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Betting on Climate Failure: The Ethics and Economics of Fossil Fuel Divestment

Across the United States the growing Fossil Fuel Divestment movement has confronted universities, local governments, churches and other institutions with the demand to divest their investment portfolios from the fossil fuel industry. Such institutions are faced with a complex economic and ethical decision as to whether they should heed the advice of the divestment movement. Unsurprisingly, in response to such a seemingly radical proposal, a growing number of academics, lobbyists and organizations are resisting the fossil fuel divestment movement claiming that it is ineffective, dogmatic, unbalanced and naïve, among other accusations. However, many of those who criticize the divestment movement are yet to truly engage with the substance of the movement, and in response to their criticism it is worth examining the economics and ethics behind the fossil fuel divestment movement in detail and in doing so assess the validity of the critiques levelled against the divestment movement in order to assist critics, institutions and divestment groups in their deliberations around divestment.

In a recent research paper I attempt to do just that by elaborating on the economic and ethical case for divestment. The paper provides an analysis of divestment using the coal industry as a case study because of its prominence as a paradigmatic target industry of the divestment movement. The paper first elucidates the financial risks associated with fossil fuels in general and the North American coal industry in particular. Collating numerous financial analyses regarding the future of the coal industry in a carbon-constrained world, the conclusion arrived at is that thanks to decreasing demand, environmental regulations and action on climate change, the coal industry faces significant risks of losing great amounts of value in the near future and that therefore investments in coal are likely to underperform, such that divesting from the coal industry would be a sound financial decision.

A number of mainstream financial analyses from institutions such as Standard and Poors and HSBC Bank suggest that like coal much of the fossil fuel industry faces potential for significant devaluation, as they are currently valuing fossil fuel reserves far beyond the amount we can afford to burn to stay below the ‘safe’ two degree level of global warming. While the financial risks from these so-called ‘unburnable reserves’ are not properly factored into market valuation, making up what is being referred to as the carbon bubble, the concept and realization of both the carbon bubble and unburnable reserves are gaining traction and credibility among a wide range of organizations and individuals such as HSBC, the Grantham Institute, Lord Nicholas Stern and increasingly among the investment community.  However, as the paper touches on, the case for divestment from the broader fossil fuel industry is significantly more complicated than it is for the coal industry and similarly greenhouse-gas intensive and environmentally problematic industries such as the tar and oil sands.
 
The next section of the paper builds on the economic case in order to examine the ethics underpinning the divestment movement. Given the deeply ethical nature of the calls for divestment, most of the ethical discourse in the divestment debate has been surprisingly thin, revolving around simple maxims and arguments that attempt to vilify the fossil fuel industry. What the research in this paper aims to do is to further the ethical discourse so as to properly elucidate the ethical issues underpinning divestment. Drawing on climate ethics literature the paper identifies three different widely-held moral principles which support divestment from the coal industry, namely, the no-harm principle, the principle of beneficence and the principle of comparable moral importance. Having identified these ethical principles the paper goes on to consider a number of objections to them. The objections relate to the proper role of institutions such as universities and the potential inefficacy of divestment. The author argues that the objections are ultimately unsuccessful in refuting the case for divestment and that therefore the economic and ethical case for divestment from coal and similar industries is sound.
 
In sum the paper concludes that the divestment movement, far from being a naïve, idealistic and dogmatic movement, is playing an important role in revealing the risks associated with the fact that much of the fossil fuel industry is over-valued if we as a global community are to keep levels of climate change below two degrees Celsius. Not only is the fossil fuel divestment movement helping to bring this ‘carbon bubble’ to light, thus revealing the true value of the fossil fuel industry in a carbon-constrained world, but furthermore through their actions they are helping many institutions to make stronger financial and ethical decisions and in many cases are even helping spur investment in the clean economy. 

Betting on Climate Failure - The Ethics and Economics of Fossil Fuel Divestment by Alex Lenferna

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