Popping the Carbon Bubble

Last week in Oslo, Marius Holm of the ZERO Foundation presented a report that I co-wrote this summer along with a number of environmental and financial professionals making the case for fossil fuel divestment in Norway’s government pension fund, a portfolio so large that it dwarfs the size of all American university endowments combined. Many of the arguments were specific to Norway, which, as one of the largest producers of oil and gas in the world, is ill-advised to double down on its exposure to shifts within the fossil energy industry. As a fund that already has in place the type of Environmental, Social, and Governance (ESG) criteria for investment missing from Middlebury’s endowment, the debate in Norway is not over whether divestment is an appropriate tool for creating change, but rather how far that tool should be extended. While Middlebury would be well advised to lead the way by creating similar investment screens, even in the absence of concerns about endowment ethics the arguments for divestment in Norway can inform the ongoing debate on this campus.

- Art by Amr Thameen

– Art by Amr Thameen

Over the past six months, many market analysts have revised their predictions for future oil prices from around $110 per barrel to down into the $80 to $90 range. A number of factors are driving this downward trend — increased efficiency of automobiles, uncertainty over future regulations and a Chinese economy far more overleveraged than that of the United States prior to the financial crisis. All of these factors contribute to falling oil demand, which in a world of abundant oil supply means that prices must soon begin to fall.

At lower prices, many of the types of tar sands, ultra-deepwater and shale oil projects currently under development would fail to earn back their investment capital. Any regulatory action that limits carbon dioxide emissions will inevitably require some of these reserves — which have already been factored into the share value of oil companies — to remain in the ground. Expectations about reserves have a significant effect on the share price of fossil fuel companies. When Shell reduced its estimated reserves by 20 percent in January 2004, its share price plunged by 10 percent in a single week. These concerns recently led a large group of investors representing over $100 billion in assets managed by companies that include Boston Common Asset Management and Storebrand Asset Management to issue a call that Norwegian Oil Company Statoil withdraw from tar sands extraction.

World Financial Markets – and, by proxy, the Middlebury College Endowment – are being inflated by a looming Carbon bubble. If you accept that there is a scant one-in-four chance that the world will meet the IEA’s targets to limit global warming to two degrees Celsius, the expected value of the endowment’s position in fossil energy equities is already ten percent inflated.  The loss of value if climate change is defeated would be forty percent, which would affect the College’s ability to pay employees, undergo capital projects and award financial aid to deserving students.

The College Administration and Trustees no doubt have faith that, as professional investment managers, Investure will be able to anticipate the shift in fossil energy share prices before they actually arrive. But that poses a significant risk to the endowment – a risk that we would do well to avoid. When financial markets adjust to reflect the changing reality of fossil fuel use, the adjustment will not be smooth or gradual. It will come suddenly and leave those too slow to act with heavy losses. For some of the market, it already has. After an energy speech by President Obama that pledged increased regulation of power plants and an end to international development aid for non-Carbon Capture and Storage (CCS) coal plants, the shares of coal companies including Peabody Energy and Walter Energy took dives of 3.4 and 10.4 percent respectively, adding to a year in which Peabody Energy has lost half its value and Walter Energy has lost three quarters. The Stowe Global Coal index, which lists coal-producing companies, fell the same day to its lowest level since the 2009 financial crisis. Utilities across Europe have similarly plunged unexpectedly in response to competition from renewable energy.

To be bullish on the future of the fossil fuel industry is the rough equivalent of a bullish outlook on the nuclear industry sometime after the alarm bells went off at Three Mile Island or after the wave headed for Fukushima. It is comparable to a bet on CFC-producing companies sometime between the discovery of the massive hole in the Ozone layer and the ratification of the Montreal protocol, or a bet on fax machines after the invention of the Internet. Coal and oil powered the 19th and 20th centuries. Their glory days are past. To bet on their future is to bet either against the future of humanity or against the overwhelming judgment of science.

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The Sky Falling is a Bad Thing

All across America, Conservative commentators are jumping up and down, waving their hands in the air, pointing at glitches in the month-old roll-out of Obamacare and yelling “I told you so!” Republicans are so eager to turn attention away from their destructive shenanigans in the budget and debt ceiling debate that more column inches have been devoted to the launch of a website than at any other time in human history. None of them, of course, go so far as to suggest an alternative to fix the actual problem: the 50 million uninsured Americans who could go bankrupt at the first appearance of major illness.

One such offender was fellow columnist Ben Kinney ’15. His column of last week contained a number of the troubling factual errors that have characterized the entire debate. First was the assertion that he lost faith in the workability of the Affordable Care Act while watching Kathleen Sebelius flub an interview on The Daily Show with Jon Stewart just weeks ago. I understand as well as anyone the temptation to use a recent statement to jump into a column (case in point) but I suspect that Kinney belongs firmly in the camp of the Republicans rooting against the program — and doing their best to sabotage its success — from its inception.

More troubling was Kinney’s claim that “The Obama Administration has already spent half-a-billion dollars creating an unusable website…how can we trust it to effectively manage the complex and varied health care needs of 400 million Americans?” This would be a reasonable criticism, if it were in any way correct. Kinney overestimated the number of Americans by 83 million and the cost of the website by roughly $400 million according to the fact-checking website Media Matters. To be fair, he was not alone in this error; much like the $200 million-per-day India trip in 2010, the myth of the absurdly expensive website has flown through a gleeful conservative media looking for any shred of evidence to pin the President as an old-school tax-and-spend liberal.

Kinney’s later claims are less defective in their veracity than deceptive in their scope. He says that health insurance premiums under Obamacare are significantly higher than current premiums. This ignores the vast majority of owners of health insurance plans, who get their coverage through their employers, Medicaid, or Medicare. Those who will see their rates increase are the five percent of Americans who purchase their insurance as individuals and an additional five percent who previously had no health insurance. Some of those people were young, healthy and had previously opted not to purchase insurance. Unsurprisingly, buying health insurance instead of playing a literal game of Russian roulette with fatal illness represents a rate increase for those individuals. A quarter of people who previously did not buy health insurance were unable to do so due to a preexisting illness. For them, the coverage they will gain from the law represents the difference between a nonzero monthly cost and complete medical bankruptcy, or death.

Many of the cheaper plans purchased by consumers in this individual marketplace prior to the law cost less for a reason — they were the insurance equivalent of a shot of whisky and a prayer. They wouldn’t cover the cost of an ambulance or a night in the hospital, and they could be cancelled during treatment due to costs. Obamacare will subsidize the increased cost of health insurance for people making less than 400 percent above the poverty line, but that cannot get around the fact that owning usable health insurance will always cost more than useless or absent insurance — until disaster strikes.

Health insurance, plain and simple, saves lives. When Conservatives point to website glitches and the states across the nation who have refused to expand Medicaid to bring coverage to the uninsured and call Obamacare a failure, they’re ignoring the greater tragedy. The website will eventually be fixed. The states refusing to expand coverage have done so out of ideological spite. And in the richest nation in the world, Americans continue to die because they cannot afford to buy health insurance. Instead of pointing at these failings as a sign that the twice-elected President isn’t so great after all, how about working on a solution?