be shocked if universities systematically avoided gaming stocks on moral grounds. The best argument for divestment isn’t moral, it’s about mitigating catastrophe.

    1. Vatch

      Interesting point. The truth is that if one invests in a financial corporation that is involved in derivatives, one has invested in gambling. Closely related to human trafficking is slavery, and this or something close to it is very widespread throughout the world. When a person buys a computer or a cell phone, he or she is buying something that is probably manufactured by people in borderline slavery conditions. The same is true for many articles of clothing. Do you like chocolate? I do, and a significant portion of the world’s cocoa is grown and harvested by slaves.

    2. Yves Smith Post author

      No, I disagree.

      The catastrophe won’t happen on the watch of the people making the investment decisions. And to the extent we start seeing some adverse changes, the critical actors are in an income stratum to be well insulated from the effects. The idea that the motivation is to prevent a catastrophe only works if you expect to be hurt personally by the catastrophe (or maybe you are worried your kids will be hurt).

      So this is a moral issue.

      1. jrs

        Whether the catastrophe will happen on their watch depends on whose climate change predictions you believe, there is certainly reason to suspect that what we usually hear is under stated.

        1. different clue

          There is reason to believe that the Overclasses know just how understated GW predictions are.
          There is reason to believe that the Overclasses welcome the warming they believe will really come because they believe they can survive it while the rest of us die. The Overclasses are invested in causing Global Warming. They consider it a Moral Imperative, equivalent to Eugenics during America’s “pre-Nazi Progressive” era.

      2. tomk

        I agree it’s a moral issue, but morality is not a basis for a persuasive argument, especially if you use gambling and prostitution as examples of clearly immoral activities. Many of us find arms manufacturing, outsize executive pay, factory farming, and so on far more objectionable on moral grounds. Maybe the push should be towards positive investments, doing what needs to done, rather than trying to maximize return.

  2. Banger

    The reason Chevron and other majors are tending to not pursue alternatives is, for them, a rational decision since that area is not immediately profitable and they are set up to create profits this quarter and maybe a few quarters on. Even if, in the long-term, companies emphasizing alt energy could do very well for themselves the long-term is just not important.

    One of my sons works for a large corporation and he was complaining that the execs were not making decision based on the actual needs of the company in efficiently carrying out its functions, pleasing customers, empowering employees, and making a successful business–no, they are making decisions based on what pleases the stock markets. This short-termism is systemic–it makes sense if you look at it as a game. Our problems aren’t that there are greedy people running companies–they are simply making rational decisions based on what is in front of them every day–what rewards penalties are they facing each day? The system tells them what to do–you could probably make a computer program that would make the same decisions–we don’t even need execs to make decisions at this point–it’s all obvious.

    The fact is that we are locked into a rotten system and we complain and kind of know that but we don’t want to deal with it. Therefore we attempt not to see the obvious–eventually we will be completely blind.

  3. susan the other

    The entire world would have to get on board with this. Divesting. It should be done because it is a relatively good political statement but it won’t make a dent in global warming. Think China and India. It is almost masochistic for us to take this on because we will have to bear the consequences alone. ‘Stranded assets’ is an interesting concept. It implies that all assets must be used up for maximum profit. Even if it causes maximum damage to the environment. Attitudes change so fast it’s hard to understand some of the underlying realities. Only last year the Saudis were talking about leaving their oil in the ground. So ironically, if everybody invested in the big oil companies it would produce incentive to leave oil in the ground because it would be more profitable. But yes we’ve all got to do something.

  4. docg

    Instead of divesting, which would probably have little to no effect, I’d suggest a movement to discourage professors from attending academic conferences at distant locations — as part of a more general movement to discourage just about everyone from any but the most essential air travel. According to the New York Times, “One round-trip flight from New York to Europe or to San Francisco creates a warming effect equivalent to 2 or 3 tons of carbon dioxide per person.” See, “Your Biggest Carbon Sin May Be Air Travel” —

    Today’s conference call technology makes it really easy to participate in such conferences remotely. I recently presented a paper at such a conference in Switzerland, via Skype. All went well and it was lots of fun. If all academics, business people, government apparatchiks and other “frequent flyers” were to do the same, the impact could be enormous.

  5. MikeNY

    The Market is amoral; it reflects the expected economic result of (among other things) the moral intuitions of countless individuals.

    Someone has to go first; someone has to be willing to say “this is wrong, it is irresponsible stewardship of the planet, and it will asphyxiate or drown us all” — regardless of immediate personal economic consequences. Someone has to be a thought-leader. If the cause is just and right, with luck, others will see the courage and correctness of the stance and follow. And over time, it will become conventional wisdom and be reflected in The Market.

    That someone may as well be a university endowment.

  6. washunate

    Great to see the mention of divestment. Passive investing is a mirage since somebody has to decide which businesses are funded and what other sorts of assets are bought and sold. I’d add another angle and ask: why should tax-exempt entities be allowed to hold sizable investment portfolios at all?

    What public purpose does it serve for Harvard and Stanford to be in the business of owning businesses? Why do we fund public pensions with investment returns rather than taxation?

  7. Paul Tioxon

    This is a good attempt and I wish them well. The Seven Sisters bought up and blunted the photo voltaic industry when it first appeared by the end the 1970s. The simplest response was also the most effective response which was simple energy conservation techniques. The 2 oil shocks propelled a massive change in the design of all consumer products from higher MPG in cars to more efficient heaters, air conditioners, refrigerators and so on. Even housing came under scrutiny with massive home improvement projects revolving around cutting cooling and heating bills by 1/3 with Low E-Glass insulated windows along with pouring insulation into the ceilings and walls of older homes across America.

    But that was 40 years ago. You would think by now, that the solar panel companies, bought up by ARCO Oil and others, would have grown to be the replacement energy for the oil giants. You would think by now, that national building standards would have incorporated passive solar design, turning homes into self heating thermos bottles. You would think by now, the 100 million new Americans added to the population since then would be living in structures designed from their initial construction to be energy sipping paragons of efficiency. Of course, that is not the case. The case is simply that we spend as much or more in energy than we pay in taxes now, and that simple iron law will not be reversed without energy companies giving up their political power in addition to their revenue. As the 6% of world’s population that has been consuming more than its proportionate share of energy in all forms….

    “In 2010, world total primary energy consumption was 511 quadrillion Btu. The United States’ primary energy consumption was nearly 98 quadrillion Btu, nearly 19% of world total primary energy consumption.”

    Only Americans have the money to pay the price, so it will continue to be sold oil, gas, coal because to move the consumer onto another decentralized form of energy, roof top solar with battery storage facilities, removes the lucrative formula of wealth. We are sold more because only we can buy more. Now, this is becoming less and less so, but we still are the auto nation with an insatiable thirst for gasoline for cars, trucks, trains and air travel. Take the American consumer out of the world market for oil, and where does that leave the oil companies? China and India are not ready to pay the price even though they are preparing to devour the resources. The question is not when renewables be ready to replace oil, gas and coal, the question is when will Americans be replaced by the Chinese, the Indians or the Russians for that matter. Only a nation large enough, populated enough and wealthy enough to build long distance highway systems for cars to run and burn fossil fuels will be able to replace the American consumer. That is what big oil is waiting for.

    We need to strike out on own, and stop looking for magic political bullets, as if some social scientist will be the Jonas Salk of poverty, or the Louis Pasteur of energy dependence.

    Here is a talk ending with an example of a region in France that is prepared to invest in whatever it takes to internalize energy production and utilization as opposed to buying it or engaging in long distance trade for it. All cities have traditionally been founded by great bodies of fresh water, lakes, river deltas or in some valley where water can be directed from the down flow of the mountain scapes. Now, cities must incorporate energy as a structural feature, the same way they have incorporated water, its in flow, it outflow, its overall management from human waste to storm run off. 21st Century civil engineering and Urban Planning will include the creation of sustainable energy to run the residences and businesses just the same as they manage sewers and water pumping.

  8. impermanence

    “Large institutional investors have social leverage, and so, especially, do universities like Stanford and Harvard, which are repositories of intellectual and cultural leadership.”

    And this is why this country faces the problems it does.

  9. optimader

    ultimately the investment will have come from a sector other than the hydrocarbon/coal industries. What more fundamentally needs to happen is to “divest” government subsidies of these traditional energy entities to allow alternatives to compete on economic merit.

    As well the Nuke industry needs to be similarly spanked to change the business model away from profit dependence on refueling reactors and instead focus the biz model on building advanced cycle plants (eg: Thorium) which would have a muuuuch longer fuel burn life ( ie the supplier industry profit motivation needs to be in building plants not inefficiently refueling them).

    The “alternative” energy industry is in a world of hurt from a scaling perspective, as well entrenched interests. The only realistic approach is generational Triage on the continuing use of hydrocarbon fuels while minimizing damage — Technologies like gas to liquid (GTL) and second generation enzymatic alcohol production from cellulose need to operate in an non-adverse commercial playing field to keep the loooong term development balls in the air for transportation fuels.

  10. Petit Bourgeois Rentier Capitalist

    Naomi I greatly appreciate your efforts to counter the climate change denialists. But I think your analysis has a serious missing piece – the inherent role of capitalism in this mess.

    Climate change is certainly an environmental gorilla but it is only one of dozens of problems we face which moving to renewables wont necessarily solve. We might solve the energy source but this would still leave us with the economic growth problem – capitalism’s tendency to gobble everything in sight that it can legally – and if it cant then it changes the rules (consider the oxymoronic concept of ‘wise use’ of national parks and the Glass Stegal laws change). Put simply even if we achieve a 100% renewables economy what is to stop us continuing to consume?

    Don’t get me wrong. I have PV and solar thermal hot water (a much bigger energy gainer ) on the roof – and want more to become fully sustainable – and there you see it. The root cause for me which also explains energy company behaviour as much as ideology, is capitalism per se drives them to seek profit or wipes them out in a fashion comparable to natural selection. Its not so personal I suggest but is rather the most brilliant system devised from turning nature (aka natural resources) into stuff we don’t strictly need.

    A related problem is that we might come closer to being able to use fossil fuels ‘sustainably’ (close to oceanic assimilation capacity) through a combination of small (cars) is beautiful, (house heating) efficiencies, sharing (e.g. cars) and conservation (put on a jumper). But then you have the problem of what to do at least in a capitalist system – with all the spare capital you will accumulate by being a bit more virtuous than some of my globe trotting ecologist colleagues. “I’ve heard the problem referred to a blowback.”

    This is a philosophical dilemma I am facing as I head into retirement and I don’t have an answer. To get an income I need to invest in something but that needs to be either rent based or growth based neither of which is ethically appealing.

    Bottom line is I see capitalism as inherently a growth mechanism and renewables I fear is just tinkering. What we need is steady state economics system but I have yet to see anything yet from the dissenting economists that passes the laugh test, while the greens don’t seem to even known how important it is to not leave economics just to the economists.
    Care to comment?

  11. optimader

    “Don’t get me wrong. I have PV and solar thermal hot water (a much bigger energy gainer ) on the roof – and want more to become fully sustainable – and there you see it”

    you need to draw your Energy Balance Control Volume bigger.. What inputs allow you to perceive “sustainability” at your local level? Heating water? Do you comprehend the backroom infrastructure/resources to produce your PEX tubing?

  12. Newtownian

    Actually I’m quite aware of such issues by virtue of working with people doing Ecological Footprint Analysis, Life Cycle Analysis and EROEI accounting and being all to aware of the uncertainties and externalities.
    As to why I didn’t mention these issues – it was mainly space and I wanted to raise other problems instead.
    Regarding why I mentioned hot water its the energy elephant locally here at 34 latitude which doesn’t have the high profile of PV but probably provides us with more energy.
    As to your point which was as I understand we need to consider the whole production and output train – I absolutely agree. The LCA analyses I’ve seen happily seems to say that solar hot water and PV aren’t bad – and as importantly for me their potential lifetime is indefinite once we get around market failures like ‘discounting’ economics and inbuilt obsolescence (not deliberate but simply the market failure of using some materials which may not last because they are cheaper and will last the 20 years guarantee). I suspect when you take these considerations into account you will find that renewable are much more sustainable and will support future generations just as some house designs have survived hundreds of years and support us now – while a lot of modern designs are optimized for demolition in 20 to 30 and will have to be replaced.

  13. GraffitiGrammarian

    So I have a different comment.

    When will big investors decide that it helps their own returns to stop investing in climate change-causing activities?

    Already, insurers are starting to lobby for reducing carbon emissions. And that makes sense, of course, because insurers on the hook for the costs of repairing/replacing/cleaning up from extreme weather events caused by climate change.

    But what about real estate guys? If you own an office tower in Miami, aren’t you worried about sea level rise caused by climate change?

    if you’re a manufacturer, aren’t you worried about supply chain issues? If you can’t get your palm oil from Indonesia because they’ve had a huge drought, that’s going to cost you.

    If you’re a retailer, aren’t you worried about “heat island effects” in major cities? Don’t you fear that consumers won’t leave the house to come buy your product?

    I would like to know if anyone out there has begun to codify the economic risks from climate change to regular, institutional investors. Any researchers? Any fund managers?

    Or has anyone seen companies doing this for themselves?


    1. Newtownian

      The answer I have heard is it all depends on the discounting rate. There is an excellent explanation in this environmental economics book ACKERMAN, F. 2009. Can We Afford the Future? The Economics of a Warming World, Zed Books Ltd, Cynthia Street, London.

      The author from the Stockholm Environment Institute is completely onside with sustainability issues and the moral dimension and includes a tip to the great Stephen Schneider in his acknowledgements a sadly missed colleague of sorts or more of Naomi’s.

      What he highlights (which I heard long ago but lacked a reference to) is the vicious nature of the economic investment trap imposed by discounting. Basically as long as 5-7% returns are demanded the medium to long term future is irrelevant to all these guys like the Miami real estate agents. In fact climate change might offer the prospect of periodic destruction and opening of new markets as it were for new customers. So it could actually be in their interests sort of. Afterall they don’t make money from real estate per se. They make it from buying and selling and the last thing they need is a low churn rate.

      For me this says capitalism, unless extremely constrained, is inimical to future sustainability not for ideological reasons but just because it is good business if you want to make a profit and you want to be the one to make the biggest profit for as long as the music lasts.

      I would really like to see Yves provide or sponsor an article on this from one of her friendly experts. Or maybe Frank Ackerman himself as he seems to be just across the state line and sufficiently eminent.

  14. GraffitiGrammarian

    Very interesting, Newtownian, thanks for the comment. It’s true that a long-term investment horizon is what’s needed, and that short-term horizons will never price in the true costs of natural resources.

    What is the answer to this puzzle, I wonder?

    1. Newtownian

      Ackerman has about 20 pages of suggestions (I recommend the whole book – you can find it using Googlescholar)

      But a warning – I was pretty disappointed too as I was with ‘Prosperity without Growth’. His solutions were more about things we have to change like pricing and things not to do like biofuels.

      At the same time his ‘where next’ proposals are worth looking at because I think they illustrate how economics is not at the centre of the solution any more than a tale wags its dog.

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