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FOSSIL FUEL DIVESTMENT REPORT: UCHICAGO
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Acknowledgements Many thanks to all the writers of this report: Anna Dinwoodle, ’14, Hannah Flynn ’16, Emmalina Glinskis ’17, Johnny Guy ’17, Kylah Johnston ’16, Paul Kim ’14, Rachel Kulikoff ’15, Brendan Leonard ’15, Shrabya Timsina ’17, and Sam Zacher ’16. This report was edited by Johnny Guy ’17, Brendan Leonard ’15, and Sam Zacher ’16.
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Contents Introduction………………………………………………………………………………………4 Statement of Objectives…………………………………………………………………..….5 Section I: The SCIENTIFIC Case for Divestment…………………………………...6
• Global Climate Change (7) • Local and Regional Climate Change (17)
Section II: The MORAL Case for Divestment………………………………………22 • Divestment Is a Moral Issue (23)
Section III: The INSTITUTIONAL Case for Divestment………………………..25
• Divestment and the Mission of the University of Chicago (26) • University of Chicago’s Academic Neutrality and the Kalven Report (28) • The Effectiveness of Divestment as an Institutional Action (33)
Section IV: The FINANCIAL Case for Divestment………………………………..37 • The Costs of Divestment and Risks of Non-‐Divestment (38) • The Direct and Indirect Financial Impact of Divestment on Industry (42)
Section V: GLOBALIZATION—Addressing Counterarguments……………48 • Global Economic Effects of Divestment (49) • Effects of Divestment on Employment (50)
Section VI: REINVESTMENT—Actions following Divestment……………..52
• Reinvestment Strategies: Alternatives to Fossil Fuel Investment (53) Restatement of Objectives……………………………………………………………..…59
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Introduction This report was initially drafted per request of University of Chicago President Robert J. Zimmer.1 Last spring, during a meeting with representatives from Student Government and the student campaign Stop Funding Climate Change, UChicago (SFCC), the president expressed his desire for a substantive, comprehensive, and intellectually sophisticated argument in favor of divestment from fossil fuels by SFCC and its parent registered student organization, University of Chicago Climate Action Network (UCAN). Over the past year, SFCC has worked to fulfill the president’s request in the hope that the release of such a report will result in increased dialogue regarding fossil fuel divestment not only between the student body and the administration but also the University community at large. The report has a few primary objectives. It describes the context and purpose of hypothetical divestiture action taken by the University of Chicago. It also aims to clear up misconceptions pertaining to the financial and political strategy of divestment as a vehicle for affecting change. It also, of course, makes a multifaceted argument for fossil fuel divestment and addresses counter arguments made by its opponents. The body of the document is divided into six sections. The first four sections bestow scientific, moral, institutional, and financial cases for divestment. The fifth, globalization, simply addresses counterarguments for divestment, and the sixth, reinvestment, argues for investment paths to pursue following divestment.
1 Kaiser. “SFCC Plans Future After Referendum”. The Chicago Maroon. 6/4/13. Web.
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Statement of Objectives Emphasizing the overwhelming scientific evidence indicating anthropogenic climate change is occurring due to the combustion of hydrocarbons, more commonly known as fossil fuels; Expressing concern about the impending catastrophic consequences anthropogenic climate change will have for the University, the city of Chicago, and the global community if immediate action is not taken; Feeling distress as students (international and domestic) whose futures will be affected and limited by the effects of climate change; Noting the University’s investments in companies that extract, refine, and sell fossil fuels, thereby accelerating the burning of hydrocarbons and anthropogenic climate change; Affirming the stance expressed in the 1967 Kalven Report, which calls on the University to oppose and defend its interests from the activities of segments of society that would do us harm; Weighing the financial and social risks associated with holding assets that will become ‘stranded’ with unburnable carbon reserves due to governmental and international regulation, natural disasters, and societal pressure; Urges the following actions be taken by the University of Chicago: (1) Immediately freeze any new investments in the most carbon-‐intensive fossil fuel extraction companies. This report will keep the exact listing of targeted company’s undefined in the interest of dialogue with this University’s Board of Trustees. However, a listing of the top 200 fossil-‐fuel companies as a function of their estimated carbon reserves are summarized in the PATHWAYS section, the raw data for which can be accessed online at http://bit.ly/ReportData. (2) Divest from direct ownership and any commingled funds that include fossil fuel public equities and corporate bonds within five years, with the goal of influencing fossil fuel companies to stop exploring for hydrocarbon reserves, stop lobbying in Washington and state capitals across the country, and pledge to keep 80% of their current reserves underground forever. (3) Implement climate and carbon risk assessment into the University’s short-‐term and long term investment strategies, in order to more accurately predict and account for the instability markets will have due to a changing climate and move towards more sustainable investment practices. These practices could be recommended requested by the University as a client of its endowment’s external investment managers.
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Section I:
The SCIENTIFIC Case for Divestment
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Global Climate Change
Note about terminology: Unless otherwise noted, “n degrees C warming” means warming of n degrees Celsius above the 1880 global mean temperature. This is a common benchmark for pre-‐industrial global temperature in the literature.
History
The modern study of climate change has its roots in the 1950s. Since the experiments in 1864 of John Tyndall that showed that certain greenhouse gases including water vapor, carbon dioxide, and methane trap solar radiation as heat, scientists have theorized that carbon dioxide from industrial fossil fuel use might globally strengthen the greenhouse effect. During the 1950s, electronic computing first allowed John von Neumann's scientists to model the atmosphere's general circulation using numerical methods.1 In 1958, scientists also began measuring atmospheric carbon dioxide levels at remote Mauna Loa in Hawaii. These data show that atmospheric carbon dioxide levels have risen every year since measurement began.
Data from Mauna Loa, Hawaii show that atmospheric carbon dioxide has increased
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every year since measurement began. (Source: Wikipedia) The 1970s and 1980s brought climate change to the center of scientific attention. As temperature continued to rise alongside CO2 levels throughout the second half of the 20th century, concern among scientists and the general public about the effects of greenhouse gas-‐induced climate change grew. In response to growing concerns among governments and civil society about climate change, in 1988 the United Nations established the IPCC for the purpose of providing policy-‐relevant research on climate change. It tends to be conservative in its assessments. The IPCC Fourth Assessment Report (AR4), released in 2007, concluded that carbon dioxide is "the most important anthropogenic greenhouse gas" (WG1 exec summary p 2). CO2 concentrations and temperatures have indeed risen significantly. According to NASA, "with the exception of 1998, the nine warmest years in the 132-‐year record all have occurred since 2000."2 The average global temperature has risen 0.6 degrees C from the average during 1951-‐1980 and 0.8 C from 1880. Scientists confidently expect this trend to continue.
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Temperature and atmospheric carbon dioxide have both risen sharply since the 1950s. While solar and volcanic "forcings" (induced changes in temperature) have fluctuated since 1900, the human contribution to temperature increase has sharply since 1975. (Source: “Global Climate Change.” Energy Studies in the College of Engineering. Cornell University.) According to the report, the combustion of fossil fuels is the most important contributor to the increase in atmospheric CO2 during the industrial age. For the past 8,000 years—the entirety of human history—until very recently, levels near 280 parts per million by volume (ppm) prevailed. In 1880 CO2 concentration in the atmosphere was 285 ppm; in 1958 it was 315 ppm. In 2013, atmospheric CO2 exceeded 400 ppm. We are witnessing atmospheric changes that are epochal in scale, though human in
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pace. According to a 2013 article in Science, CO2 concentrations were last 400 ppm 3.6 to 3.4 million years ago, when summer temperatures in northeast Siberia were about 8 degrees Celsius warmer than today.3 Homo has never witnessed 400 ppm CO2, and in particular the past eleven thousand years have been characterized by a climatic stability that is unusual in Earth's history. According to the IPCC, at current rates, we will reach 450 ppm between 2038 and 2060.4 However, its predictions have historically underestimated climate change effects. Parties to the United Nations Climate Change Conference in Durban in December 2011 declared a cap of two degrees Celsius warming as a non-‐binding international consensus goal. A concentration of 450 ppm CO2 is seen as the most likely cap to correspond to this target, following a calculation we shall reproduce. Delegates agreed to take legally binding action by 2015 to limit warming to two degrees Celsius,5 via action after the year 2020. Scientists are beginning to warn that two degrees is too hot to handle. Kevin Anderson of the Tyndall Centre for Climate Change Research at the University of Manchester warns that the symptoms scientists once predicted for two degrees are more likely to occur as we approach one degree.6 Notwithstanding these new risks, we will discuss the magnitude of the changes needed to cap warming at two degrees in the next section.
Effects of Climate Change
Along with higher temperatures, the IPCC foresees that heavy precipitation events, tropical cyclones, and "extreme high sea level" events will all grow more frequent. Hurricane frequency and intensity have both grown.7 This is not surprising: more heat energy in the air and water should lead to higher-‐energy weather. The area affected by droughts is also expected to grow.8 The processes that cause increased drought are complex, but can be explained by the increased water vapor capacity of warmer air and the increasing intensity of rain events when they do happen. These long dry spells punctuated by large storms are disastrous for farmers. The World Bank's report on the possibility of four degrees warming claims that, although "there are technically and economically feasible emission pathways that could still limit warming to 2 °C or below in the 21st century," if we continue on our current trajectory, the future is grimmer:
The emission pledges made at the climate conventions in Copenhagen and Cancun, if fully met, place the world on a trajectory for a global mean warming of well over 3 °C. Even if these pledges are fully implemented there is still about a 20 percent chance of exceeding 4 °C in 2100. If these pledges are not met then there is a much higher likelihood-‐-‐-‐more than 40 percent-‐-‐-‐
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of warming exceeding 4 °C by 2100, and a 10 percent possibility of this occurring already by the 2070s, assuming emissions follow the medium business-‐as-‐usual reference pathway.
It also lists the probable consequences:
The inundation of coastal cities; increasing risks for food production potentially leading to higher malnutrition rates; many dry regions becoming dryer, wet regions wetter; unprecedented heat waves in many regions, especially in the tropics; substantially exacerbated water scarcity in many regions; increased frequency of high-‐intensity tropical cyclones; and irreversible loss of biodiversity, including coral reef systems. And, most importantly, … a world so different from the current one that it comes with high uncertainty and new risks that threaten our ability to anticipate and plan for future adaptation needs."9
The slowdown in warming over the past fifteen years is not a sign that warming has stopped. Many critics of the scientific consensus on climate change cite the fact that despite accelerating carbon dioxide emissions, rates of temperature increase have slowed. However, during the past half-‐century there have been substantial temperature fluctuations on decadal scales, which do not falsify the trend over the past fifty years. Our own analysis of NASA annual global average surface temperature data shows that the rate of temperature rise and fall has fluctuated, and that despite even a period of cooling during the 1970s, the sixty-‐year trend has been upward. Slow periods have followed fast, and fast slow.10
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The pace of change: The average rate of change of global temperature over the previous fifteen years, in degrees Celsius per year. For each year, global temperature for the previous fifteen years were fit to a line, and the slopes for each fifteen-‐year period are shown. The pace of warming is indeed slower between 1997 and 2012 than between 1992 and 2007, but is not outside the range seen since the 1950s. (Source: "GLOBAL Land-‐Ocean Temperature Index in 0.01 degrees Celsius." NASA. 2013.) Non-‐anthropogenic factors alter climate on the scale of decades as well, but their effects are temporary or very gradual compared to human greenhouse gas emissions. Though their findings are far from conclusive, a recent paper in Nature found that "accounting for recent cooling in the eastern equatorial Pacific reconciles climate simulations and observations."11 Their model "reproduces the annual-‐mean global temperature remarkably well with correlation coefficient r = 0.97 for 1970 – 2012 (which includes the current hiatus and a period of accelerated global warming)." The study's authors claim that this "decadal cooling" is part of the natural La Niña pattern, and that such events in the future should not be confused with a weakening of the causal chain in climate change.
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Feedback Effects and Nonlinearity
Climate feedback mechanisms make the timing of climate action a critical issue. In addition to influencing climate sensitivity, many effects of warming instantiate positive feedback loops, where the results of increased temperatures themselves cause increased warming or greenhouse gas emissions. At one point, the reverse of these processes brought the polar ice caps well into the tropics. Climate researchers still struggle to understand these feedback processes because modeling nonlinear processes introduces additional computational issues. Some positive feedback mechanisms, such as the melting of the Arctic ice cap, are widely accepted, while others, such as the possibility of catastrophic methane release due to permafrost melting, are frightening but poorly understood.
September mean ice levels in the Arctic Sea have declined significantly since the 1970s. This decline is not only a symptom but a cause of warming. (Source: Arctic Sea Ice Graphs website.) For example, figure 4 shows trends in sea ice. Higher temperatures have lowered
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sea ice levels in the Arctic Sea in recent years. But ice reflects much more radiation and heat than seawater; it acts like a mirror. Because open water absorbs more heat, the increase in open water causes the oceans to retain more solar energy, which in turn aggravates warming. This may help explain why Arctic temperature anomalies have risen from 1.0 to 1.6 degrees C over the last decade or so, much larger than the global average temperature anomaly (see Figures 2 and 5).
Arctic average surface temperature anomaly between 70 and 90 degrees N. (Source: "Temperature in Polar Regions: Arctic and Antarctic." Climate4you, 2013.) Because of these accelerative effects, we may soon be substantially unable to mitigate warming. If the carbon dioxide level and the temperature keep increasing in the presence of positive feedback mechanisms whose strength is bounded below, there must be a point at which temperatures and carbon dioxide levels must keep increasing in the total absence of human-‐caused emissions. Imagine pushing a boulder up a hill: once you pass the peak, the rock rolls down on its own. To avoid this outcome we must effectively cease fossil fuel-‐related carbon dioxide emissions before this tipping point.
What will mitigation require?
It is generally agreed that total emissions over the period 2000-‐-‐2100 (integrated over time) is a good metric for climate change mitigation. Deliberate CO2 removal (not including that caused, say, by currently living plants) is considered negative emissions. This implies that for a given desired level of total emission, we face a choice between emissions now and emissions later.
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There are multiple costs associated with delaying action to reduce emissions. First, given an emissions budget, more fuel consumption now means not only less consumption later, but a more abrupt transition between fuel consumption levels. This is likely to lead to short-‐term hardship as well as greater wasted investment in assets that must be abandoned during their useful life.12 More importantly, delay increases the risk that we cross the threshold into a self-‐perpetuating warming that brings the temperature above any upper bound for safety. Scientists generally assign probability distributions for the total permitted emissions before we reach two degrees warming. This total permitted level is a function of climate sensitivity, which is defined as the change in global mean temperature due to a doubling of carbon dioxide concentration. AR4 reports that "climate sensitivity is likely [greater than 66 percent chance] to be in the range of 2 to 4.5 degrees C with a best estimate of about 3 degrees C," while it is "very unlikely [less than 10 percent chance] to be less than 1.5 degrees."13 The chance of climate sensitivity exceeding 4.5 degrees is thus between 0 and 29 percent. Given climate sensitivity, we can compute likely temperature change at a given concentration of CO2. Assuming a simple logarithmic model with climate sensitivity of 3 degrees C, warming of 2 degrees above pre-‐industrial levels requires CO2 levels to rise to approximately 452 ppm, replicating the UN consensus figure. Warming of 4 degrees requires CO2 levels of 718 ppm CO2.14 The IPCC predicts that a future with continued rapid economic growth and fossil fuel use that is heavy or "balanced" with renewable energy, or even a future with slower economic growth but insufficient global coordination, will likely lead to CO2 concentrations above 720 ppm by the year 2100; if rapid economic growth is combined with heavy fossil fuel use, we will reach this level by about 2070, within the lifetimes of people living today.15
Climate sensitivity outcomes from running a model simulation 500 times. The distribution of outcomes is similar to that reported in the IPCC report, with 20 percent of outcomes predicting sensitivity of greater than 4.5 degrees. Note that 10 percent of outcomes predict sensitivity greater than 6 degrees.
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Achieving 2 degrees warming will require prompt, large-‐scale action. The article "Beyond `dangerous' climate change: emission scenarios for a new world" by Kevin Anderson and Alice Bows considers emission caps of 1578 and 1321 GtCO2.16 The first "provides an approximate 50 per cent chance of not exceeding 2 degrees C" (page 26). AR4 states that 450 ppm requires limiting 2000–2100 CO2 emissions to a value which is likely between 1370 and 2200 Gt. As total remaining proven fuel reserves were equivalent to 2,795 GtCO2, this cap will require not exploiting substantial reserves.17 The paper lays out three paths for staying within each cap. They all require global emissions to peak before 2020. Since global equity requires countries with histories of high emissions to reduce emissions sooner and more quickly than countries with lower historical emissions, all the authors' mitigation pathways prescribe a decline in emissions every year after 2015 for industrialized nations. This will be challenging, but lowering our sights to a "reasonable" cap of 4 degrees warming will, as we have detailed, lead to consequences that most policymakers consider unacceptable. As the consequences of warming become more severe, we believe that emissions reduction will occupy a more important role in policy across levels of government. One thousand sixty mayors across the United States have pledged to reduce carbon dioxide emissions in their cities to below 1990 levels, in line with the Kyoto Protocol.18 Due largely to civil society efforts and increasingly sympathetic governments, two thirds of 249 new coal plant proposals were thrown out between 2001 and 2012, while existing plants such as the Fisk and Crawford stations in Chicago have been shuttered.19 In 2013, the EPA for the first time passed rules on power plants that explicitly target carbon dioxide emissions, and effectively halts any new coal generation.20 Coal generation has declined from 1,973,737 MWh in 2003 to 1,517,203 MWh in 2012.21 In contrast, thanks in part to a policy of public investment in renewable energy, renewable generation has gone up from 79,487 MWh in 2003 to 218,787 MWh in 2012, with wind generation jumping from 11,187 to 140,089 MWh over the same period.22 The wisdom of policy to reduce carbon dioxide emissions is now taken for granted; the question is now whether changes will take place sufficiently quickly to avert catastrophic levels of damage.
Conclusion
Since the 1950s, climatologists have learned a great deal about the ways Earth's atmosphere, hydrosphere, cryosphere, geosphere, and biosphere interact to create the global climate. During this time, the theory of anthropogenic climate change, which holds that human emissions of carbon dioxide and other greenhouse gases are responsible for ecosystem-‐wide climatic change and worldwide climatic warming, has become the consensus among climate researchers. The Intergovernmental Panel on Climate Change, an collaboration among governments to collect, evaluate, and present policy-‐relevant research on climate
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change to policymakers and the public, has blamed increasingly severe weather events on warming. It has announced in its IPCC Fourth Assessment Report and other publications that rapid, decisive action to reduce greenhouse gas emissions is necessary to avoid water scarcity, declines in agriculture, large-‐scale population displacement, and the social upheaval that would follow. The international community has officially agreed to 2 degrees above the 1880 global mean temperature and 450 ppm of carbon dioxide as upper limits. In order to achieve this, we must refrain from fully exploiting current proven fossil fuel reserves; yet efforts to expand reserves are continuing. Large-‐scale emissions reduction will require reversing this trend of business as usual; this will require government and intergovernmental action and cooperation. As the short-‐term effects of climate change become more apparent, we believe that governments will take action to reduce carbon emissions; it is to be determined whether they will act quickly enough to avert environmental and economic breakdown. We do not fully know what will happen if government and civil society fail to coordinate large-‐scale action to reach desired emissions outcomes. Already we are approaching an atmospheric composition radically different from that which has supported human settlement for the entirety of its history, and whose last precedent coexisted with a climate that could not have supported our current civilization. The speed of these changes is unprecedented in Earth's history, and the opportunity to address the problem is quickly passing. We fear that these changes deeply threaten our way of life and the well-‐being of all life on earth. Local and Regional Climate Change It is easy to understand the detrimental effects of climate change on the Global South. While it’s true that the lives and homes of those residents are greatly threatened by climate change and sea level rise, residents of Chicago, too, are facing the consequences of increased greenhouse gas emissions. Just this winter, Chicago has experienced the so-‐called “polar vortex,” relevant as an extreme weather event but newsworthy only because winters in Chicago have become much milder in the last fifty or so years. This section seeks to elucidate the ecological effects that global climate change is having on the University of Chicago campus community, the city of Chicago, and the Midwest region of the United States. The effects of climate change have both large-‐scale effects in the Midwest region, as well as particular threats to the city of Chicago. In Illinois, the recently approved State Natural Hazard Mitigation Plan (SHMP) of 2013 fails to mention climate change as one of the threats that factor into natural hazards. However, the effects of climate change, if not effectively dealt with by decreasing the use of fossil fuels, will become the main cause of increased natural hazards in the region.
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The city of Chicago will feel many of the effects of climate change much sooner than many people think. With temperature increases, more extreme weather events like flooding, heat waves, and extreme droughts will occur. Because of the high population density in the city, these events will have serious negative health effects on many residents, particularly those who live in apartments without air conditioning (which includes many UChicago students, including several dormitories). To put these higher mean temperatures, specifically an increase of 0.6-‐0.8 degrees Celsius by 2039 and 2-‐4 degrees Celsius by 2099, in context: some scientists have predicted that just a 4-‐degree (C) rise in a global mean temperature would destroy ecosystems and disrupt human life enough that species survival becomes questionable.23 Warmer summers will mean a higher demand for energy to power cooling systems not only in Chicago homes, but businesses as well. This will lead to a higher amount of carbon dioxide released and even greater negative effects on the climate, creating an ecological positive feedback loop. In the larger region of the Midwest, an immediate threat that has already shown signs of worsening is the amount of flooding the Midwest has currently encountered and will continue encounter. As the climate warms each year, precipitation levels increase dramatically. The U.S. Federal Emergency Management Agency (FEMA) estimates that Illinois counties can expect between a 40% and 90% increase in size of areas susceptible to flooding by 2100.24 The annual number of precipitation events greater than 3 inches has increased by 83% over the last 50 years, and the amount of total precipitation during these events has increased by 100 percent. What this means for the state of Illinois and the Midwest region is the destruction of countless homes, roads, hospitals, and yes, schools as flood-‐prone zones widen. Illinois has experienced $5.5 billion in flood losses since 1993, and the cost continues to grow. The city of Chicago has also already seen more rainstorms. A storm classified as a once-‐in-‐ten-‐years storm has occurred twice in Chicago in the past four years, and a storm categorized as a once-‐in-‐a-‐hundred-‐years has occurred thrice since 1980.25 Extreme flooding will disrupt transportation for students and faculty, and has the potential to contaminate drinking water obtained from Lake Michigan. However, the worst damage the increased flooding will have is on the Chicago River. Massive levels of precipitation can cause the river to revert itself and flow into Lake Michigan instead of away from it, thus carrying with it millions of gallons of untreated sewage.26 In the Midwest region, along with this extreme flooding, there will be increased drought and extreme heat, affecting not only the fragile ecosystems of the area but also posing a serious public health threat to the inhabitants who live there. In 2012, not too long ago, the Midwest experienced a historic drought which severely affected the agricultural industry, with crop losses totaling nearly 3 billion dollars. The average precipitation in the summer will decrease by 10%, coinciding with
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summer temperature increases of 5-‐6 degrees Fahrenheit.27 110 heat records were broken in 2012, posing a huge risk to residents of Illinois including the University’s very own student and faculty members. On a local scale, this translates into greater year-‐to-‐year variability in Chicago’s weather. In March of 2011, temperatures were reaching 80 degrees Fahrenheit, while in March 2012 the campus temperatures were hovering about 32 degrees Fahrenheit. Extreme heat decreases the quality of air to breathe, so hotter Chicago days would increase both the ambient ozone in the atmosphere of the city and the number of days Chicago’s ozone measurements are above safe levels. When they are above safe levels, going outside becomes hazardous due to respiratory illnesses, and the financial sector as well as the health sector suffers. Thus, the bottom line is that if nothing is done, the odds for larger storms and disasters, flooding, extreme heat, and droughts will continue to increase every year the climate warms both in the Midwest and the city of Chicago. The SHMP of 2013 is not an adequate enough of a source to counter a move like divestment, because it does not adequately express the role climate change will play in the increasing number and size of the natural hazards of the Midwest. According to Matthew Babcock’s “Rating the States” report for Columbia Law School’s Center for Climate Change Law, which surveyed the preparedness plans of each state to climate related dangers, the state of Illinois is ranked as Category 2, meaning a minimal mention of climate-‐related issues. Brief qualitative mentions are made, but without expansion, and prove that the SHMP of Illinois as a Category 2 state is lacking behind a lot of other states in regards to responding to climate change.28 In reality, Illinois’s SHMP only relies on historical data, proving the state is not ready for the effects of climate change unless a strong move against it is taken. The University of Chicago, by agreeing to divest from fossil fuels, could set the example for the Midwest to move away from practices that aide in multiplying the severity of natural disasters that threaten public health as well as the ecological health of its residents.
Glossary
Anthropogenic climate change Climate change with human causes, most importantly greenhouse gas emissions from fossil fuels but also including changes from land use, agriculture, and smog pollution. Climate sensitivity The change in global mean surface temperature due to a doubling of atmospheric carbon dioxide concentration. Feedback loop A pattern in a system in which the effects of a stimulus tend to either increase or decrease the stimulus. An example of positive feedback is audio feedback, when a small noise is amplified, that amplified noise is itself amplified, and so on. Feedback effects are an important determinant of climate sensitivity, and also raise the specter of self-‐perpetuating climate change. Greenhouse gases Gases such as water vapor, carbon dioxide, methane, etc. which absorb solar radiation and store it as heat. This phenomenon is called the
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greenhouse effect. IPCC The Intergovernmental Panel on Climate Change is an organization devoted to collecting, assessing, and presenting policy-‐relevant research on climate change to policymakers and the general public. For its "efforts to build up and disseminate greater knowledge about man-‐made climate change, and to lay the foundations for the measures that are needed to counteract such change," it shared the 2007 Nobel Peace Prize with Al Gore. ppm Parts per million. In this section, "ppm" always refers to parts per million by volume, which in gases always coincides with parts per million by molecule count. _________________________________________________________________________________________________ 1 Edwards, Paul. “The Vast Machine.” Cambridge, Massachusetts: MIT Press, 2010. 2 "NASA Finds 2012 Sustained Long-‐Term Climate Warming Trend". NASA, 2013. Accessed 16 September 2013. 3 Brigham-‐Grette, Julie et al. "Pliocene Warmth, Polar Amplification, and Stepped Pleistocene Cooling Recorded in NE Arctic Russia." Science. 21 June 2013. 4 "Carbon Dioxide: Projected emissions and concentrations." Intergovernmental Panel on Climate Change, 2013. Accessed 16 September 2013. 5 Harvey, Fiona and Vidal, John. "Global climate change treaty in sight after Durban breakthrough." The Guardian, 11 December 2011. Accessed 16 September 2013. 6 Anderson, Kevin. "Climate Change: going beyond dangerous." July 2011. Web, slide at 08:19. 7 "What is the link between hurricanes and global warming?" Skeptical Science, 2010. Accessed 16 September 2013. 8 See 7 “What…” 9 World Bank. "Turn Down the Heat: Why a 4 deg C Warmer World Must be Avoided." November 2011. 10 "GLOBAL Land-‐Ocean Temperature Index in 0.01 degrees Celsius." NASA, 2013. Accessed 16 September 2013 11 Kosaka, Yu and Xie, Shang-‐Ping. "Recent global-‐warming hiatus tied to equatorial Pacific surface cooling." Nature 28 August 2013. 12 "Delaying climate policy would triple short-‐term mitigation costs." Potsdam Institute for Climate Impact Research, 2013. Accessed 16 September 2013. 13 AR4, p. 38. 14 If climate sensitivity is n degrees, then warming as a function of carbon dioxide concentration, x, is given by (log base nth root of 2) * x. Therefore, three degrees climate sensitivity requires a 1.59-‐fold increase in concentration for two degrees warming and a 2.52-‐fold increase for four degrees warming. From the pre-‐industrial 285 ppm, this is 452 and 718 ppm respectively. 15 Intergovernmental Panel on Climate Change. IPCC Third Assessment Report, Working Group I: The Scientific Basis, Summary for Policymakers, Figure 5. 2001. 16 Anderson, Kevin and Bows, Alice. "Beyond 'dangerous' climate change: emission scenarios for a new world." Philosophical Transactions of the Royal Society A 29 November 2010. 17 "Carbon Bubble." Carbon Tracker Initiative, 2011. Accessed 16 September 2013. 18 "U.S. Conference of Mayors Climate Protection Agreement." Mayors Climate Protection Center, 2009. Accessed 16 September 2013. 19 Battistoni, Alyssa; Aleaziz, Hamed; and Oatman, Maddie. "Map: The Cross-‐Country Fight Against Coal. 20 “Carbon Pollution Standards for the Power Sector." Environmental Protection Agency, 2013. Accessed 16 September 2013. 21 "Net Generation by Energy Source: Total (All Sectors), 2003–June 2013." U.S. Energy Information Administration, 2013. Accessed 16 September 2013. 22 See 21 “Net…” 23 “Introduction: Assessing the effects of climate change on Chicago and the Great Lakes”, Donald J. Wuebbles, Katharine Hayhoe, Julia Parzen. Journal of Great Lakes Research. 2010.
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24 “Illinois Must Look Ahead to Anticipate Natural Disasters, Not Backwards”, Rob Moore. Natural Resources Defense Council (NRDC), 2013. 25 Wuebbles, et al. 2010. 26 Moore. 2013. 27 Moore. 2013. 28 “State Hazard Mitigation Plans and Climate Change -‐ Rating the States”, Matthew Babckick. Columbia Law School, Center for Climate Change Law, 2013.
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Section II:
The MORAL Case for Divestment
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Divestment Is a Moral Issue Despite public misconception that the scientific community is uncertain about the existence or primary cause of climate change, the phenomenon and its anthropogenic nature are seen as a certainty among scientists: Cook et al. (2013) found that around 97% of scientists agree climate change is caused by human activity. The IPCC has outlined a report that includes all of the economic and ecological damage that climate change will cause if we are to proceed in “business as usual” fashion—that is, making no substantial attempt to lower anthropogenic CO2 emissions. The report predicts unprecedented death tolls in the billions and mass species extinction. All in all, climate change is widely regarded as the greatest long-‐term threat to the survival of our species. However, people, institutions, companies, and governments worldwide continue to not prioritize climate action for a number of reasons: poor understanding of climate change held by some of the general public, potential economic hardship of transition, and unsustainable socially embedded consumer habits. The most formidable roadblock to change, however, is the ‘time discounting effect’, a psychological phenomenon where the perceived urgency of addressing a potential problem decreases as the distance between the present and the realization of the issue’s consequences increases. In other words, the fact that the catastrophic consequences of climate change are relatively far off is causing the subconscious reprioritization of climate action. This cognitive bias is morally hazardous and highly detrimental considering the short-‐term urgency of reducing carbon pollution. The best way to combat climate change, therefore, is to understand it not just an economic or political issue but also a moral one. With political and economic issues, analysis tends to center around optimization of several possible outcomes, in order to achieve the best possible outcome. Alfred Marshall, the neoclassical economist, noted the lack of worry in Western Europe apropos to ecological limits allowed for a unique period of enhanced production and resource extraction, and such an attitude (and cause for said attitude) must be present for total freedom of action to exist. As previously stated, it is clear that we are not currently living in such a period. Understanding that effectively dealing with climate change is a moral issue requires the ability to see that not all possible outcomes of the issue are desirable, or even acceptable. This is not simply a case of optimization of results, or of getting the best results for the least input. This is a situation in which the incorrect balance of priorities can and will result in environmental damage accompanied by worldwide political and economic damage. While it is understandable that economic choices are first deliberated in an ethical vacuum, away from normative ethical judgments, it must be understood that there are inherent judgments in any sort of framework. In analysis, there is an expectation of freedom of choice, which will allow an analysis to avoid being normative and subjective and continue in a positivist manner. However, this assumption belies a sort of normative nature that prioritizes freedom of choice above other guiding
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tenets, such as socially healthy, pro-‐equality, pro-‐moral, or pro-‐environmental values. It is also important to understand that the climate change is not an amoral situation; this is a dynamic world in which economic and social interests must be balanced on a local and global scale. The University of Chicago holds its own amount of economic and social power, and this does not exist in a vacuum. While education and research are the Universities two main goals, there are ramifications of its actions outside the academic world, and one of those actions is investing. Instead, the University functions in a system in which its actions and investments ultimately affect community health, national health, and global health, and yet this power does not come in a democracy but in a free-‐for-‐all financial playing field. Divestment and investment are opposites, that is understood; however, what needs to be clarified is that they are not opposites in that one represents action and the other, non-‐action: both are actions that impact third parties. Fossil fuel investments affect companies financially and the earth environmentally, which will affect every single human being an adverse time. There adverse effects will worsen every year, too. This is why divestment is the morally correct choice—it’s the correct decision when thinking of all seven billion fellow human beings on the planet, particularly those in developing nations who rely so heavily on agriculture, where increased disasters can wipe out livelihoods and even cause displacement. Additionally, climate change will continue to adversely impact those in developed nations, too, in disasters striking coastal regions and other extreme weather all over, causing forest fires, droughts, flooding, and more. At the end of the day, while investing in fossil fuel companies allows society to function in its current fashion, the same investing hurts every single human being through climate change and will only continue to harm the human race’s well-‐being.
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Section III:
The INSTITUTIONAL Case for Divestment
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Divestment and the Mission of the University of Chicago Fossil fuel divestment is not only consistent with the University’s mission as a research and educational institution, but is in fact necessitated by that mission. The purpose of the University is, as put forward by the University of Chicago’s Articles of Incorporation, to establish and maintain opportunities for higher education and “to do all and every of the things necessary or pertaining to [this] accomplishment.”1 One of the ordering principles necessary for the pursuit of higher education is, presumably, an environment that supports and facilitates human activity. Yet, investment in fossil fuel companies financially contributes to global climate change and thus to increasingly frequent and severe weather patterns and natural disasters.2 Recent extreme weather events in Chicago and across the United States, while not necessarily caused by climate change, provide examples of the ways in which meteorological and climate conditions affect the University’s ability to carry out its mission. The first day of the current academic quarter (Winter 2014) saw University courses cancelled due to “severe weather” and “dangerous cold,”3 with some students and faculty unable to return to campus for up to two weeks.4 Other American universities have been even more severely affected by natural disasters. New York University, for example, was forced to close down for a week and to evacuate its hospital and residence halls as a result of Superstorm Sandy in 2012, with students losing electricity and running water in some cases,5 severely affecting NYU’s ability to operate both during and after the storm. Severe weather will affect the University’s ability to function normally, whether due to the inability of students, faculty and staff to reach campus or to the devastating impact of natural disasters on members of the University community and possibly on the University campus itself. The long-‐term effects of climate change extend well beyond inconveniences in transit or momentary suspension of basic services. The 2012 Climate Vulnerability Report predicts 100 million deaths attributable to climate change worldwide by 2030, with that number increasing exponentially moving forward.6 Future members of the University community will have to grapple with sustained drought, famine, overcrowding in cities, flooding, heightened seismic activity, and drinking water shortages that will significantly impede the institution’s ability to function. Considering the gravity of the threat anthropogenic climate change poses, the University is therefore obligated to “do all and every of the things necessary” to ensure that climate change will not prevent or inhibit the pursuit of higher education at the University of Chicago. One of these necessary actions is divestment from fossil fuel companies, whose activities are directly contributing to climate change. By investing in these companies, the University is effectively sponsoring climate change,7 jeopardizing its future ability to fulfill its mission.
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While most major institutions of higher learning in the United States have acknowledged the existence and threat of anthropogenic climate change, only nine universities have divested as of the release of this report. Statements made by the presidents of Harvard University and Brown University have raised objections to divestment, dismissing it as an ineffective tactic for combatting climate change.8 This report addresses these statements, which are reproduced in italics and underlined below. Since the purpose of the university’s endowment is to maintain education and research, only considerations of the endowment’s financial strength and ability to advance academic goals should be considered in divestment. Since climate change will severely impact the university’s ability to advance academic goals, considering the environmental consequences of funding fossil fuel companies should be part of the University’s investment strategy. Climate change is predicted to cause significant increases in the intensity of storms and other severe weather patterns in the future, which has and will continue to demonstrably interfere with the university’s ability to conduct education and research. Furthermore, the volatility of oil prices and the threat of a carbon bubble affect not only University capital directly invested in fossil fuel assets but in all areas if asset-‐damaging climate change is allowed to occur unmitigated. Thinking of the endowment as a political tool to establish a stance on any issue risks the University’s academic freedom. The University’s investment in fossil fuel companies is an action with social and political consequences; is it not a neutral stance or a lack of action. Just as divestment is an act undertaken by an institution, so is investment in a company; even actions as basic as participation in a market economy are inherently political. It is fallacious to say that divestment, but not investment, carries political and social meaning. Divesting from fossil fuel companies is not intended to insert the University into the political arena, or even to be a statement of institutional ideology. It is simply both recognition of the fact that investing in the destruction of a stable planetary climate is counterproductive to the University’s mission of education and research, as well as an attempt to limit said destruction. Climate scientists have reached overwhelming consensus on the issue, and the ethical imperative to avoid ecological catastrophe is a matter of social responsibility.9 This report’s call for divestment, therefore, is different from previous divestment campaigns based on political or social issues. While fostering social equality is a goal the University rightly strives for, financial investment in corporations that take unpopular stances on social issues does not directly affect the University’s ability to conduct its academic mission, even while these corporations may contribute to the inability of some individuals to enter or engage with the University community. The
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operations of fossil fuel companies, in contrast, contribute directly to climate change and engender increasingly severe storms, significant changes in temperature and precipitation, and changing sea levels, all of which are affecting or are likely to affect Chicago in the future.10 To invest in these companies is to finance the destruction of an institution conducive to education, research, and free inquiry. It is inconsistent to rely on fossil fuel companies’ products and services, as individuals and as a community, while boycotting or refusing to have anything to do with these companies through our investments. Investing in a company is a choice unrelated to consumption. Relying on the products we buy from oil, gas, and coal companies does not compel us to donate to these companies, nor does it compel us to invest money in them. The University purchases oil and carbon-‐based electricity because current economic constraints offer scant alternatives. The University is not hypocritical, therefore, if investments in fossil fuel companies are discontinued. Economic dependence on fossil fuels has been perpetuated in large part due to aggressive lobbying and protectionist practices by the industry. Fossil fuel companies contribute unprecedented sums of money to organizations and political candidates that deny climate change and spend millions on lobbying efforts to block climate legislation and the cessation oil subsidies.11 In summary, divestment from fossil-‐fuel companies is consistent with the University’s mission as a research and educational institution and is in fact necessitated by that mission. The predicted consequences of climate change are extremely likely to interfere with the University’s ability to conduct research and education, and the Articles of Incorporation therefore oblige the University “to do all and every of the things necessary” to ensure that extreme weather caused by climate change does not interfere with education and research at the University. One of these necessary actions is fossil fuel divestment. Divestment will not compromise the integrity of the University’s academic independence, nor will it constitute an appropriation of the endowment for political or social purposes. Divestment from fossil fuel companies is an essential means by which the University can pursue its mission as an educational and research institution in the coming years. University of Chicago’s Academic Neutrality and the Kalven Report Drafted by a committee of faculty and administrators in 1967, the Kalven Report acts as the University of Chicago’s guide on matters of academic freedom and institutional actions related to social or political causes. The paradigms presented in the Kalven Report were written in the historical context of decades-‐long attacks on free academic inquiry by parties external to the University itself, namely the political persecution of faculty and students by representatives of the United States Government. This report makes several different arguments that are summarized as
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follows: (1) that divestment is not a violation of the Kalven report because the University will be materially affected as a direct party to the operations of fossil fuel extraction companies, (2) the historical context and intention of the Kalven report targeted actors outside of the University itself, not internally deliberated decisions such as divestment (3) that the University would be acting in its apolitical corporate capacity if it were to divest, (4) the University’s primary goals of not taking or supporting actions that cause serious harm or suffering to its student and alumni community trumps consideration of the Kalven report. The University is a direct party to the effects of climate change perpetuated by fossil fuel extraction. Divestment does not violate Kalven principles because it targets companies that threaten realization of the University’s institutional self-‐interest. The passage of the Kalven report relevant to this argument of institutional self-‐preservation reads as follows:
“From time to time instances will arise in which the society, or segments of it, threaten the very mission of the university and its values of free inquiry. In such a crisis, it becomes the obligation of the university as an institution to oppose such measures and actively to defend its interests and its values.”12
This clause holds that confrontational action taken against external threats is justifiable in some cases. University of Chicago Law professor and former Provost of the University Geoffrey R. Stone further interprets this clause as governing “exceptional circumstances in which it is appropriate for the University to take positions on public issues. It may do so in order to protect the fundamental interests of the University itself.” 13 These exceptional instances of collective action for the sake of institutional interests can be understood to cover environmental externalities produced by fossil fuel companies when considered in the Kalven Report’s historical context. Though the relationship between student campaigns and the Kalven Report is complicated and has been historically contentious, as in the case of the student movements to divest from South Africa and Darfur, readers are encouraged to consider the Kalven Report’s own statement on the need for open-‐mindedness in administrative affairs: “A university faithful to its mission will provide enduring challenges to social values, policies, practices, and institutions. By design and by effect, it is the institution that creates discontent with the existing social arrangements and proposes new ones. In brief, a good university, like Socrates, will be upsetting.” 14 The drafting of the institutional preservation clause was motivated by various attempts to place external limits on the University’s operations. The Kalven Report names three contextual events that guided the principles contained therein. First, hearings held by the federal Seditious Activities Investigating Committee in 1940 attempted to “assess the loyalty [to Communism ideologies] of faculties of the University of Chicago.” 15 Personal and political attacks against faculty members of
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the University at these hearings led Robert Maynard Hutchins to offer a principled defense of academic freedom, stating “the policy of repression of ideas cannot work and never has worked."16 Second, the United States Senate’s ‘Jenner Committee’ (formally known as the Internal Security Subcommittee) attempted to investigate “subversive” faculty members in the departments of national universities including the University of Chicago. The final external threat to academic freedom the Committee considered was the ‘affidavit clause’ of the 1958 NDEA Act which required all applicants for federal student loans to answer a disclaimer regarding their political beliefs towards the government.17 Each of these three guiding historical precedents involved repressive action taken by the United States government through attempts to place direct limitations on the University’s ability to conduct academic research and educate freely. The above-‐mentioned historical precedents, when considered as the context for the adoption of the Kalven Report, suggest that the document was never intended to prevent the University from divesting for two primary reasons. First, divestment is an act that would be taken by the University voluntarily without coercion, unlike external challenges to its interests and values in the 20th century. Former University president George Beadle’s critique of the NDEA Act was entered on what he called an “injunction to close the mind,” a critique that was based on the premise of an actor outside the University limiting;18 this is distinct from the act of divestment, which would be conducted by the University it8elf. Second, divestment would not place a constraint on the allowed positions of faculty members of students, unlike the Kalven Report-‐inspiring historical precedents that involved the censure of students and faculty members for their internally held beliefs. Divestment itself, after being approved by the Board of Trustees, would negatively screen for external financial assets that are not subject to the internally sanctioned academic freedoms of the University of Chicago. Divestment places no direct or indirect constraints on the University’s research. The academic freedom of faculty and students to conduct research or take positions on climate change, pollution, environmental regulation, or energy production would face no tangible constraint as a result of institutional divestment. Furthermore, if the University’s decision to divest were grounded in financial justifications, then divestment would not be a political action by extension of the University acting in its corporate capacity. Indeed, the University’s actions can be demarcated between when it acts in its corporate and educational capacities. A helpful demarcation of these capacities was offered by Chair of the Political Science Department Cathy Cohen is as follows: “The University has multiple missions and roles. There are ways that the University acts as corporate actor. The Kalven report doesn’t give us much guidance or helpful guidance about how to act as a corporate entity.”19 Cohen is correct in drawing the ambiguities of the Kalven Report’s applicability to the University’s corporate capacities. The Kalven Report itself expresses ambivalence of its applicability to these situations -‐ as expressed by the dissenting addendum of University of Chicago economist and Nobel Prize winner George Stigler:
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I agree with the report as drafted, except for the statements in the fifth paragraph from the end as to the role of the university when it is acting in its corporate capacity. As to this matter, I would prefer the statement on the following form:
The university when it acts in its corporate capacity as employer and property owner should, of course, conduct its affairs with honor. The university should not use these corporate activities to foster any moral or political values because such use of its facilities will impair its integrity as the home of intellectual freedom. 20
The ambiguity present in the original framing of the Kalven report, as expressed by Stigler, creates room for demarcating fossil fuel divestment from past campaigns targeting companies doing business with the Apartheid regime in South Africa and the Sudan in the 2000s. The fossil fuel divestment movement can be demarcated from these past efforts because institutional action can be motivated by financial sensibility, allowing the University to divest in its apolitical capacity. Indeed, the framing and arguments for past divestment campaigns did not argue for divestment on financial or institutionally interested grounds. Rather, as with the South African divestment campaign in particular, the framing of divestment as an action of ‘morality’ prevented the campaign from activating the University’s capacity as a corporate actor.21 The direct and indirect institutional linkages of the University to the effects of climate change demarcates fossil fuel divestment allows the University to divest in its corporate capacity. There are two arguments from this report which differentiate the fossil fuel divestment campaign from divestment movements past: (1) the argument that the University’s investments are based on unrealized financial risk -‐ made in the FINANCIAL case for divestment (2) that the activities of fossil fuel companies impinge upon its purpose, operational needs, and larger institutional interests -‐ made in the SCIENTIFIC section and the previous sub-‐section. A speech made by President Zimmer at Columbia University in 2009 helps to explain the exception to the Kalven report that these arguments draw upon:
Second, it follows that the University, as an institution, should take no political positions and should remain neutral on such matters (except of necessity those in which it is a direct party), in order to ensure that we have a maximally open environment. Violations of neutrality are a mark against the maintenance of a non-‐chilling environment.22
Zimmer’s invocation of instances in which the University is a ‘direct party’ invokes arguments for divestment based upon the University acting in accordance with its institutional and corporate interests. In the week after the passage of a referendum
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in favor of a ‘shift’ in the University’s investment strategy towards divestment made this appeal to the University’s institutional interests.23 The direct threat posed to students and alumni by the effects of climate change trump any potential violation of the Kalven report in considering divestment. More explicitly, as an institution that guards the interests of its students, the University ought not support activities that would cut its students futures short. The University’s role as a ‘global citizen’, particularly in the recruitment of international students, contradicts support for activities which might flood or, the case of the Maldives, submerge whole nations -‐ activities which the university is financially tied to through its investments in fossil fuel companies at present. 24 Could the University continue to recruit international students considering when that the activities it invests in are expected to displace millions of people in the developing world?25 Within the United States, the state of Massachusetts alone is projected to experience a major sea level rise, as displayed in the figure below.26
The relative suffering, likely deaths, and displacement that will be experienced by members of the University of Chicago student and alumni community form an institutional prerogative for divestment from industrial activities -‐ namely the extraction of fossil fuel reserves -‐ that science shows to cause them harm. A recent University student forum on the University's finances and investments stated a goal of our investment portfolio through its title to be “Investing in your Future”.27 This report argues that investments in fossil fuel companies that guarantee planetary
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chaos and shortened lives and opportunities for students and alumni alike cannot fulfill this goal. Indeed, the Spring 2013 vote by the graduate and undergraduate student body in favor of divestment (70% voting ‘yes’ to divest) ought to show the Board of Trustees that it should consider divestment as a conscientious move in the interest of its students, since climate change is becoming a very real concern among us—after all, our generation will inherit the bulk of the wreckage caused by the unsustainable culture of subsidized fossil fuel extraction. The Effectiveness of Divestment as an Institutional Action American institutions of higher education are engines of economic activity and wield unmatched intellectual influence, giving legitimacy to reasoned ideas. In addition to the $406 billion total value of United States college and university endowments, higher education institutions hold unique types of sway over public and private industries.18 There is little debate in scientific academia over the reality of anthropogenic climate change and the ability of humans to mitigate its effects. Universities have several options in contributing to this mitigation effort. Clearly, more detailed climate research is necessary, and the University of Chicago will likely continue to remain engaged in this capacity. Additionally, the University currently offers many courses, seminars, and other learning opportunities focused on educating students and members of the community about anthropogenic climate change as well as possible methods of mitigation and adaption. These actions, essential though they are in supporting scientific and technological progress, do little to affect political and social change as directly or effectively the way divestment does. Of the $406 billion, only $9.6 million of U.S. college and university endowments is in the fossil fuel industry.28 UChicago’s endowment ranks 12th nationally at $6.57 billion,29 making the isolated financial impact on fossil fuel corporate asset value admittedly small. The collective disinvestment resulting from other universities following suit, however, could prove financially influential. In any case, the primary objective of divestment is the social stigmatization of fossil fuel corporations, which historically has led to changes in corporate practices such as less corrupt administration practices, environmental protection initiatives, and investor transparency. Corporations are the vehicle for and cause of excessive reliance of the global economy on fossil fuels and therefore the perpetrators of destructive practices that result in global warming. The stigmatization effect of divestment is more effective in the short run than the intellectual actions of a university insofar as it catalyzes popular movements that affect policy change. While Brown University President Christina Paxson has argued that divestment would not have a significant impact on fossil fuel companies and that immediately
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ceasing coal production would harm communities around the globe,30 these objections misrepresent the point of divestment. We do not argue that divesting from fossil fuel companies will cause them to immediately cease operations, nor do we believe this will happen. Harvard undergraduate Eric Hendey wrote in a recent article in the Harvard Political Review that even if the financial impact of divestment on specific companies is negligible, divestment can have a significant impact by shaping public discourse, as was the case in the divestment movement around Apartheid.31 Divestment is a signal to companies with enormous amounts of money and influence that our institution does not support, and is unwilling to contribute to, the destruction of the environment and of our future and that we do support a transition to renewable sources of energy that will not jeopardize humanity’s future. The presidents of Harvard and Brown have presented two main methods of combatting climate change they contend are more consistent with the role of a university. Explanations of these methods and the problems with their approaches are outlined below. 1. Shareholder advocacy Attempts over the past decade to change the behavior of the fossil fuel industry through shareholder advocacy have been unsuccessful, and such attempts will continue to fail because transitioning away from lucrative fossil fuel production is at odds with shareholder interests.32 Brown University President Paxson has also argued that the statement conveyed by divestment would not engage with the complexity of the problem posed by climate change—how, for example, we ought to transition away from fossil fuels and at what pace—but would rather convey an unspecified rejection of fossil fuels in general.33 This statement is correct in that divesting from these companies would not convey the exact steps the University envisions for a transition to a more sustainable energy economy. But it is not the University’s responsibility to provide such a blueprint, nor does the University have the power to enforce a specific path in this transition. Divestment conveys a clear statement that the University refuses to fund the devastation of its future capacity to conduct research and education by sponsoring climate change. 2. Research and education While the University of Chicago’s contributions to climate science and education are critical, they do not negate the University’s financial investment in the very root of the problem of climate change. The University’s direct financial investments in fossil fuels contribute to the impediment of the renewable energy industry, revealing a counterproductive approach to solving the problem of climate change. _________________________________________________________________________________________________ 1 “Restated Articles of Incorporation of The University of Chicago.” Trustees.uchicago.edu. Web. Feb 2014.
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2 Peterson, Hoerling, Stott, and Herring. “Explaining Extreme Events of 2012 from a Climate Perspective.” Bulletin of the American Meteorological Society. September 2013. Web. Feb 2014. 3 Art, Susan. “Classes cancelled on Monday.” Email message. 5 January 2014. 4 El Ouardani, C. “Life Course and Generation in the Arab World: Rescheduling Wednesday’s Class.” Email message. 5 January 2014. 5 Kingkade. “NYU To Remain Closed Through Saturday Due to Hurricane.” Huffington Post. 31 October 2012. Web. Feb 2014. 6 “Climate Variability Monitor.” Climate Vulnerable Forum. Web. Feb 2014. 7 As argued in the Harvard Guide to Divestment Arguments. 8 “Fossil Fuel Divestment Statement.” Harvard University. Office of the President. 3 October 2013. Web. Feb 2014. “Coal Divestment Update.” Brown University. Office of the President. 27 October 2013. Web. Feb 2014. 9 As argued in the Harvard Guide to Divestment Arguments 10 “Climate Change and Chicago.” Chicago Climate Action Plan. 2009. Web. Feb 2014. 11 As Harvard Guide to Divestment argues. 12 Kalven, Harry, John H. Frankline, Gwin J. Kolb, George Stigler, Jacob Getzels, Julian Goldsmith, and Gilbert F. White. Kalven Report on the University's Role in Political and Social Action. Rep. no. 1. Vol. 1. Chicago: 13 University of Chicago Record, 1967. Print. 13 Stone, Geoffrey. "Darfur and the Kalven Report: A Personal Journey (2.9.07)." Web log post. The University of Chicago Law School Faculty Blog. University of Chicago Law School, 9 Feb. 2007. Web. 25 Feb. 2014. 14 Kalven, 1967 15 Fried, Richard M. "The Rise of the Communist Issue." Nightmare in Red: The McCarthy Era in Perspective. New York: Oxford UP, 1990. 106-‐07. Print. 16 Neely, Caroline. "McCarthyism and Academic Freedom on the University of Chicago Campus." The University of Chicago Humanities Division Wiki. Division of the Humanities at the University of Chicago, 20 Mar. 2008. Web. 27 Feb. 2014. <https://coral.uchicago.edu:8443/display/chicago68/McCarthyism+and+Academic+Freedom+on+the+University+of+Chicago+Campus>. 16 Ibid. 17 Kalven, 1967. 18 Nely, Caroline, 2008. A copy of the affidavit form found in the Archives reads as follows: "I, (name of student), do solemnly swear (or affirm) that I do not believe in, and am not a member of and do not support any organization that believes in or teaches, the overthrow of the United States Government by force or violence or by any illegal or unconstitutional methods." 19 Zhang. “Kalven report examined, questioned at open forum.” The Chicago Maroon. 2 March 2012. Web. Feb 2014. 20 Kalven, 1967. 21 In Vol. 101 #10, October 13th 1989 the South Africa Divestment campaign published the following update in the Gray City Journal:
The Board of Trustees and President Gray ... fail to realize that the University community is guilty through association, of all the crimes committed against Black South Africa. I urge all students, faculty, and staff to insist that the University commit itself to its proclaimed noble intentions and divest now against the injustice of white rule in Black South Africa. I urge new students to question the morality of the institution they have just entered.
22 Zimmer, Robert. "Address Delivered at Columbia University ." Office of the President.University of Chicago, 21 Oct 2009. Web. 18 May 2013. 23 Wright, Natalie. “Say yes to divest”. The Chicago Maroon. 7 May 2013. Web. Feb 2014. 24 McGranahan, Gordon, Deborah Balk, and Bridget Anderson. "The Rising Tide: Assessing the Risks of Climate Change and Human Settlements in Low Elevation Coastal Zones." Environment and Urbanization 19.17 (2007): 17-‐37. Google Scholar. Web. 27 Feb. 2014. <http://eau.sagepub.com/content/19/1/17.full.pdf>. See: "TABLE 1: Population and land area in the Low Elevation Coastal Zone (LECZ) by region, 2000" (p. 24)
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25 Dasgupta, Laplante, Meisner, Wheeler, and Yan. “The impact of sea level rise on developing countries: a comparative analysis.” Springer. 12 July 2007. Web. Feb 2014. 26 “Sea Level Rise: Understanding and Applying Trends and Future Scenarios for Analysis and Planning.” Report by Massachusetts Office of Coastal Zone Management (CZM). December 2013. Web. Feb 2014. 27 Sheth, Jeevna, and Preston Thomas. "Administrators Field Student Queries on Univ. Finances." The Chicago Maroon. The Chicago Maroon, 25 Oct. 2013. Web. 27 Feb. 2014. <http://chicagomaroon.com/2013/10/25/administrators-‐field-‐student-‐queries-‐on-‐univ-‐finances/>. 28 Ansar, Caldecott, and Tilbury. “Stranded Assets and the Fossil Fuel Divestment Campaign: what does divestment mean for the evaluation of fossil fuel assets?” Stranded Assets Programme. Smith School of Enterprise and the Environment, University of Oxford. Oxford, England. 2013. Web. Page 55. Feb 2014. 29 O’Shaughnessy, Lynn. “20 biggest college endowments.” CBS Moneywatch. 4 February 2013. Web. Feb 2014. 30 “Coal Divestment Update.” Brown University. Office of the President. 27 October 2013. Web. Feb 2014 31.Hendey. “Does Divestment Work?” Institute of Politics. Harvard University. 2014. Web. Feb 2014. 32 As Harvard Guide to Divestment argues. 33 See 30 “Coal…”
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Section IV:
The FINANCIAL Case for Divestment
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The Costs of Divestment and Risks of Non-‐Divestment Risk of Fossil Fuel Divestment The financial risk added to an investment portfolio from fossil fuel divestment is extremely small. The investment management firm Aperio LLC adds a 0.5978% tracking error to a portfolio that divests from a “comprehensive list of companies” in the oil, gas, and consumable fuels industries, corresponding to an absolute portfolio risk increase of 0.0101%.1 This figure and others from similar firms indicate that the financial risk of fossil fuel divestment is negligible. In fact, if climate change risk assessment is implemented into risk calculation, the act of divestiture may actually decrease overall risk taking into account the volatile tendency of fossil fuel pricing as well as the impending threat of a carbon bubble, as outlined below. The Carbon Bubble Perhaps the most dire threat to the well-‐being of the University’s endowment is the potential collapse of the carbon bubble, a term made popular by the 2011 report Unburnable Carbon—Are the World’s Financial Markets Carrying a Carbon Bubble? published by the nonprofit Carbon Tracker Initiative. The report outlined a hypothetical, likely scenario in which many of the world’s fossil fuel assets will not be able to be brought to market, tanking their value and with it the portfolios of investors around the world. The following pages attempt to describe the origins of such a bubble and outline the consequences for the global economy as well as the University of Chicago. Origins and Structure of the Bubble The 2009 United Nations Climate Change Conference in Copenhagen, Denmark resulted in the adoption of the Copenhagen Accord, a non-‐binding international agreement that set the benchmark for limiting the rise of the global average temperature to 2 degrees Celsius from pre-‐industrial levels. This figure has been widely touted by climate scientists over the past 20 years as being the maximum temperature increase that can occur without causing catastrophic damage to human civilization. The UN conference in Cancun the following year affirmed this goal and recognized the possibility of having to amend the target maximum temperature increase to 1.5 degrees Celsius.2 In attempts to determine the type and magnitude of action that will need to be taken in order to achieve such an ambitious goal, questions have been raised as to just how much greenhouse gas (GHGs) can be released into the atmosphere while keeping the climate relatively stable. An acclaimed study by the Potsdam Institute for Climate Impact Research published in 2009 estimated a “carbon budget” for humanity, that is, the amount of carbon dioxide that can be released into the atmosphere while still maintaining an 80% chance of avoiding a global temperature increase of 2° C. According to the study, the carbon budget for the global economy
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from the years 2000 to 2050 is approximately 886 gigatons of carbon dioxide (GtCO2), with 321 GtCO2 of that budget already having been consumed within the first decade of the century.3 More recent estimates that assume higher levels of GHG-‐reducing aerosols in the atmosphere and higher reductions of non-‐CO2 GHGs are slightly more generous, allowing humanity 525 GtCO2 for a 50 percent chance of staying under a 1.5-‐degree increase and 1075 GtCO2 and 900 GtCO2 for 50 percent and 80 percent chances of staying under a 2-‐degree increase.4 The total potential CO2 emissions of unburned fossil fuel reserves, including oil, coal, and natural gas is estimated to be approximately 2860 GtCO2, far exceeding any of these carbon budgets. If the aversion of a 2+ degree increase is to be achieved, most of this carbon will have to remain unburned, and the subsequent loss in future utility will cause the value of unusable fossil fuel stocks to effectively fall to near zero.5 A carbon bubble has many possible catalysts. Specifically, the bubble would be caused by a combination of governmental action to prevent the burning of excess fossil fuels combined with increasing competition with alternative energy sources. The following paragraphs attempt to outline some of these trends and their implications. The most mainstream policy mechanism idea for governments to limit the burning of fossil fuels is through a carbon pricing scheme, in which companies and private individuals pay a tax in order to burn carbon. The two most common types of carbon pricing schemes are the carbon tax, a predetermined amount of money per ton of carbon dioxide burned designed to financially disincentivize emissions, and an emission trading system (also known as “cap-‐and-‐trade”), a state-‐constructed market where a fixed number of permits to burn carbon are traded between private parties and gradually reduced as time progresses. Many governments around the world have already began to implement carbon pricing schemes. In 2005, the European Union launched the European Union Emissions Trading Scheme (EU-‐ETS), a power plant-‐focused emission trading system that is projected to reduce emissions in that sector by 2020 with more ambitious reductions on the way.6 Other countries that have either implemented or have plans to implement an emissions trading system in the next few years are Australia, New Zealand, and South Korea. Furthermore, countries that have either enacted or are in the process of enacting a carbon tax include South Africa, China, India, South Korea, Taiwan, Australia, Finland, France, Denmark, Ireland, the Netherlands, Sweden, Finland, Norway, Switzerland, Costa Rica, and several US and Canadian states, provinces, counties, and cities. Although the current political climate makes it difficult to determine whether the United States will implement a carbon-‐pricing scheme within the next five to ten years, action is already being taken to prevent excess consumption of fossil fuels. Currently, the Environmental Protection Agency places caps on the rate of carbon
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pollution from new power plants and, as part of President Obama’s Climate Action plan released in September 2013, new caps on existing power plant emissions are likely to be implemented within the next couple of years.7 Additionally, the planned removal of fossil fuel subsidies from government budgets around the world is picking up traction, with estimates that doing so could, directly by itself, avoid 1.6 GtCO2 through disincentivizing use.8 That figure is only a minute fraction of the potential CO2 reductions the removal of carbon subsidies will potentially bring. Most of the decreases in fossil fuel consumption as a result of subsidy removal are likely to be resultant of a trend of which subsidy removal is merely one component: the gradual increasing competitiveness of renewable energy with fossil fuels. Technological innovation, driven by the vast amount of research being put into renewable energy development through governmental programs such as the American Reinvestment and Recovery Act and the Chinese National Renewable Energy Law has caused the production costs of solar, geothermal, tidal, and wind power to plummet dramatically.9 Differences in regulatory policy and structure, levels of renewable and fossil fuel subsidies, geographical factors, and speculative market conditions make it impossible to determine an exact critical point at which oil, gas, and coal futures will be more highly priced on various major stock exchanges. This has already occurred in some regional markets, most notably in Australia. Financial analysis done by the Bloomberg New Energy Finance firm in February 2013 found that unsubsidized wind energy futures from new Australian plants are estimated to be 80 Australian Dollars (AUD)/MWh, compared to 143 AUD/MWh for new coal and 116 for new natural gas.10 Accordingly, the analysis showed that the four largest Australian banks—Australian National Bank, Commonwealth Bank, Westpac, and the ANZ—are avoiding investment in new coal and gas development as a combination of rising natural gas prices in the Asia-‐Pacific market combined with production cost decreases of 10 percent and 29 percent for wind and solar power, respectively, in the past two years. By 2020, unsubsidized photovoltaic solar production will be more cost-‐effective than solar.11 This trend is occurring despite the fact that Australia has one of the largest coal reserves in the world, and as governmental action combined with renewable energy technological advancement make fossil fuels prohibitively expensive in other markets, coal exports from the country will diminish drastically as well.12 Of course, no bubble forms without widespread investor miscalculation of the long-‐term viability of assets, and the carbon bubble is no exception. The amount of carbon reserves listed on the New York Stock Exchange (NYSE) has increased by 37 percent since 2011, indicating that investors are unprepared for a stranded-‐asset scenario where most listed fossil fuel reserves will be rendered worthless.13 A minority of individuals in the investment community—most notably Henry Paulson, Jeremy Grantham, and Michael Bloomberg—have warned about a possible carbon bubble. The 2013 Global Investor Survey on Climate Change found that 23 percent of fossil fuel asset owners in 2012 took action to divest or avoid investment, a 14
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percent increase from the previous year.14 Divestment action was taken both by investors with explicit sustainability focuses as well as mainstream value-‐neutral funds. Most investors remain enthusiastic to invest in the industry however, as oil and gas stocks currently yield lucrative returns. Wasted Capital, Stranded Assets, and the University of Chicago’s Risk Exposure Despite the reality that only one-‐fifth of current proven fossil fuel reserves can be burned if catastrophic climate change is to be avoided, fossil fuel companies and national governments around the world continue to invest in the research and development of additional reserves. In 2013, the largest 200 fossil fuel companies in the United States spent $674 billion on exploring and developing potential carbon reserves.15 Considering that current carbon reserves already exceed long-‐term carbon budgets, this capital was effectively squandered, calling into question the wisdom of investments in companies with such financially reckless practices. The rupture of a carbon bubble would result in trillions of dollars of carbon assets being stranded, meaning that their value would depreciate very rapidly. According to some estimates, as much as $23 trillion worth of current reserves is under threat of being stranded.16 Public data on the University’s market exposure to fossil fuel is scarce, save for a statement last year by the Office of Investments estimating the proportion of the University’s portfolio invested in fossil fuel assets to be three to four percent.17 We recommend that the University implement climate change risk assessment as a means of determining precise, accurate risk. We believe that the results of risk calculation using climate change risk assessment will give the University strong incentive to divest. What if the Carbon Bubble Doesn’t Exist? Whether or not a carbon bubble exists in the global energy market is a question that has been the focus of vigorous debate over the past five years. The primary arguments in favor the negative are varied, but generally fall into two categories: 1) that investors will anticipate carbon regulation well ahead and transition away from investment slowly, gradually deflating the bubble, or 2) that said carbon regulation won’t occur and all known fossil fuel assets will be sold and burned, thereby yielding returns. These arguments have merit, and the fact that the carbon bubble hypothesis is a fairly recent development means that there will be debate for years to come. However, as many experts have pointed out, in the two alternative scenarios posed by carbon bubble skeptics it is still favorable for the long-‐term bottom line of investors to sell their assets in fossil fuel reserves. If the bubble is anticipated and gradually deflated over time, asset values will still depreciate, albeit at a slower rate. If carbon regulation is not put in place and assets are sold and burned, the
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destruction of manufactured capital and holdings by the resulting cataclysmic climate change will easily outweigh any profit made from carbon investment. The Direct and Indirect Financial Impact of Divestment on Industry Corporations can only function because entities such as universities, cities, public pension funds, foundations, and private individuals invest in them. When any person or group disinvests from a corporation, that company has slightly less financial power, depending on the size of their investment. While a single university’s divestment from a certain corporation wouldn’t make any noticeable difference in the corporation’s asset value, divestment has substantial concomitant financial effects. From the standpoint of a university, divestment is used to establish resistance against a social harm, and often aims to motivate similar schools to follow suit, contributing to larger collective action. With enough support, a group of investing parties can socially stigmatize a particular company or industry, creating a negative image around those corporations because of some effect they engender. Stigmatization of an industry motivates suppliers, workers, and consumers to withdraw support, causing financial hardship. This is clearly done with the overarching goal of affecting business practices rooted in social values (in this case, environmental protection), and often ultimately manifests itself in the form of new legislation.18 Empirical investigation into the historical track record of divestment movements indicates that fossil fuel divestment would have direct and indirect economic effects on the target industry. A collection of peer-‐reviewed studies on divestment compiled by Oxford researchers supports the causal claim made in this report regarding fossil fuel divestment. Table 5 of Ansar et al. (2013, 64)’s report, displayed below, summarizes the effects of divestment on its targeted industry by drawing upon the case studies of nine campaigns.
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One of the most relevant precedents discussed in the report is the 1970s and 1980s divestment movement of colleges across the United States that targeted investments in companies doing business in Apartheid South Africa.19 By the mid-‐1980s, 155 colleges and universities had divested from companies conducting business in the country, and the U.S. Congress passed the Comprehensive Anti-‐Apartheid Act of 1986, which outlawed all new loans and investments in South Africa.20 Stigmatizing the tobacco industry in the 1960s led to increased consumer awareness of tobacco health risks and the enactment of the 1969 Public Health Cigarette Smoking Act, which banned tobacco product advertisements on radio and television and mandated warning labels for cigarette packages.21 The timelines of previous divestment campaigns indicate the fossil fuel divestment movement has empirical grounding for efficacy against fossil fuel companies. Already, 22 cities, two counties, 20 religious organizations, nine colleges and universities and six other institutions have committed to fossil fuel divestment.22 Additionally, the January 2014 announcement that seventeen foundations would divest nearly $1.8 billion dollars from fossil fuel industries in a coordinated action—after the Ansar et al. (2013) piece was written—lends credibility to divestment as a logical and efficacious tool for targeting industrial practices.23 The divestment movement is currently entering into its second ‘stage’ which consists of university and select public institutions taking part. The full arc of a typical divestment campaign is pictured below.
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One of the indirect effects the University of Chicago divesting from fossil fuels would be the catalyzing of this second stage. Divestment by a major university would encourage peer institutions to divest, and push the campaign toward the third stage of action by the wider market. The early signs of wider market action itself are evidenced in recent technological innovations to the investment profession. In December 2013, the financial information firm Bloomberg LLP released the ‘Carbon Risk Valuation Tool’, an investment instrument that evaluates the financial strength of the top oil, coal and natural gas companies as a function of five pre-‐built scenarios, effectively attempting to track carbon bubbles and risk to assets from climate change.24 Additionally, former Treasury Secretary Hank Paulson and Bloomberg Philanthropies have recently partnered to form the ‘Risky Business’ initiative, an attempt to “quantify and publicize the economic risks the United States faces from the impacts of a changing climate.”25 Support for fossil fuel divestment has been expressed by a variety of financial and political leaders ranging from World Bank president Jim Yong Kim to Barack Obama. Divestment can cause industry change through the process of social stigmatization. Stigmatization would ultimately cause asset values to decrease because of (1) expected legislation around an industry, such as a cap-‐and-‐trade carbon pricing scheme and (2) newly negative connotations of industry practices that change patterns of consumption. If legislation is expected in the near future, the likelihood of divestment increases, and vice versa. Stigmatization can also lead to decreased corporate market value, as is the case with the Russian firm Rosneft, which produces more barrels of oil per day than ExxonMobil, but as of June 2013 was valued at $88 billion compared to ExxonMobil’s $407 billion because of “weak corporate governance.”26 In both of these ways, divestment can lead to corporate business practices that are more aligned with the divestment campaign’s goals, whether they are (1) enforced by laws brought about through divestment-‐fueled public pressure for legislation or (2) motivated by the financial situation of losing investors because of prior practices or anticipated legislation. _________________________________________________________________________________________________ 1 Geddes. “Do the Investment Math: Building a Carbon-‐Free Portfolio.” Aperio Group LLC. 2013. Web. Feb 2014. 2 “Copenhagen Accord.” Framework Convention on Climate Change. United Nations. 7-‐18 December 2009. Web. Feb 2014. 3 “Unburnable Carbon—Are the world’s financial markets carrying a carbon bubble?” Carbon Tracker Initiative. Web. Feb 2014. 4 See 3 “Unburnable…” 5 See 3 “Unburnable…” 6 “The EU Emissions Trading System.” Climate Action. European Commission. February 2014. Web. Feb 2014. 7 “What EPA Is Doing.” United States Environmental Protection Agency. September 2013. Web. Feb 2014.
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8 “IEA analysis of fossil-‐fuel subsidies.” International Energy Agency. 2011. Web. Feb 2014. 9 Gloystein. “Renewable energy becoming cost competitive, IEA says.” Reuters. 23 November 2011. Web. Feb 2014. 10 “Renewable energy now cheaper than fossil fuels in Australia.” Bloomberg New Energy Finance. 7 February 2013. Web. Feb 2014. 11 Parkinson. “Energy costs: Business-‐as-‐usual no cheaper than 100% renewables.” RE new economy. 5 August 2013. Web. Feb 2014. 12 See 11 Parkinson. 13 See 11 Parkinson. 14 “Global Investor Survey on Climate Change.” Ceres. 2013. Web. Feb 2014. 15 See 3 “Unburnable…” 16 Fullerton. “The Big Choice.” Capital Institute. 19 July 2011. Web. Feb 2014. 17 Peereboom. “Group to detail impact of energy investment.” Chicago Maroon. 29 October 2013. Web. Feb 2014. 18 Ansar, Caldecott, and Tilbury. “Stranded Assets and the Fossil Fuel Divestment Campaign: what does divestment mean for the evaluation of fossil fuel assets?” Stranded Assets Programme. Smith School of Enterprise and the Environment, University of Oxford. Oxford, England. 2013. Web. Page 65-‐66. 19 Dreier, Peter. “Obama Embraces the Divestment Movement: From Apartheid to Climate Change.” Huffington Post: Politics. 29 June 2013. Web. www.huffingtonpost.com. 20 Glass, Andrew. “House overrides Reagan apartheid veto, Sept. 29, 1986.” Politico. 29 September 2010. Web. www.politico.com/news. 21 “Selected Actions of the U.S. Government Regarding the Regulation of Tobacco Sales, Marketing, and use.” Centers for Disease Control and Prevention. November 2012. Web. Feb 2014. 22 “Commitments.” Gofossilfree.org. 2014. Web. Feb 2014. 23 Doom. “Foundations With $1.8 Billion Vow Fossil-‐Fuel Divestment.” Bloomberg. 30 January 2014. Web. 2014. 24 “Bloomberg Carbon Risk Valuation Tool.” Bloomberg New Energy Finance. November 2013. Web. Feb 2014. 25 “Next Generation, Bloomberg Philanthropies, Office of Hank Paulson Launch New Climate Risk Initiative.” 26 See 1 Ansar et. al. Page 68.
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Section V:
GLOBALIZATION— Addressing
Counterarguments
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Global Economic Effects of Divestment The demographic and population differences between the United States and countries in the developing world do not warrant cross-‐national conclusions against taking action on climate change. Clearly, China’s population of 1.35 billion and India’s population of 1.22 billion are greater than the United States’ count of 316 million.1 The United States emitted 5.49 billion metric tons of carbon dioxide in 2011, a figure outstripped by China’s fossil fuel consumption of 8.72 billion metric tons. Russia ranked third with 1.79 billion, India was fourth with 1.73 billion, and Japan ranked fifth with 1.18 billion.2 The United States is responsible for 29 percent of carbon emissions from the top five polluting nations, a significant amount considering it only has 5 percent of the world population. An American renewable energy revolution—catalyzed by divestment—would make significant progress in mitigating climate change and set an example for other countries who rely heavily on fossil fuels. The industrial activities and fossil fuel reserves of companies originating in the United States contribute the more to the problem of climate change than that of any other country, warranting a response that is focused on investment here. The two largest oil and gas companies in China are PetroChina and Sinopec, producing 4.4 and 1.6 million barrels of oil and natural gas (energy equivalent to oil) per day, respectively. India’s main producer, Indian Oil, produces 1.30 million barrels per day.3 U.S. oil production, however, outstripts that of both of China and India, with ExxonMobil fourth internationally (5.3 million barrels per day), Shell seventh (3.9), Chevron ninth (3.5), and ConocoPhillips 21st (2.0).4 Divestment is aimed at influencing a complete transition to renewable energy as soon as possible. Although Chinese fossil fuel consumption is likely to continue to rise, at least in the short term, Chinese investment in renewable energy outpaces that of the United States, and the country has been much more ambitious in setting policy goals for renewable energy consumption: China currently gets 8 percent of its energy from “non-‐fossil sources” and aims to increase that to 11.4 percent by 2015 and 15 percent by 2020.5 The direct purpose of institutional divestment isn’t simply to financially cripple the fossil fuel industry but rather to a) take part in critiquing it for facilitating and perpetuating horrific climate change and b) affect climate-‐saving policy change. Universities can set an example for the rest of the world by divesting and bringing about strict legislation regarding carbon fuel extraction. U.S. oil and gas companies own a significant portion of the global fossil fuel market, seeing as three American companies rank in the top ten in terms of market capitalization and profitability. Universities divesting from fossil fuels and reinvesting in renewable energy development will certainly have an impact on mitigating climate change.
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Effects of Divestment on Employment Oil and gas companies do employ large populations of people, especially in developing nations. There, energy companies often have more economic power as compared to more economically diverse countries like the U.S. However, potential job losses in the fossil fuel sector as a result of divestment will be offset by job gains in the renewable energy industry. A transitional lag in employment will be short-‐lived due to skyrocketing energy demand in the developing world. The fear of the loss of jobs in transitioning to a renewable energy economy is unjustified. A recent report on American Energy by World Watch shows that renewable energy creates more jobs per unit of energy produced and per dollar spent than fossil fuel technologies do. U.S. Secretary of State John Kerry said, “This six trillion dollar market is worth millions of American jobs…and we had better go after it.” Another group, EcoWatch, reported that in 2012, solar energy added 14,000 new jobs, up 36 percent from 2010. On the other hand, the fossil fuel industry slashed 4,000 jobs in 2011 and 175 U.S. coal fired power plants are on the verge of closure over the next five years. Solar, wind, hydroelectric, nuclear, and geothermal energy production happen all around the globe, nullifying concerns about equitable employment distribution. Germany, Italy, and Spain produce the most solar energy;6 the United States, India, and Germany are leaders in wind energy production;7 China, Brazil, and Canada are leaders in hydroelectric energy production;8 the United States, the Philippines, and Indonesia are atop geothermal energy;9 and the United States, France, and Russia are leaders in nuclear energy production.10 Renewable energy jobs will exist in all locations and in large quantities, as they do now in the fossil fuel industry. Most importantly, renewable energy jobs are far more resilient because of the relative price stability these sources have. Lastly, the potential impact from allowing climate change to continue unmitigated would cause exponentially more significant problems than any temporary hardship from a renewables transition. A policy brief by the World Health Organization estimates that climate change currently causes roughly 150,000 deaths per year—mostly occurring in developing countries—and that number will surely increase with the continued prevalent use of fossil fuels.11 Reducing fossil fuel use can only ultimately help the employment and safety of humans around the globe. As pointed out elsewhere in this report, divestiture action is not likely to impart financial hardship on fossil fuel companies in the short term. Divestment by the University of Chicago, therefore, is unlikely to have considerable impact on the financial stability of third world residents. Considering that the World Bank is no longer offering loans for new coal projects except in exceptional circumstances, one
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form of fossil fuel development in underdeveloped nations will likely be hindered with or without divestiture action.12
_________________________________________________________________________________________________________________________________________________ 1 “The World Factbook.” Central Intelligence Agency. February 2014. Web. Feb 2014. 2 “International Energy Statistics.” U.S. Energy Information Administration. Web. Feb 2014. 3 “Refining.” Indian Oil Corporation Ltd. Web. Feb 2014. 4 “The World’s 25 Biggest Oil Companies.” Forbes.com. 2014. Web. Feb 2014. 5 “ChinaFAQs: Renewable Energy in China – An Overview.” ChinaFAQs.org. July 2013. Web. 2014. 6 “The World’s Top 10 Solar Energy Companies.” The Energy Collective. December 2013. Web. Feb 2014. 7 “Top Ten Countries Where Wind Turbines are used most Efficiently.” Mariah Energy Development Corporation. January 2011. Web. Feb 2014. 8 “Which countries get the most energy from hydropower?” Greenbang. April 2012. Web. Feb 2014. 9 “Top Ten: Geothermal Energy Locations.” Energy Digital. April 2011. Web. Feb 2014. 10 “Top 10 Nuclear Generating Countries.” Nuclear Energy Institute. 2012. Web. Feb 2014. 11 “Climate Change.” The Health and Environmental Linkages Initiative. World Health Organization. 2014. Web. Feb 2014. 12 Choudhury. “World bank to stop financing coal projects.” Responding to Climate Change. July 2013. Web. Feb 2014.
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Section VI:
REINVESTMENT— Actions following Divestment
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Reinvestment Strategies: Alternatives to Fossil Fuel Investment Investing in Renewable Energy Companies that produce and sell renewable energy-‐defined here as energy generated directly or indirectly from the sun or other natural environmental sources, such as solar, wind, hydroelectric, and geothermal processes-‐ constitute one of the fastest-‐growing and increasingly profitable sectors of the global economy. Considering the enormous growth potential of the renewable energy industry, adapting investment portfolios to accommodate shifting methods of energy production should be a matter of concern to all investors. Companies that generate electric power from renewable energy or produce goods and services supporting renewable energy infrastructure could receive capital previously invested in fossil fuel companies. Reinvestment could also occur in the form of purchasing equity in organizations that offer or are committed to energy efficiency solutions and renewable energy usage. Transferring investments from fossil fuel companies to the renewable energy industry is supported by some mainstream investment circles. British investor Jeremy Grantham of the asset management firm Grantham Mayo van Otterloo, renowned for correctly anticipating various financial bubbles, is skeptical of investing in fossil-‐dependent industries and promotes renewable energy projects:
“...on one hand, I think the progress of solar and wind is moving faster than most investors realize and, on the other, I expect the continuous rise in the price of hydrocarbons as we continue to move through the cheap stuff and move on to the more expensive stuff in terms of getting it out of the ground. And I don’t think that if you put billions of dollars into a new tar sands project that you will see a decent return on it. It will be underpriced by solar, wind and other alternatives which are moving at considerable speed.”
Regional economic trends within the United States toward the adoption of wind energy qualify Grantham’s projections. According to the Federal Energy Regulatory Commission, 100 percent of the energy capacity added to the United States in March 2013 power grid was solar power.1 Wind energy is an increasing source of electricity all over the States, especially Iowa and Texas. Many energy efficiency investments are paying back quickly, too, in a matter of months. The large-‐scale deployment of renewable energy technology is rapidly becoming a global trend as a result of skyrocketing oil prices, imminent worldwide government carbon regulation, financial insecurities surrounding the dependence on fossil fuels, and escalating degradation of natural resources. Germany, in the aftermath of the Fukushima Daiichi nuclear disaster, committed to a clean energy campaign of unprecedented scale by announcing plans to close all of its nuclear plants by 2022 while expanding renewables, efficiency, and natural gas.2 Firms like Mercer and private equity firm WHEB Group advised investors to transfer their coal and oil
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investments into renewable energy industry.3 Major investors such as Google and Warren Buffett’s MidAmerican Energy Holdings have already invested about $2 billion collectively in some of the largest solar farms in the world. Buffett himself has predicted the end of coal as an American power source, to be replaced by wind and solar power. The renewable energy industry has continuously expanded despite the recent economic recession. A 2012 report by research firm Clean Edge found that the combined global revenue for solar PV, wind power, and biofuels rose from $188.1 billion in 2010 to $246.1 billion in 2011, an increase of 31 percent.4 This expansion was mainly the result of the double-‐digit growth rates for both wind and solar deployment along with an increase in biofuel prices. Solar Energy The American solar power industry has been expanding rapidly in the past eight years, growing at an average pace of 40 percent per year and is expected to contribute to 10 percent of the nation's power needs by 2025. The cost per kilowatt-‐hour of solar power has also been dropping (already by more than half between 2007 and 2011 to 14 to 23 cents per kWh for complete photovoltaic systems), while fossil fuel power sources are becoming more expensive. Projections indicate that solar power will reach cost parity with the volatile fossil fuel based power sources by 2015.5 As shown in Figure 1 below, a continually downward pressure has been exerted on the price of solar energy cells from the period of 1977 to 2013.
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The historic decline in solar prices pictured above is a reliable trend with a structural basis. Increasing economies of scale in the production of silicon solar cells are analogous to sustainable trends seen in silicon-‐based based product markets such as computers and cell phones. As projected by the analysis of McKinsey and Co. (2012, 7), the market segments for solar power are at peak viability for returns when compared to other energy sources; Figure 2, reproduced below, shows solar’s comparative advantage.
The economic window of comparative advantage for solar energy, supplemented by a continuing downward price trend for solar cells, presents an opportune window for the University of Chicago to reorient from fossil fuels to renewable energy holdings in its investment portfolio. The figure above illustrates that with the upcoming introduction of new power providers in domestic residential, commercial
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and industrial markets the opportunity for a price decline is imminent. The solar photovoltaic market already grew from $71.2 billion in 2010 to a record $91.6 billion in 2011, with projections of continued expansion to $130.5 billion by 2021. In 2011, solar power revenues rose by 29 percent as system installations increased by more than 69 percent worldwide. Wind Energy A 2008 report by the U.S. Department of Energy envisioned that wind power could supply 20 percent of all U.S. electricity. According to the report’s (2008, 150) cross-‐regional over multiple time periods, the supply curve for wind energy is projected to increase its ability to provide for the United States’ cumulative energy demands as a function of increasing capacity of the existing transmission grids. Under those flexible economic projections, Figure A-‐8 of the report (below) projects that, under the report’s 20 percent Wind Scenario, reductions “more than 2,100 million metric tons of carbon equivalent (MMTCE)” would take place as a function of wind energy expansion from 2005-‐30 [3].
Notably, the model that produced the above findings is not contingent upon regulation of carbon emissions or fossil fuel industries. Instead, it relies on the basic capacity of the existing United States power grid, based upon certain market-‐driven modifications. The projected success of solar power becoming more of a reality: in 2012, wind power became the fastest growing energy source in the United States, as the country became host to the fastest-‐growing wind power market in the world.6 The Department of Energy’s more recent 2012 Wind Technologies Market Report states
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that wind power contributed to 43 percent of the total electric-‐generating capacity additions and $25 billion in new investments in the previous year.7 The growth is mostly a result of the rapid evolution of wind power technology. Turbines are now much larger, and new ones generally have a 2.3-‐megawatt capacity. Recent developments indicate that 7-‐megawatt turbines will be available soon.8 Technological advancement has allowed new wind farms to produce electricity in the price range of 5-‐8 cents per kWh, making wind power competitive with the cost of fossil fuel electricity generation in many markets.9 Though there are installation costs associated with intermittent renewable energy, unlike fossil fuels-‐which have suffered volatile fuel prices-‐wind and solar power are based on perennial sources and have relatively miniscule post-‐installation costs. Energy Efficiency Energy efficiency, defined here, refers to initiatives and products committed to conservation and reduction of energy consumption per capita of economic utility. Examples of energy efficiency initiatives include smart grid technologies such as modern wiring configurations, smart meters and two-‐way power transmission. Despite the possibility that energy efficiency improvements may increase overall consumption per the Jevons paradox, they are crucial for low-‐cost, large-‐scale deployment of renewable energy. Other initiatives like net-‐metering by electric utilities and programs like CLEAN LA that allow customers to sell their excess power into grids are expanding, too. Efficiency investments, valued at $837 billion, make up 13 percent of total renewable energy investments, and revenues are projected to increase 13 percent annually through 2020.10 Companies usually benefit from efficiency investments via lower energy costs within 12 to 24 months. According to the World Wildlife Fund and Ecofys Consultancy, energy efficiency initiatives will soon become an integral aspect of all economic activity, saving businesses and consumers nearly £4 trillion by 2050. Addressing Concerns about Renewable Energy The argument that solar is economically effective only by relying on government subsidies may hold at the present moment, but if solar prices reach Citigroup’s prediction of $.25/watt by 2020, subsidies will not be required. In fact, according to research firm Bloomberg New Energy Finance, unsubsidized renewable energy is now already cheaper than electricity from new build coal and gas fired power stations in Australia. Moreover, the 2013 IMF energy subsidy report points to the undismissable fact of how fossil fuels, too, are dependent on subsidization with their global total subsidy of $409 billion being incomparable to the meager $60 billion awarded to renewables. The IMF believes the resultant misleading prices are fueling
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mis-‐investments, unjustifiable on economic and environmental grounds, such as in the rapidly growing shale gas industry and new coal plants in Europe, with the Keystone tar sands project perhaps becoming the next scenario. _________________________________________________________________________________________________ 1 “Energy Infrastructure Update.” Office of Energy Projects. Federal Energy Regulatory Commission. March 2013. Web. Feb 2014. 2 Dempsey and Ewing. “Germany, in Reversal, Will Close Nuclear Plants by 2022.” NY Times. 30 May 2011. Web. Feb 2014. 3 Arnold, Martin. "Private Equity: Specialist Funds Are Keen to Invest in Clean Technology." Financial Times. Pearson PLC, 3 June 2010. Web. 25 Feb. 2014.
Relevant quote: “James McNaught-‐Davis, managing partner of UK-‐based clean-‐tech investor WHEB Ventures, says the shortage of financing from banks and other sources may be creating more opportunities for specialist funds in this area. ‘There are quite a few clean tech businesses that need capital to develop and have owners who can’t or won’t provide the money, and these are being sold quite cheaply,’ says Mr McNaught-‐Davis. ‘It is currently a buyer’s market.’”
4 Pernick, Wilder, and Winnie. “Clean Edge Trends 2012.” Clean Edge, Inc. 2012. Web. Feb 2014. 5 See 4 Pernick et al. 6 Woody. “U.S. Installed Record 13.2 Gigawatts of Wind Energy in 2012.” Forbes.com. 18 January 2013. Web. Feb 2014. 7 Wiser and Bollinger. “2012 Wind Technologies Market Report.” U.S. Department of Energy. August 2013. Web. Feb 2014. 8 “Cost of Wind vs. Fossil Fuels.” Montana Environmental Information Center. April 2012. Web. Feb 2014. 9 See 4 Pernick et al. 10 Spedding, Mehta, and Robins. “Oil and carbon revisited.” HSBC Global Research. January 2013. Web. Feb 2014.
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Restatement of Objectives Emphasizing the overwhelming scientific evidence indicating anthropogenic climate change is occurring due to the combustion of hydrocarbons, more commonly known as fossil fuels; Expressing concern about the impending catastrophic consequences anthropogenic climate change will have for the University, the city of Chicago, and the global community if immediate action is not taken; Feeling distress as students (international and domestic) whose futures will be affected and limited by the effects of climate change; Noting the University’s investments in companies that extract, refine, and sell fossil fuels, thereby accelerating the burning of hydrocarbons and anthropogenic climate change; Affirming the stance expressed in the 1967 Kalven Report, which calls on the University to oppose and defend its interests from the activities of segments of society that would do us harm; Weighing the financial and social risks associated with holding assets that will become ‘stranded’ with unburnable carbon reserves due to governmental and international regulation, natural disasters, and societal pressure; Urges the following actions be taken by the University of Chicago: (1) Immediately freeze any new investments in the most carbon-‐intensive fossil fuel extraction companies. This report will keep the exact listing of targeted company’s undefined in the interest of dialogue with this University’s Board of Trustees. However, a listing of the top 200 fossil-‐fuel companies as a function of their estimated carbon reserves are summarized in the PATHWAYS section, the raw data for which can be accessed online at http://bit.ly/ReportData. (2) Divest from direct ownership and any commingled funds that include fossil fuel public equities and corporate bonds within five years, with the goal of influencing fossil fuel companies to stop exploring for hydrocarbon reserves, stop lobbying in Washington and state capitals across the country, and pledge to keep 80% of their current reserves underground forever. (3) Implement climate and carbon risk assessment into the University’s short-‐term and long term investment strategies, in order to more accurately predict and account for the instability markets will have due to a changing climate and move towards more sustainable investment practices. These practices could be recommended requested by the University as a client of its endowment’s external investment managers.
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