Fossil Fuel Divestment: Not an Easy Goodbye
Much recent pontification regarding climate change, whether in protests or in print, has advocated divesting from fossil fuels—removing funds in an investment portfolio from companies that profit from the accumulation or exploitation of carbon-based energy sources. Writing for Forbes in February 2021, David Carlin summarized the simple yet radical vision of environmentalist Bill McKibben: Defunding such enterprises would devalue their stock, ultimately depriving them and the entire energy sector of the economic resources needed to continue their harmful activities. However, despite having grown to $14.5 trillion and enlisted a multitude of diverse stakeholders, as Carlin noted, the movement to divest remains a complicated proposition fraught with competing interests.
However noble the goal, some fear that a stampede of divestment could accelerate bursting of the so-called “carbon bubble,” the large spread between the initial investment in fossil fuel assets and the presumably paltry value that they would have once stranded because of changing environmental policy and outright abandonment due to the movement. Financing for these assets assumes long-term output, a use-specific discount rate, subsidies, and other financial incentives, all of which could be wiped out in the aftermath of mass divestment. Indeed, Matt McGrath of BBC News, in June 2018, noted one study that projected global economic losses of $1 trillion to $4 trillion by 2035 due to dwindling demand for fossil fuels, which would harm the U.S. and Canada most.
Some states whose economies rely heavily on fossil fuels—such as West Virginia, Louisiana, Oklahoma, and Texas—have resorted to weaponizing their legislatures to try to stem the tide of divestment to protect their industries. For example, in an episode of the NPR legal podcast All Things Considered from March of this year, Jason Isaac of the Texas Public Policy Foundation touted a new law that officially suspends business between the Lone Star State and financial groups that affirmatively divest from fossil fuels. After asserting in his 2022 Letter to CEOs that “every company and every industry will be transformed by the transition to a net zero world,” BlackRock Chairman and CEO Larry Fink, perhaps in an attempt to temper his tone to appease lawmakers in Austin, also made a point of stating, “BlackRock does not pursue divestment from oil and gas companies as a policy,” demonstrating some measure of effectiveness to such drastic political maneuvers.
Other powerful institutions such as universities remain determined to divest from fossil fuels. Cornell University halted its investments in fossil fuels two years ago in favor of backing alternative and renewable energy, and the Massachusetts Institute of Technology is under pressure from students to follow suit. Clearly, the crusade of fossil fuel divestment has too much momentum, but, as long as money stays somewhere within the energy industry, the carbon contingent may have an opportunity to stay relevant. If real progress is made in technologies such as carbon capture and storage, the movement’s adherents may be persuaded not to eliminate those legacy assets and businesses from the energy landscape altogether.