Students and faculty members across the country have been urging their college administrations to divest from fossil-fuel companies. Several small colleges, including Hampshire, Brevard, and the New School, have responded by promising full disinvestment. A few universities, including Johns Hopkins and Stanford, have partially divested, while students at Harvard and MIT have held sit-ins to demand similar action. The regents of the University of California, my own institution, will soon be considering divestment. I hope they decide to reject the idea. The reality is that divestment is ineffectual, and that stigmatizing fossil-fuel companies is misguided.
A fundamental problem with divestment is that it treats product boycotts and stock boycotts (divestitures) as having similar effects on a company’s profitability and behavior, but this is not the case. When colleges reduce their carbon use, it reduces not only the amount of carbon emitted into the air but also, to some degree, the profits of coal and oil companies, thereby encouraging them to find alternative areas for investment.
In contrast, divestiture of a company’s stock has virtually no effect on its profitability and as a consequence no effect on corporate behavior.
Here’s why: After an initial public offering, a stock’s value has almost no influence on a company’s profitability. The company has sold its stock to the public and has received money in return. If the price of the stock goes up (or down), that means that the present holders of stock can sell the stock for a higher (or lower) price to other investors. The company neither gains nor loses.
Second, and much more important, unlike a boycott of a company’s product, disinvestment based on ideological grounds will have either a zero or a minuscule effect on stock prices. The stock price represents the expected return to stockholders. Disinvestment does not change the expected return, so the stock price will remain essentially the same. The same logic holds for politically motivated divestment from any industry.
Even though divesting doesn’t hurt these companies, some might argue that doing so is a symbol of a university’s commitment to reduce global warming. Well, there are many possible symbols, and divestiture is a particularly inappropriate one. First, it is a symbol that the university community does not understand stock markets. Second, divestiture and the accompanying stigmatization of fossil-fuel companies shows that the university community does not understand the problem of global warming in its entirety.
Divestiture largely focuses on 200 fossil-fuel companies (the Carbon Underground 200), when in truth the problem of global warming will be solved only by a reduction in demand for fossil fuels by everyone — government entities, corporations in general, and individuals. It is more pleasant to stigmatize certain corporate bad actors, but we are also to blame when we drive SUVs, maintain offices and homes at 68 degrees rather than 66 in winter, and consume items that require fossil fuels to produce and distribute.
Instead of promoting disinvestment, students and faculty members should use their time promoting the revenue-neutral carbon-tax proposal supported by more than 3,500 economists, including Nobel Prize winners and former heads of the Council of Economic Advisers. “Revenue neutral” means that the proceeds of the tax would be used to offset income taxes, possibly for those who are lower income.
Carbon taxes would reduce the demand for fossil fuels, which in turn would reduce profits of fossil-fuel companies, their stock prices, and their investments in fossil-fuel extraction and distribution. Carbon taxes would have a widespread, real effect on behavior and significantly reduce the threat of global warming.
Other acts are both symbolic and potentially effective. If individuals donated either time or money to candidates who vowed to enact policies to reduce global warming, those donors might wear black ribbons, a symbol of mourning and of coal.
Those who are in favor of fossil-fuel disinvestment invariably claim that similar efforts on college campuses helped lead to the end of apartheid and white rule in South Africa. It is true that disinvestment, along with other strategies by outside groups and countries, preceded the end of apartheid, but were these strategies causal? And should divestiture take credit?
While embargoes on South African imports and exports did have a significant negative economic effect, that does not imply that politically motivated disinvestment in corporations doing business in South Africa had any effect. With the exception of war, an embargo was among the few methods available to outsiders for punishing the South African regime for the evils of apartheid, and so it had my full support.
Global warming is a real problem that requires an urgent solution. Unfortunately, divestment isn’t it.
Nevertheless, it is not obvious that the embargoes caused the end of white rule. South Africa was the last European-led country in sub-Saharan Africa, so the odds of its remaining so were, in any event, quite low. And F.W. de Klerk believed that the inevitable end of white rule promised a better future for the whites if the end came through a peaceful settlement rather than war.
So how do university trustees decide whether to disinvest? Universities like to satisfy their students and alumni and thus have some reason to respond positively to their demand for disinvestment. However, such disinvestment does have a cost, because the endowment’s portfolio of stocks is less diversified and therefore more risky, undermining the fiduciary responsibility of the trustees. Those in favor of disinvestment argue that investing in fossil-fuel corporations is itself risky, as there is a significant chance of increased regulation that reduces the value of fuel stocks. But that again shows a misunderstanding of the stock market. Presumably the market has already taken into account this possibility, and thus the stock prices of fossil-fuel corporations are lower than they would be otherwise.
Global warming is a real problem that requires an urgent solution. Unfortunately, divestment isn’t it. Instead of trying to persuade colleges to change the stocks they own, students and faculty members who are dedicated to saving the planet should spend their precious time and energy on strategies that have a real effect.
Donald Wittman is a professor of economics at the University of California at Santa Cruz.
