Kevin Milligan

Notes prepared for roundtable on fossil fuel divestment

Event hosted by Liu Institute for Global Issues, UBC

April 6/2016

Notes by: Kevin Milligan, Professor of Economics, Vancouver School of Economics

Updated 7pm after the roundtable…see at bottom.

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I have seen four arguments put forward in favour of divestment from fossil fuel assets. I find none of them persuasive. Here are my notes for the roundtable, addressing each in turn.

1. Fossil fuel divestment will hurt fossil fuel companies.

This is very unlikely. To a large degree, asset prices reflect expected future returns. If the current price of an asset diverges from expected future returns, there is an opportunity to buy a flow of future returns cheaply. If UBC sells some oil stocks, the only way this will lower asset prices is if no one in the world wants to buy future returns cheaply. If there is at least one person with deep pockets who wants to buy future returns cheaply, any pricing deviation will close quickly. I think there are sufficient deep-pocketed pools of wealth happy to buy cheap flows of future returns, so I don’t think  divestment will lower asset prices.

2. Fossil fuel divestment will improve portfolio returns.

Without better information than deep-pocketed market participants, removing an asset from portfolio consideration has a non-positive impact on the expected risk-return portfolio frontier.

Some divestment campaigners seem convinced that future returns for oil companies will be poor. But even if true, this fact should be reflected in prices already. Perhaps divestment campaigners are better at stock-picking than people who ply the stock-picking trade for a living. I have seen no evidence this is true.

3. Producing fossil fuels is immoral; we should own none.

Moral belief systems are personal in nature. I can’t tell others that my moral beliefs are better than theirs; but neither should others force their beliefs on me.

 I think that collectively deciding on a “moral” set of  investments is a difficult task. For this reason, my view is that moral concerns should not be considered for investing common pools of money. If one has strong moral concerns, a financially savvy individual could offset the asset holdings of the common fund on one’s own account, and exercise his her moral judgment individually.

But let’s suppose I’m wrong about that and we do engage the task of choosing moral investments. It strikes me as arbitrary that oil producers be the target of this campaign. Why not General Motors, which manufacturers automobiles–a major contributor to CO2 problems. Why not goods made in factories powered by Chinese coal–a major CO2 emission source. Why oil companies in particular? I don’t think we should penalize one particular way of burning carbon.

Moreover, why target producers at all–do consumers not have any responsibility?  No one would produce if there were no demand for goods that use carbon. The best way to lower carbon use is to lower the carbon content of consumption, not to stop producing energy.

I also dismiss the notion that using carbon–whether as producer or consumer–is in itself immoral. Consuming carbon entails a private cost and a social cost from the environmental externality. So long as both aspects of cost are paid in full, consuming carbon is no more immoral than consuming a salad, a hair-cut, or a tennis ball. Consuming carbon does involve tradeoffs–but is not in itself immoral.

4. Divestment may not be effective, but it provides activists with a ‘win’ that makes them feel effective.

I’m the last person who should be asked for advice on how to motivate a movement of activists. But for my own time, I prefer to devote effort to causes where I both believe in the outcome and believe my efforts have some impact. To argue that there is no other, better way for activists to employ their activist efforts strikes me as displaying a paucity of both confidence and imagination.

Right now as we sit here, ten provinces and the federal government are considering how (and in the case of Saskatchewan–whether) to respond to the recent Paris greenhouse gas commitments. There has never in the history of the country been a more fruitful time to engage in policy advocacy that could push one’s provincial government in the direction of action. Devoting my time to divestment would have the same impact on the environment as yelling at clouds or pounding on sand. Me, I can think of more fruitful ways to spend time that would have a meaningful impact on climate policy in Canada. That’s how I will choose my efforts, but I am far from expert in how best to motivate activist movements so they must make their own choices.

Update: 

The event was held under the Chatham House Rule, so I will add a couple of comments here about what I learned.

The proponents of divestment did not make points (1) and (2) above. They did assert (3) and (4). On the political strategy, they argued that the divestment issue provided a unique opportunity to build a social movement to build awareness of climate change; that other potential policies would have been worse focal points for building student/university involvement. I’m surprised by that, but I have little experience in building social movements. I learned from the explanations and examples on this.

I didn’t change my mind on the issue of divestment, however. I remain resolute that we should treat all burning of carbon equally, and not single out extractive industries for particular moral castigation. Carbon burned in extracting oil has the same impact on the climate as carbon burned making cars or flying planes; I don’t agree with the case for separating and shunning one industry for special treatment in university financial portfolios.