Friday, November 20, 2015

Economic Science, The Fossil Fuel Divestment Movement and the Role of Universities in Political Debate

Students and Faculty at some universities are calling upon such institutions to sell investments in companies that extract or refine so-called "fossil fuels."  These advocates invoke scientific evidence purporting to establish that reliance on such fuels is causing "Global Climate Change," previously known as "Global Warming."  They also claim that, by investing in such companies, endowments are "funding climate change," and that divestment by various universities will visit economic harm on such firms, discouraging the production of such fuels.

Science is often a useful guide to Public Policy.  However, as previously explained on this blog (see here, here and here), so-called Progressives often reject the dictates of basic economic science when formulating policy recommendations or interpreting economic events. Unfortunately, proponents of such divestment have invoked science selectively.  The purchase of common stock traded on a national exchange does not "fund" that firm, which presumably issued the shares in question long ago in an initial public offering. Moreover, as Professor Todd Henderson at the University of Chicago Law School explains, divestment will not alter firms' stock prices and thus will not put financial pressure on publicly-traded firms.  Stock prices reflect "an estimate of the cash flow that ownership of the stock will produce in the future."  Moreover, sales by university endowments or other investors do not impact the demand or supply of coal or oil and thus have no impact on any firm's future cash flow.  Thus, as Henderson points out, after any divestment, the economic value of individual stocks will remain unchanged, and "others will stand ready to buy the shares at the current market price."

Henderson also explains how divestment will force schools "to accept lower returns than would otherwise be available" and thus deprive schools of much-needed endowment income.  As Henderson points out, Swathmore, with an endowment of $1.5 billion, estimates that such divestment would cost the school $20 million annually, or over $12,000 per student.  (See here for the size of Swathmore's student body.)  Thus, divestment would require schools to raise tuition significantly and/or substantially reduce the quality of their teaching and/or research.  So far as this author is aware, proponents of divestment have not identified alternate sources of revenue to replace that which would disappear following divestment.

It should go without saying that debates within the academy about institutional policies should consist of reasoned argument supported by evidence and logic. As the divestment movement spreads, Henderson has done Higher Education a useful service by reminding us that the economic logic behind much pro-divestment rhetoric does not withstand scrutiny.  Hopefully academic proponents of divestment will adhere to academic norms, heed the teachings of economic science, and develop alternative rationales to support their demands and/or channel their efforts to reduce carbon emissions in other directions.  Indeed, Henderson himself suggests that, in lieu of divestment, schools could "source their energy from more renewable sources[.]"  Presumably such re-sourcing would increase schools' energy costs --- otherwise schools would have already engaged in such re-sourcing simply to reduce costs.  In fact, many schools have already followed Henderson's advice, overtly investing resources in efforts to reduce carbon emissions for the sake of doing so, independent of whether such efforts reduce energy costs.

Should schools embrace Henderson suggestion and invest resources in reducing their carbon emissions?  This blogger respectfully disagrees with any suggestion that schools invest scarce resources in reducing their carbon emissions unless, of course, such investments produce net reductions in the school's energy costs.  Such investments necessarily divert resources from teaching and research, in service of ideological objectives entirely unrelated to the academic mission of a university.  As Henderson's colleague Geoffrey Stone recently explained "universities should not take ideological or political positions."  Moreover, as previously explained on this blog, a university that purports to provide a liberal education should not consider itself authorized to inculcate its students with the school's own version of moral or political virtue.  In the same way, such universities should not consider themselves authorized to expend scarce resources furthering ideological objectives unrelated to teaching and research.  Universities are not politically-oriented think tanks or service organizations. Instead, they exist to create and transmit knowledge, including knowledge about the existence, causes and possible cures for social problems like climate change.  Diversion of resources away from academic programs to unrelated projects hampers the achievement of this core mission and blurs the lines between research and education, on the one hand, and political activism, on the other.