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.

Published by

Zane Selvans

A former space explorer, now marooned on a beautiful, dying world.

5 thoughts on “Doing the Math on Climate Divestment”

  1. I’m sort of flabbergasted by McKibben’s strategy. First, selling the stock of the oil companies wouldn’t do much, as you explained. But more importantly, the publicly traded companies represent only a small fraction of the world’s oil reserves, probably between 10%-20% depending how you count. These companies are dwarfed by the national oil companies like Saudi Aramco, PDVSA, National Iranian Oil Company… According to the Economist, 16 of the 20 biggest oil companies (ranked by reserves) are NOCs. Exxon Mobil, the epitome or what we think of as “big oil”, only controls something like 1% of the world’s reserves. So in order to have any meaningful effect on production you have to convince the Mexican government that they can do without the 40% of the budget that comes from PEMEX, you have to convince Saudi Arabia that its exploding population won’t become increasingly restive without the benefits Saudi Aramco pays for, you have to make Venezuelans give up their free gas and halt whatever machinations Putin is up to with Gasprom and Rosneft. (Not to mention convincing China not to tap their coal reserves.) Such a supply-side attack seems simply impossible. So I agree with your question: does McKibben really believe that selling all of your Exxon and BP shares would shut down worldwide production? I can’t imagine, but if so it’s unfortunate anyone would let him near a stage.

    But what about demand? I think there is room here to undercut the fossil fuel price via better alternative technology, especially as the cheap and easy oil/gas reserves start to run out. And if it costs more to extract than it can be sold for, it simply won’t be pumped. And I do buy your vision of more efficient, lower intensity “cities for people” that would actually be more pleasant places to live. But remember that much of the recent growth in energy use is coming from non-OECD countries and many of these people that are still vying for Hans Rosling’s washing machine ( So there’s definitely going to be continuing pressure for increased energy use going forward. Hopefully there is some combination of efficiency, reduced use at the high-end, and conversion to non-carbon sources that is tenable and still gives everyone a decent quality of life. Hopefully, but not obviously.

    Always enjoy reading your articles, keep up the good work!

    1. Good point about the prevalence of un-traded reserve holding entities, which only emphasizes the fact that this campaign really can’t, in any way, be about the finances. The more I think about it, the more I’m convinced that McKibben et al. must be fully aware of this. I think the divestment campaign is much more about changing the political calculus, especially in the US. Because the carbon industries are so much better funded than either the climate movement or the renewables industries, the strategy has to be to somehow nullify that advantage on the political playing field. We have to make their money political poison, that no politician outside of the Powder River Basin or the North Slope can accept, and remain respectable in the eyes of their constituency. In this vein, the Citizens United decision is particularly pernicious, because it allows campaign contributions to be anonymized. It has to be overturned, somehow, or this kind of campaign can be short-circuited.

      And a big part of why the political landscape has to be changed is so that we can even begin to deploy alternatives, incentivize efficiency, and level the playing field. So I disagree that that’s a potentially productive route at the moment. The rules of the game are just broken. Catastrophically stacked in favor of the incumbents.

      Regarding the non-OECD demand growth, I still subscribe to the 2000W per person target laid out by Saul Griffith and the Swiss ETH. You can have laptops and washing machines, bicycles and mass transit, comfortable shelter, long life, low infant mortality, plenty of good food, a world-class education, community, democracy, and all the other things that actually define a high quality of life on a 2000W power budget. You just have to decide that’s what you actually want. And 2000W/person is doable with carbon-free power for 10 billion people. It’s monumental, but it’s doable.

      1. You could be right about their strategy. Still it seems like the confusion they’re generating about petroleum economics can’t be helping them. And the strategy also seems too US-centric to me, although obviously the US does play an outsized role in energy usage so perhaps this makes sense.

        2kW/person carbon-free is indeed monumental. First, as you said, it’s a huge engineering task to produce that much carbon-free energy. And then it would also be rather difficult to convince most people to willingly consume so little. Saul Griffith calculated his own original baseline usage to be ~14kW, but conceded that it’s so hard to measure accurately that his actual consumption might have been as high as 25kW. In any case, it was a lot. You already know this Zane, but for anyone else reading, here’s what he estimates he would need to do to hit his personal target of 2291W: Limit his flights to one cross-country trip per year, plus one trip from San Francisco to Australia every three years to visit family, one to Europe every four years, and one to Hawaii every ten years. Limiting his flying is key. Driving is restricted to two trips to the office per month and very occasional weekend excursions to the beach and to visit the in-laws. Additionally he would need to convert to 6/7th vegetarian and own 1/10th as much stuff. His budget also requires that his home and office heating and electric bills be slashed dramatically, presumably via much better insulation and other efficiencies. And (somewhat mysteriously) he assumes that his share of “society’s” tab (i.e. government consumption, military, usps, nasa, etc…) drops from 400W to 22W. Currently he’s estimating his share of the military alone at 94W, so he’s assuming some radical changes at the governmental level as well. I agree that doing all this is possible (after all everyone used to do it and many people around the world still do), but it would definitely be a very significant shift compared to the way most people live in developed countries today. It would probably render large swaths of suburbia uninhabitable and require replacing, upgrading or eliminating huge amounts of infrastructure. Not impossible, but a monumental transformation that will be especially hard for people to accept while they still have lots of carbon “just sitting around waiting to be burned.”

        1. On the monumental nature of aiming for 2kW/person… I think it’s helpful to note that many of our generation’s parents in the developed world lived 2kW lives, as did virtually all of our grandparents. Switzerland (which originally came up w/ the 2kW goal) estimates that as a nation, they were living on 2kW/person in the late 60s to early 70s. It’s actually not that far away, culturally. I think it’s also helpful to note that we’re going to endure monumental change no matter what we do. The question isn’t whether or not to change things, it’s how to change things. Our current trajectory has a good chance of inundating half of Bangladesh, and several hundred million other coastal dwellers, dissolving all the world’s coral reefs, incinerating most of the world’s remaining forests, and sharply reducing agricultural productivity by the end of the century. What kind of epic story would we like to live through?

Leave a Reply