Doing the Math on Climate Divestment

I just got back from the Do The Math event in Boulder.  The touring show is an outgrowth of Bill McKibben’s piece in Rolling Stone this summer, Global Warming’s Terrifying New Math.  The argument is elegant and horrifying: if we want to keep global temperature from rising more than 2°C, we can emit at most 565 more gigatons of CO2, ever.  Currently, the global fossil fuel industry’s reserves total nearly 2800 gigatons.  That carbon accounts for a substantial fraction of their overall market value, and at least 80% of it must never be extracted.  Ergo, we must necessarily bankrupt pretty much all of them, and soon.  At our present burn rate, we’ll have used up the 565 Gt allowance in about 15 years, taking us well into that part of the map where, as they say, there be dragons.

I get all of the above, and am enthusiastically in support.  However, I’m confused by the logic of McKibben’s suggested first salvo against the industry.  He is promoting a divestment campaign, along the lines of the one aimed at apartheid South Africa in the 1980s.  In this campaign, institutional investors susceptible to moral or public relations arguments — like pension funds, church congregations and university endowments — are being encouraged to purge their portfolios of fossil fuel related securities.  There seems to be widespread confusion as to what this would mean in a purely financial sense to the targeted companies.  Certainly the audience was confused, but I couldn’t tell what McKibben and the other folks on stage really thought.

So, what would happen if a major swath of the world’s institutional investors dumped their fossil fuel stocks?  Presumably, this would depress the industry’s stock prices, by reducing demand.  But would this actually hurt the companies in any way?  The simple answer is no.  Most people I talked to seemed to think that by selling stock, they’d somehow be taking money away from these companies.  That’s just not how stock works.  The only time you’re buying stock from the company itself, and giving it funding, is at the initial public offering (IPO), or, occasionally, in subsequent public financing rounds, where new shares are issued, diluting existing shares.  Institutional investors owning shares of publicly traded companies are trading with other investors, not the company itself.  You can’t go to a company and say “I want my money back” after they’ve issued the stock.  Sometimes companies that are sitting on a mountain of cash will voluntarily buy back their own stock, but this results in the value of remaining outstanding shares appreciating — you’re sharing ownership of the same business over fewer shareholders.  Buybacks are often used as a tax efficient way to return earnings to investors, since dividends are taxed as income, but share price appreciation is taxed as capital gains, and those taxes can be deferred indefinitely.

The stock price of a company that’s in financial trouble goes down, reflecting that financial trouble.  Artificially depressing that company’s stock price doesn’t induce financial trouble.  What would it do?  It would lower the price to earnings (P/E) ratio, which would increase the dividend rate.  It would make the companies with stable underlying businesses more attractive stock purchases, and in a purely financial world, other less morally encumbered investors would buy up all the dumped shares, probably severely limiting any depression of the stock price.

The fact that climate divestment won’t starve the fossil fuels industry of capital doesn’t necessarily make it a bad idea.  So what are the other potential consequences of a successful divestment campaign?

Getting churches, universities, pension funds and other institutional investors to divest would decouple their financial interests from those of the fossil fuels industry.  This might make it easier for divested institutions to take strong political stances on climate change.  At the same time, as an individual, unless you have a lot of money invested, or live in a very efficient house and refuse to drive and fly, you’re more tightly bound to the financial interests of these companies via the prices of the fossil fuels you consume, than by the prices of the stocks of the companies that produce them.

If you’re feeling optimistic, getting institutions you care about (or depend on) to divest from the carbon industry might be seen as self-interested.  If we succeed in keeping 80% of the world’s booked fossil fuel reserves in the ground, then all these companies are the walking dead.  Like the hordes of zombie banks created in the financial collapse a few years ago, in a world that rises to meet the climate challenge, they are already bankrupt — they just don’t know it yet.  If you really believe we’re going to succeed, divesting is clearly the right thing to do financially in the medium to long run.

Probably most importantly, the campaign is aimed at branding fossil fuels as a morally repugnant investment, both explicitly and by analogy with the apartheid divestment movement.  In the case of South Africa, it was successfully argued that companies taking advantage of apartheid were benefiting from a form of legalized slavery, and anybody sharing in those profits was, in some part, morally equivalent to a slaveholder.  In the case of the Carbon Lobby we’re not slaveholders, we’re waging a war on the future.  This is particularly ironic in the case of university endowments, which support the education of young people, who will live further into that war-torn future than the rest of us, and pension funds that ostensibly work to ensure we are supported in our old age, as much as 50 years hence.

Morally repugnant industries are often allowed to operate, but their political influence becomes diminished and expensive.  Unless you’re actually representing a tobacco growing district, it’s tough to stand up publicly these days as a politician and rub shoulders with tobacco companies.  Their veneer of respectability has been peeled away.  This has made advertizing restrictions and smoking bans and hefty sin taxes politically possible.  If fossil fuel extraction were broadly accepted as a repugnant transaction, would it remain politically feasible to continue spending  five times as much on fossil fuel subsidies as we do on climate mitigation?

In the case of the technology driven oil and gas development and exploration, one might hope that a successful re-branding of the carbon industries as repugnant dinosaurs waging a war on the future would make it more difficult for these companies to recruit young technologically savvy talent, at any price.  Will petroleum and coal mining engineers one day feel unable to mention their work, for fear of public shaming?

This shift in our cultural norms about whether releasing geologically sequestered carbon is morally defensible is necessary, I think, but like virtually all climate campaigns it is not alone sufficient.  Especially in the energy-intensive developed economies, shaming and shunning the fossil fuel industry must also involve some amount of self-flagellation today.  It runs the risk of guilt-tripping people whenever they buy gas or fly, or leave the coal-fired lights on in the kitchen overnight.  That guilt can induce people to tune out, if they don’t feel like they have any alternative to their “bad” behavior.

We need to aggressively create those alternatives by creating paths to high-renewable penetration electricity, building cities for people that don’t depend on cars, inter-city high-speed rail that doesn’t suck, re-solarizing our agricultural systems, requiring the highest possible building energy efficiency, and mandating closed-loop zero-waste materials systems whenever they’re possible.  We also need to make sure we brand the fossil fuel industry as other.  We need a Them.  They take hundreds of billions of dollars in subsidies every year.  They fund disinformation campaigns on climate.  They spend half a million dollars a day lobbying congress.  They are the problem, preventing necessary change, preventing us from adopting systems that don’t wage war on the future.  This otherness can forestall that feeling of short-term guilt.

This may sound like irresponsible heresy in the face of a tidal wave of consumer green marketing.  However, the vast majority of our emissions and resource utilization are systemically determined, and are not susceptible to significant change through personal choices alone.  Those necessary systemic changes are being blocked in large part by industry lobbying and disinformation.  In that arena of systemic change, which is what matters most, it really is Us vs. Them.

Dust Bowl Scale Drought Unrelated to Climate Change?

A couple of weeks ago Bill McKibben wrote a sarcastic op-ed encouraging people to ignore any possible connection between climate change and the unusually intense tornado season, as well as other extreme weather events.  I thought it was a little hyperbolic — of course people must be considering all this weather news in that light, right?  But maybe he wasn’t being over the top.  This NY Times article about Dust Bowl scale drought across the south and southwest doesn’t mention climate change once.  The omission seemed conspicuous.