Economic bubbles, inflated by overvalued assets and dicey purchasing, are difficult to predict but easy to autopsy.
When it comes to the fallout from financial bubbles, the dot-com bubble of the late 1990s lost roughly half its value from 2000 to 2001 after it popped, and the aftershocks from the real estate bubble that helped precipitate the financial meltdown of 2007 and 2008 are still being absorbed worldwide.
Today, the possibility of a bursting "carbon bubble" has the underpinnings of perhaps even more financial turmoil than either of those predecessors.
Students, part of the still-nascent fossil fuel divestment movement, have argued that their schools' continued investment in fossil energy extraction companies is a dangerous and unethical decision. Some financial analysts point to long-term risks. Above all, investment advisers often cite the possibility of "stranded assets" as one reason for investors to be wary of fossil fuel-based investment.
In order to prevent a global temperature rise of more than 2 degrees Celsius above preindustrial levels, climate scientists say, the vast majority of known fossil fuel reserves must remain in the ground. As international governments enact more policies to limit carbon emissions, energy companies could be stuck with untouchable pockets of oil, coal and natural gas.
"Financial analysts are increasingly warning investors of the risks that tighter regulations on carbon dioxide emissions and falling demand for fossil fuels could make fossil fuel reserves substantially less valuable, or even 'stranded' and ultimately rendered worthless," write the authors of a report by Impax Asset Management, a financial services firm. "So the question becomes: How should a fiduciary compare the risks to portfolios by stricter carbon regulations to the risks associated with reducing exposure to fossil fuel stocks?"
The Carbon Tracker Initiative, working with the Grantham Research Institute for Climate Change and the Environment at the London School of Economics and Political Science, published a watershed report on carbon risk and so-called bubbles in 2013.
The analysis places the remaining carbon budget between 900 gigatons of carbon dioxide (for an 80 percent chance to remain below the 2 C threshold) and 1,075 gigatons for a 50 percent change to hit that mark.
"The scale of this carbon budget deficit poses a major risk for investors," the authors write. "They need to understand that 60-80 percent of coal, oil and gas reserves of listed firms are unburnable."
Though some investors have become increasingly concerned about fossil fuel bubbles and the ensuing carbon crash that some forecast, the most strident voices against fossil fuel investment are coming from college students, not activist investors.
Students march, with mixed results
A week ago, a group of several hundred American University students marched, chanted and spoke at an on-campus rally in Washington, D.C. -- the latest demonstration in a two-year effort to compel the school administration to sell its investments in fossil fuel companies over five years. American University manages a $550 million endowment, 4 percent of which is invested in fossil fuel extraction companies.
"We know we'll be fine if we divest," said Bryan Paz, a sophomore and on-campus divestment organizer. "Reinvestment wouldn't be an issue."
Under chilly drizzle and amid pockets of swaying colorful divestment banners depicting apocalyptic floods and towering waves, students and professors told the crowd last Monday how important it was for the divestment movement to make climate change a personal concern for their audience.
One student speaker said his hometown, Miami, could soon be underwater. Anna Bonomo, a sophomore political science major who is working within the "FossilFree AU" campaign, said the natural gas and hydraulic fracturing industry is reminiscent of past American steel businesses, and the nation cannot afford another collapse within the energy or raw materials sectors.
A professor from India spoke of the land her country would lose from floods if energy exploration firms continue to follow a "business as usual" path.
On Friday afternoon, though, the AU student movement stalled: The American University board decided not to divest from fossil-based investments.
Jeffrey Sine, the chairman of AU's board of trustees, said in a statement that the board had decided against divestment after its financial adviser, Cambridge Associates, "estimated this withdrawal would double the management fees, increasing from $1.1 million to $2.2 million per year as added costs."
For American University, Sine said, divesting would violate the board's fiduciary responsibilities and such an act would have "surpassed" a law for Washington, D.C. -- the "Uniform Prudent Management of Institutional Funds Act," or UPMIFA.
Fourteen schools in the United States and United Kingdom have pledged to divest, though some have only promised to dump their coal holdings.
Several U.S. universities with multibillion-dollar endowments -- like the University of California ($11.2 billion) and Columbia ($8.2 billion), Cornell ($5.7 billion), Harvard ($32.3 billion) and New York ($2.9 billion) universities -- have rebuffed activist pressure to divest. In Australia, a nation with higher per-capita fossil fuel use than the United States and deep ties to the mining sector, administrators have also declined to sell.
Cities discover a way to save money
Divestment critics who acknowledge climate change maintain that shareholder activism is a better way to address carbon dangers and selling shares simply moves carbon holdings into another investor's portfolio, without affecting energy companies' business.
Though the divestment movement has yet to sway schools with the largest endowments, city and regional leaders have discreetly sold their fossil holdings, or are planning to, and argue that divestment is an easy and financially savvy step to take.
Swedish pension fund AP2 announced in October that it will divest $116.7 million from 12 coal companies and eight oil and gas companies in the fourth quarter in order to reduce its carbon exposure and protect long-term returns.
Norway's largest pension fund, KLP, announced Wednesday that it will divest $75 million worth of coal investments, and Storebrand, a Norwegian pension fund and life insurance company, announced in July 2013 that it had divested from 19 fossil fuel firms, 13 of which were coal companies.
Thirty-six cities and countries worldwide have divested or promised to divest, as well.
"The decision to divest has not been a bad one, quite the opposite," said Daryl Justin Finizio, the mayor of New London, Conn., in an interview with ClimateWire. The public response was generally positive, he said.
"You can still have a diversified portfolio without fossil fuels," he said, emphasizing that cities must act to combat climate change because the federal government isn't doing so. "This kind of common notion that a portfolio must include fossil fuels and coal [is false]."
Energy stocks were one of the leading culprits behind a rocky third quarter for U.S. markets and were the worst-performing S&P 500 sector in the July through September period. Yet New London, which divested before the quarter, dodged the turmoil.
"Anyone who was doubled down on fossil fuels six months ago just lost," Finizio said.
Missing a bad 3rd quarter for oil
Jeff Smith, the director of the city's finance department who oversees the $45 million investment portfolio, said energy stocks are always volatile, but coal is looking "increasingly risky." According to an outside investment adviser, New London saved about $300,000 by jettisoning its fossil fuel holdings.
"Oil encountered a correction during the third quarter and as a result underperformed the benchmark," wrote an outside investment adviser to the city. "For the short term, New London's reduced exposure to the sector, due to the restrictions in place, benefited the equity portion of the account by approximately $292,000."
Matt McKrae, a climate and energy analyst for the city of Eugene, Ore., which committed to divest last year, said city leaders learn from one another to become more energy-efficient. Eugene, he said, has reduced its energy use 2 to 2.5 percent annually during the past few years.
"There's a huge number of things that we can do right now that don't cost us," he said of policies, like Eugene's rapid transit bus system, that the city could enact to lower greenhouse gas emissions.
"These reductions are achievable, and we're not living in caves," McKrae added.
In Ann Arbor, Mich., the city's retirement and pension board is mulling a plan to phase out carbon investments within the next five years and is set to announce its decision before the year is out.
Mike Scriberg, a University of Michigan lecturer and a member of Ann Arbor's energy commission who doesn't work for the city, said Ann Arbor could purge 43 percent of its portfolio of fossil holdings very easily. He estimated that 13 percent would likely not be able to go fossil-free. Ann Arbor's investment strategy is "antithetical" to its policies, he said. If the financial industry produces fossil-free index funds, which can be managed with low fees and little effort, divestment may become appealing to new institutions.
"The people on Wall Street who move billions of dollars and trillions of dollars around are not in the business of losing money. And they know global climate change is real," Finizio said. "We can't afford to live in the fantasyland that this is a hoax."
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