Fossil fuel divestment is the process of withdrawing financial support and investments from companies involved in the extraction, production, and distribution of fossil fuels, such as coal, oil, and gas.
Fossil fuel divestment or fossil fuel divestment and investment in climate solutions is an attempt to reduce climate change by exerting social, political, and economic pressure for the institutional divestment of assets including stocks, bonds, and other financial instruments connected to companies involved in extracting fossil fuels.
HISTORY
Fossil fuel divestment campaigns emerged on college and university campuses in the United States in 2011 with students urging their administrations to turn endowment investments in the fossil fuel industry into investments in clean energy and communities most impacted by climate change. In 2012, Unity College in Maine became the first institution of higher learning to divest its endowment from fossil fuels.
By 2015, fossil fuel divestment was reportedly the fastest growing divestment movement in history. As of July 2023, more than 1593 institutions with assets totaling more than $40.5 trillion in assets worldwide had begun or committed some form of divestment of fossil fuels.
READ: RENEWABLE ENERGY AND THEIR DIFFERENT SOURCES
REASONS FOR DIVESTMENT
These reasons may vary depending on the institution, organization or individual considering divestment.
Reducing carbon emissions:
Fossil fuel divestment aims to reduce carbon emissions by accelerating the adoption of the renewable energy transition through the stigmatization of fossil fuel companies. This includes putting public pressure on companies that are currently involved in fossil fuel extraction to invest in renewable energy.
The Intergovernmental Panel on Climate Change found that all future carbon dioxide emissions must be less than 1,000 gigatons to provide a 66% chance of avoiding dangerous climate change; this figure includes all sources of carbon emissions. To avoid dangerous climate change, only 33% of known extractable fossil fuel of known reserves can be used; this carbon budget can also be depleted by an increase in other carbon emission sources such as deforestation and cement production. It is claimed that, if other carbon emissions increase significantly, then only 10% of the fossil fuel reserves can be used to stay within projected safe limits.
Risk of regulation and carbon pricing
A 2015 report studied 20 fossil fuel companies and found that, while highly profitable, the hidden economic cost to society was also large. The report spans the period 2008–2012 and notes that: “for all companies and all years, the economic cost to society of their CO2 emissions was greater than their after‐tax profit, with the single exception of ExxonMobil in 2008.” Pure coal companies fare even worse: “the economic cost to society exceeds total revenue (employment, taxes, supply purchases, and indirect employment) in all years, with this cost varying between nearly $2 and nearly $9 per $1 of revenue.
Similarly, in 2014, financial analyst firm Kepler Cheuvreux projected $28 trillion in lost value for fossil fuel companies under a regulatory scenario that targets 450 parts per million of atmospheric CO2.
Economic Impact:
- Stranded assets
Stranded assets, which are known in relation to fossil fuel companies as the carbon bubble, occur when the reserves of fossil fuel companies are deemed environmentally unsustainable and so unusable, so must be written off. Currently the price of fossil fuels companies’ shares is calculated under the assumption that all of the companies’ fossil fuel reserves will be consumed, and so the true costs of carbon dioxide in intensifying global warming is not taken into account in a company’s stock market valuation.
Unstable fossil fuel prices
Unstable fossil fuel prices have made investment in fossil fuel extraction a riskier investment opportunity. West Texas Intermediate crude oil fell in value from $107 per barrel in June 2014 to $50 per barrel in January 2015. Goldman Sachs stated in January 2015 that, if oil were to stabilize at $70 per barrel, $1 trillion of planned oilfield investments would not be profitable.
Competition from renewable energy sources
Competition from renewable energy sources may lead to the loss of value of fossil fuel companies due to their inability to compete commercially with the renewable energy sources. In some cases, this has already happened. Deutsche Bank predicts that 80% of the global electricity market will have reached grid parity for solar electricity generation by the end of 2017. In 2012, 67% of the world’s electricity generation was produced from fossil fuels.
Morality
The moral motivation for fossil fuel divestment is based on the belief that it is wrong to profit from willfully and knowingly damaging the planet, and especially so when the impacts those damages are borne disproportionately by those who have benefitted the least from fossil fuel extraction and use. Philosopher and climate justice campaigner Alex Lenferna presents these three interlocking moral arguments in favor of fossil fuel divestment.
Legal
The legal argument for divestment is the case that as the fossil fuel industry faces long-term structural risks, investors who continue to place bets on it may be breaching their fiduciary duties.
BENEFITS OF DIVESTMENT:
- Reduced Carbon Footprint: Divestment helps reduce the financial support for fossil fuel extraction and production.
- Increased Investment in Renewables: Divested funds can be reinvested in renewable energy, supporting a low-carbon economy.
- Financial Returns: Renewable energy investments often provide stable, long-term returns.
- Leadership and Influence: Divestment commitments from influential institutions can inspire others to follow suit.