Katerina Swanson
Fossil fuels are the most widely used energy sources in the world, accounting for ~80% of total energy consumption. However, they come with several drawbacks. Firstly, they are non-renewable resources, formed from the decomposition of organic matter over millions of years, and at our current rate of consumption, they will eventually run out. Secondly, the burning of fossil fuels releases greenhouse gases, contributing significantly to climate change and global warming, with severe environmental and health impacts. Additionally, the extraction and transportation of fossil fuels can lead to oil spills and water pollution, causing harm to ecosystems and communities. Furthermore, the infrastructure required for fossil fuels, such as pipelines and access roads, can result in land degradation and ecosystem destruction. While fossil fuels have been a reliable and inexpensive energy source, the world is now seeking to transition towards renewable and cleaner energy alternatives to address the drawbacks associated with fossil fuels.
Characteristics and their values regarding withdrawals of fossil fuels:
| Characteristics | Values |
|---|---|
| Reason for divestment | To reduce climate change by exerting social, political, and economic pressure |
| Institutions divesting | 1593 institutions with assets worth more than $40.5 trillion |
| Types of institutions divesting | Faith-based, educational, philanthropic foundations, pension funds, governments, and for-profit corporations |
| Largest group divesting | Faith-based organizations (35%) |
| Fossil fuel divestment campaigns | Go Fossil Free: Divest from Fossil Fuels!, Keep it in the Ground |
| First institution to divest | Unity College in Maine |
| Year of the first fossil fuel divestment campaign | 2011 |
| Alternatives to fossil fuels | Electrification, green hydrogen, biofuel, hydropower, biomass, wind, geothermal, solar energy, nuclear energy |
| Number of commercial CCS plants in operation worldwide in 2020 | 26 |
| Amount of carbon captured by CCS plants in 2020 | 40 million tons |
| Percentage of total yearly global emissions captured by CCS plants in 2020 | 0.11% |
| Fossil fuel subsidies in 2022 | $7 trillion |
| Fossil fuel consumption since 1950 | Increased eight-fold |
| Fossil fuel consumption since 1980 | Doubled |
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What You'll Learn
Fossil fuel divestment campaigns
The moral motivation for fossil fuel divestment is based on the belief that it is wrong to profit from damaging the planet, especially when those who have benefitted the least from fossil fuel extraction and use are the most impacted. Fossil fuel divestment campaigns aim to exert 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. Fossil fuel divestment is often symbolic in nature, and critics argue that it has very little practical consequence on fossil fuel producers, especially since many of the world's fossil fuel companies are owned and operated by governments.
However, recent evidence has suggested that, along with having social impacts, fossil fuel divestment hinders the fossil fuel industry's ability to carry out its business model. As of July 2023, more than 1593 institutions with assets totalling more than $40.5 trillion worldwide had begun or committed to some form of fossil fuel divestment. The biggest proportion of these divestment commitments comes from faith organisations, with 350 out of 1300 faith organisations committing to divest from fossil fuels.
Fossil fuel divestment is a tactic for combating the fossil fuel industry and accelerating the transition to renewable energy. It is a means of aligning investments with core values and protecting portfolios from climate-related financial risk. Financial research suggests that fossil fuel divestment has positively impacted investors' returns in the long term.
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The impact of divestment on investors
Fossil fuel divestment is a topic that has gained prominence in recent years, with a growing number of institutions and individuals recognizing the need to transition from fossil fuels to cleaner energy sources. This movement has been driven by both moral and financial considerations, as society grapples with the realities of climate change and the role of fossil fuels in driving it.
However, a growing body of financial research suggests that, in the long term, fossil fuel divestment has a positive impact on investors' returns. This perspective considers the risks associated with continued investment in fossil fuels, including the likelihood of legislation banning the use of fossil resources, which could render fossil fuel reserves as stranded assets. Additionally, the stigmatization of fossil fuel companies and the increasing demand for climate action may further accelerate the transition to renewable energy, making divestment a prudent financial decision.
The moral and ethical dimensions of fossil fuel divestment also play a role in investors' decisions. The belief that it is wrong to profit from damaging the planet, especially when the impacts disproportionately affect those who have benefited the least from fossil fuel extraction, is a strong motivator for divestment. Climate justice campaigners argue that investing in fossil fuels contributes to harm and injustice, while divestment helps fulfill a moral responsibility to promote climate action.
Overall, the impact of divestment on investors is multifaceted and depends on various factors, including the pace of the energy system transition, the availability of alternative energy sources, and the regulatory environment. While there are potential financial risks, the growing momentum behind the divestment movement, coupled with increasing public awareness about climate change, suggests that investors have a key role to play in shaping a sustainable future.
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The impact of divestment on fossil fuel producers
Fossil fuel divestment is a tactic to combat the fossil fuel industry and accelerate the world's transition to renewable energy. It involves withdrawing investments from fossil fuel companies and investing in climate solutions instead. As of July 2023, more than 1593 institutions with over $40 trillion in assets have committed to some form of fossil fuel divestment. Faith-based organizations comprise the largest group of divestment commitments, followed by educational institutions, philanthropic foundations, pension funds, governments, and for-profit corporations.
On the other hand, some argue that divestment campaigns have little practical consequence on fossil fuel producers, especially those that are state-owned or not publicly traded on stock markets. Financial research on the impact of divestment on investment performance is mixed. Some studies suggest that divestment has a positive impact on investors' returns, while others indicate no significant difference in risk and return between portfolios that exclude fossil fuel production companies and unrestricted portfolios. Still, others claim that divestment results in underperformance.
However, it is important to note that the continued financing of fossil fuels since the 2015 Paris Climate Agreement does not necessarily indicate the failure of divestment. The fossil fuel divestment movement has gained remarkable traction, and the number of investors and institutions committing to divestment is growing. The movement has forced a fundamental reckoning with the future of the global energy system within finance, government, and civil society. Additionally, the volatility, capital-intensity, and unsustainability of some fossil fuel business models have been exposed, and fossil fuel equity prices have plummeted, leading to value destruction for many shareholders.
In conclusion, the impact of divestment on fossil fuel producers is not solely determined by immediate financial impacts but also by the wider effects of the movement. Divestment campaigns have played a crucial role in increasing awareness about the need for climate action and accelerating the transition to renewable energy. While the consequences for fossil fuel producers are complex and varied, divestment has undoubtedly contributed to a shift in perception and investment trends, influencing the future of the industry.
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The role of governments in fossil fuel subsidies
Fossil fuel subsidies have long been a significant feature of government intervention in energy markets. In 2022, global fossil fuel subsidies reached $7 trillion, or 7.1% of global GDP, with an expected increase to $8.2 trillion by 2030. These subsidies are intended to protect consumers by maintaining low energy prices. However, they have substantial drawbacks, including fiscal consequences, inefficient allocation of resources, hindering growth, and encouraging pollution and climate change.
At COP26 and COP27 in 2021 and 2022, countries agreed to accelerate efforts to phase out inefficient fossil fuel subsidies. Several countries have made progress in this direction, including India, Morocco, Saudi Arabia, and Ukraine, which have phased out explicit subsidies and introduced taxes. Over 160 countries also tax road transportation use, recognizing the externalities associated with fossil fuel consumption.
Despite these efforts, reforming subsidies remains challenging due to the potential for social unrest as prices increase. Additionally, the absence of public support for subsidy reform is partly due to a lack of trust in governments' ability to compensate the poor and middle class during the transition. Nevertheless, removing fossil fuel subsidies would bring significant benefits, including reduced carbon emissions, decreased air pollution deaths, and increased government revenue.
In the United States, the federal government provides various subsidies to the fossil fuel industry, including direct and indirect support. Special provisions in the U.S. tax code specifically support and reward domestic fossil fuel-related production, while other provisions create indirect subsidies for businesses in general. The fossil fuel industry also receives substantial funding for research and development, project loans, grants, and guarantees from government institutions like the Overseas Private Investment Corporation (OPIC) and the Export-Import Bank.
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The environmental and health impact of fossil fuels
The use of fossil fuels—coal, oil, and natural gas—results in significant climate, environmental, and health costs that are often not reflected in market prices. These costs are known as externalities. Each stage of the fossil fuel supply chain, from extraction and transportation to refining and burning, generates externalities.
Air Pollution
Air pollution from burning fossil fuels can cause multiple health issues, including asthma, cancer, heart disease, and premature death. Globally, fossil fuel pollution is responsible for one in five deaths. In the United States alone, 350,000 premature deaths in 2018 were attributed to fossil fuel-related pollution. The combustion of additives found in gasoline, such as benzene, toluene, ethylbenzene, and xylene, produces cancer-causing ultra-fine particles and aromatic hydrocarbons. Fossil fuels also emit hazardous air pollutants, including sulfur dioxide, nitrogen oxides, particulate matter, carbon monoxide, and mercury, which contribute to the formation of smog and acid rain.
Water Pollution
Fossil fuels are responsible for water pollution through oil spills, fracking fluids, and wastewater from drilling operations. Each fracking well uses between 1.5 million and 16 million gallons of water, and the resulting wastewater can be toxic, containing substances like arsenic, lead, chlorine, and mercury that contaminate groundwater and drinking water.
Ocean Acidification
Ocean acidification is another consequence of burning fossil fuels. Approximately a quarter of the carbon dioxide emitted from fossil fuels is absorbed by the ocean, altering its chemistry (pH). This absorption increases the acidity of the ocean, negatively impacting marine life and ecosystems.
Extreme Weather and Sea Level Rise
The burning of fossil fuels contributes to climate change, leading to more frequent and severe extreme weather events, including wildfires, hurricanes, wind storms, flooding, and droughts. Climate change also causes oceanic and atmospheric warming, resulting in global sea level rise. Sea levels have risen about 9 inches since the late 1800s, leading to increased flooding, destructive storm surges, and saltwater intrusion, particularly affecting coastal communities.
Plastic Pollution
Over 99% of plastics are made from fossil fuels, contributing to global plastic waste production, which currently stands at 300 million tons per year. A significant amount of this plastic waste ends up in the ocean, killing wildlife and polluting the food chain. The plastic industry's greenhouse gas emissions are expected to surpass those of coal-fired power plants by 2030, further exacerbating climate change.
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Frequently asked questions
Fossil fuel divestment 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.
People cite several reasons for divesting from fossil fuels. For some, it is a means of aligning investments with core values, for others, it is a tactic for combating the fossil fuel industry, and for others still, it is a way to protect portfolios from climate-related financial risk.
Fossil fuel divestment campaigns have had a significant impact on the industry. The "cost of capital" for funding new fossil fuel projects has risen steeply in the last decade, from 8% to 10% to around 20% as of 2021, according to Bloomberg. During the same period, the cost of financing renewables has dropped.
Faith-based organizations comprise the single largest group of institutions divesting from fossil fuels, at about 35% of the total. This is followed by educational institutions (nearly 15%), philanthropic foundations (12.6%), pension funds (11.8%), governments (11.4%), and for-profit corporations (8.7%).
Notable institutions that have divested from fossil fuels include Harvard University, Boston University, Brown University, the California Institute of the Arts, Columbia University, Cornell University, George Washington University, Georgetown University, Oxford University, Rutgers University, Syracuse University, and Unity College.
