POLITICS

Who pays the price for fossil fuel divestment? Students, pensioners -- and you

April 12: A gas station in Portland, Oregon. Gasoline jumped 5.6 percent last month and has risen nearly 28 percent in the past year.

April 12: A gas station in Portland, Oregon. Gasoline jumped 5.6 percent last month and has risen nearly 28 percent in the past year.  (AP)

Advocates for fossil fuel divestment have spent the past several years pressuring universities and pension boards to sell their investments in energy companies in order to take a symbolic stance against carbon-based fuels and climate change.    

The costs of divestment do not occur in a vacuum. When a university or pension fund takes that action, the fund must reduce either current or future spending or payouts, or find another source of cash to offset the costs.  In other words, divestment effectively transfers wealth to the financial sector, and leaves the costs to be borne by students, faculty, or pensioners. 

How big are those costs? 

My colleagues and I at Compass Lexecon, one of the world’s leading economic consulting firms, set out to answer this question, and found that these costs are substantial.  For a typical large university endowment, our team calculated that, absent an increase in tuition or some other source of cash to fill the gap, the immediate and ongoing costs of divestment would require reduced endowment spending of approximately six to 15 percent. 

Reduced endowment spending could result in cuts to faculty research, increases in class sizes, or reductions in student services. 

Alternatively, institutional spending could be maintained at current levels by hiking tuition.  Specifically, we found that a typical large university could offset the costs of fossil fuel divestment by raising tuition (or reducing existing scholarships) by approximately $123 to $385 annually per person at a public university or $1,043 to $3,265 annually at a private university.  The actual figures would, of course, depend on the extent of the university’s fossil fuel investments and its reliance on endowment spending. 

In a similar fashion, pensioners could suffer substantial costs if their pension funds divested. I estimate that the costs triggered by divestment would equate to a reduction of about five to seven percent in the monthly benefits that can be paid to typical pensioner, depending on the extent of the pension fund’s fossil fuel assets, unless these costs were somehow offset by additional contributions to the pension fund.  

But at a time when many public pension funds in the U.S. are already severely underfunded, the additional costs of divestment would also add to the financial and political distress surrounding them.

These very significant costs are, at least in part, the reason why even colleges and other institutions that have announced intentions to divest have limited their actions to some form of partial divestment, attempting to placate divestment activists while minimizing the proportion of the fund actually pledged to remain fossil-free.  Many universities, such as Harvard, Massachusetts Institute for Technology (MIT), and New York University, have declined to divest from fossil fuels at all.   

During upcoming weeks divestment activists will be staging an array of events to try to push the nostrum forward. What should be done about climate change is an important issue that deserves our careful attention, and the full range of options should be considered.   

But decisions should be based on facts, not political posturing.  Divestment simply transfers ownership of existing securities from divesting institutions to new investors, with no direct effect on the operations of the companies involved.  

There is a direct and costly effect, however, on students, faculty, pensioners and taxpayers.    

Editor's note: The work highlighted in this article was commissioned by the Independent Petroleum Association of America. Read the full report on DivestmentFacts.com.

Dr. Hendrik Bessembinder is a Professor of Finance, and holds the Francis J. and Mary B. Labriola Endowed Chair, at the W.P. Carey School of Business of Arizona State University. He is also an Affiliate Professor in Business Economics and Finance at the Foster School of Business of the University of Washington and a Senior Consultant with Compass Lexecon