Economics is an extremely broad field with many subsets that is applicable to virtually every issue. Thus far, I have explored microeconomic theory, macroeconomic policy analysis, and environmental economics, to name a few. In this blog post, I’m going to be exploring how principles of financial economics and political economics can be applied to environmental protection (or any social cause in a capitalist society, really).
To understand how to defend the environment, we must first understand what we are defending it from. When talking about the issue of climate change, we are defending the Earth from the practices of fossil fuel companies, those companies that profit from supplying society with dirty fuels that release climate change inducing greenhouse gases. We must also understand why other bodies and mechanisms aimed at protecting the environment have failed. The body and mechanism to which I am referring is our government. The government has largely failed at implementing the policies and regulations necessary to ensure a sustainable climate on the Earth. This is in large part because of the corruptive influence that that the fossil fuel industry has on political processes as a result of the extensive lobbying that is done on behalf of the industry through organizations such as the American Petroleum Institute, and because of the stranglehold which the fossil fuel industry holds on the American economy due to its sheer size. This is not to say that there is no hope for our political system to adequately regulate the fossil fuel industry; it is simply to say that the system may need some extra help.
One of the most effective activist techniques for enabling our political system to regulate the fossil fuel industry is divestment. To divest is to dis-invest. It is to remove one’s investments from any given firm or industry. The fossil fuel divestment movement is one of the fastest growing social movements in contemporary America, and the fastest growing divestment movement of all time. The movement encourages bodies of all types to remove investments in the fossil fuel industry from their financial portfolios. In the United States, there are fossil fuel divestment campaigns at over 380 college campuses, numerous cities, and large religious denominations. Of those 380 colleges, Penn State, which invests tens of millions of dollars per year in the fossil fuel industry, is one. (I happen to be the president of Penn State’s fossil fuel divestment group, Fossil Free PSU). Of the numerous cities that have committed to divestment, State College happens to be one as well.
Fossil Free PSU is Penn State’s student divestment team
Now that we’ve all got some background on fossil fuel divestment, let’s get into the economics of it.
As I mentioned at the beginning, I will be focusing on financial economics and political economics in this post. And it turns out that divestment can go a long toward hindering the fossil fuel industry both financially and politically.
Fossil fuel companies, like any other publicly traded companies, are owned by a group of shareholders, people who buy shares of the companies’ stock. Basic economic theory tells us that as demand for these shares rises (more people buy them), the price increases. And a higher share price correlates to higher profits for a company. If the demand for a company’s share were to suddenly decline (resulting from people selling shares rather than buying), the profits of the company would be impacted. Based solely on economic theory, this end goal of divestment seems entirely reasonably. The problem is that, realistically speaking, it would take an enormous number of shareholders to divest in order to meaningfully impact a company of the size of ExxonMobil, Shell, BP, or the like. A more realistic goal of a divestment campaign is to politically, rather than financially, bankrupt the fossil fuel industry.
This graph illustrates an increase in demand. As the demand curve shifts right, the equilibrium is moved further up the supply curve, and to a higher price level.
This is where the concept of a political economics comes into play–applying economic principles and analyses, such as cost-benefit analyses, to political issues. Under the current situation, it is more beneficial than it is costly for politicians to oppose policies that restrict the fossil fuel industry because of the large monetary influence that such companies have on political processes. Divestment can show our elected officials that influential societal institutions disapprove of the practices of the fossil fuel industry. The amount of institutions needed to show their disapproval through divestment in order to overshadow the power of the fossil fuel industry in our political system, to politically bankrupt it, is far less than the number that would be needed in order to financially hinder the industry as a whole.
Our government has largely failed at taking the necessary steps to protect the environment and combat global warming. When government’s fail their people, it is time for direct action, and fossil fuel divestment can be one of the most effective means of direct action within the environmental movement. Divestment allows the power of all-mighty dollar to work against the fossil fuel industry for a change. Wouldn’t that be a turn of the tables?
Sources:
Click to access SAP-divestment-report-final.pdf
http://www.theguardian.com/sustainable-business/bill-mckibben-fossil-fuel-divestment-campaign-climate
It’s nice to see that I attend a school that is as Green as it is Blue & White. There is definitely a necessary push for environmental help in the country and it’s people like you who are going to be the change that is coming. Economics and the environment are easily collaborated in discussion and reflect each other more often than not, and you’ve clearly displayed that in this post. Being a part of such a huge university, it is easy to loose sight of the environmental damages this place can have. I’m glad to see that this place isn’t as damaging as it could be due to the necessary steps taken to ensure environmental quality.
One of the (many) flaws with our government is how much sway companies and corporations have. Unfortunately, politicians receive huge investments from these corporations, so obviously they are greatly influenced to make decisions based on the interests of their investors. But I think that this concept of divestment could definitely address this problem, if enough people are on board. Like Beth said in her comment, if only a minority of people are willing to go along with this divestment, the entire operation would prove largely ineffective. For this to be truly successful, large numbers would need to be committed to the cause. With that in mind, I think it’s great to see that entire cities, like State College, are involved in this divestment process.
I’m not one for understanding economics, but you made this very easy to comprehend. I didn’t know that Penn State had a program for this. That is actually really cool! It’s awesome that Penn State is so involved in bettering the environment in so many ways. Divestment is a very interesting idea in my opinion. I think that it’s one of those things that can either work really well or work terribly. If people are all for divestment, it can be extremely successful. If only a few people are willing to divest, though, it will have little to no impact. If people are able to reach out to bigger investors, things are more likely to happen.