Amanda Biernacki

Bradley and Birmingham, LLC 200 Quentin Plaza

Waltham, MA 02254
November 20, 2015
Janet Hopkins, CEO
Ralph Kramden, COO
Bradley and Birmingham, LLC 200 Quentin Plaza
Waltham, MA 02254
Subject: Fossil Fuel Divestment Economics Report Dear CEO Janet
Hopkins and COO Ralph Kramden,
The formal report on nuclear fusion entitled, the Economic Effects of
Fossil Fuel Divestment, was submitted. It was received at 1:00 pm on
November 19, 2015 200 Quentin Plaza, Waltham, MA 02254.
If you have any questions or concerns regarding this report, contact me
at amandabiernacki@bbi.com.
Sincerely,

Amanda Biernacki
Amanda Biernacki
 The Economic Effects
of Fossil Fuel Divestment

Prepared for:
Janet Hopkins, CEO
Ralph Kramden, COO

Prepared by:
Amanda Biernacki
Thompson Research Consulting, Inc.

December 3, 2015
Contents
Executive Summary .3
Introduction ..4
The Technical Element ....4
The Controversial Element ..8
Conclusion..12
Works Cited ...14
 Executive Summary

The purpose of this report is to ensure that the PWG members are educated about
important divestment issues, and divestment as a whole, in order to prepare them for the
CRC meetings. PWG managers have reported that group members have been insisting
BBI pension funds be divested from environmentally insensitive companies, and in some
groups there have been conflicts among the members. By displaying how divestment
issues are both technical and controversial, this report aims to prepare the employees for
the CRC meeting regarding divestment and help avoid possible future conflicts
surrounding this topic.

The economic effect of fossil fuel divestment is a technical and complex topic. Some of these
concepts include economic inputoutput life cycle assessment models (EIO-LCA), shadow
impact calculators (SICs), and endowment carbon shadows. Often times, accuracy of data
relating to the economic impacts of fossil fuel divestment is up for debate due to the complex
nature of the calculations. This leads to uncertainty surrounding the data that is collected. These
uncertainties open the door for multiple analyses of the same information. This leads to
disagreements and controversies surrounding the topic. Many economists say the negative
economic costs, including loss of income, make fossil fuel divestment a poor financial and
economic decision for investors. However, others, such as California State Senator Kevin de
Len, believe that fossil fuels are old technologies that will prove to be poor long-term
investments as cleaner energy sources gain popularity. Additionally, others fear fossil fuels are a
risky investment due to what is called the carbon bubble. The long-term effects of fossil fuel
divestment are under debate, and economists, politicians, and investors are unable to come to a
consensus on this topic.

This topic, while specific, is complex enough to represent the technical and controversial
elements of divestment as a whole. It is a perfect example to display how complex and
controversial divestment topics can be. Through the economic effects of fossil fuel
divestment, the report aims to ensure that the PWG members are educated about
important divestment issues in preparation of the CRC meeting.
Introduction

As many of you are aware, PWG managers have reported that group members have been
insisting BBI pension funds be divested from environmentally insensitive companies, and in
some groups there have been conflicts among the members. In hopes of coming to a reasonable
company-wide agreement on these issues, the CRC will hold a series of meetings with PWG
members about the controversial investments and, based on these meetings, come to a decision
on divestment. In order to ensure that the PWG members are educated about important
divestment issues, BBI requested that formal reports regarding divestment-related issues be
written. The economic effects of fossil fuel divestment was approved for one of these reports.
The purpose of the report is to ensure that the PWG members are educated about important
divestment issues in preparation for the CRC meetings.

The report will address the technical element of the economic effects of fossil fuel divestment as
well as detail the controversies surrounding the topic. Since there are many confusions regarding
the economic outcomes of fossil fuel divestment, the first section will discuss the technical
aspect of the topic. This section is included to show how the complicated nature of divestment
economics can lead to the controversies surrounding the topic. The second section will address
the controversies relating to the economics of fossil fuel divestment. It will discuss economic
reasons why companies should divest as well as reasons why companies should not. This will
show that there is a genuine controversy concerning the topic.

This report will give all employees an accurate understanding of this confusing and controversial
topic, as well as the concept of divestment as a whole. This will prepare the employees for the
CRC meeting regarding divestment and help avoid possible future conflicts surrounding this
topic by outlining the technical and controversial elements of the economic effects of fossil fuel
divestment.

The Technical Element

As you are aware, there have been many arguments among PWG members regarding the topic of
divestment. The CRC is to hold a series of meetings that will deal with the issue of divestment
for BBI. The company wants to make sure the employees are properly informed regarding
controversial divestment topics in order for them to be prepared for the meetings. In order for
PWG members to be completely informed, it is important for them to understand where the
controversies come from. As will be discussed in this section, controversies surrounding the
economics of fossil fuel divestment often arise because of the topics technical element. Conflicts
among PWG members can be avoided in the future if they understand why the same data can
lead multiple conclusions. The employees will be more tolerant of other opinions if they can
understand where these opinions come from. This understanding will help prepare them for the
CRC meetings.
The economic effects of fossil fuel divestment are complex and often difficult to measure. The
technical and complex nature of measuring the effects of fossil fuel divestment are often what
lead to the controversies surrounding the topic. The complexity associated with measuring these
economic activities can lead to many different analyses and predictions associated with the same
actions. These different interpretations associated with the same economic data can often lead to
disagreements among economists. This section discusses two tools economists can use to
measure the economic effects of fossil fuel divestment: Economic Input-Output Life Cycle
Assessment Models and Shadow Impact Calculators. These tools are presented to show how the
complex nature of fossil fuel divestment can lead to controversies surrounding the topic.

Economic InputOutput Life Cycle Assessment Models

The purpose of this section is to prepare the PWG members for the CRC meetings by giving
them an understanding of where controversies surrounding divestment come from. This sections
will show how the technical aspect of fossil fuel divestment economics can lead to controversy
surrounding the topic. The EIO-LCA method is frequently used to measure the economic and
environmental effects of fossil fuel divestment; however, the complexity of the method leads
large amounts of uncertainty, bringing flexibility into how the data can be interpreted.
Disagreements and controversies arise because the same data can lead to different conclusions.
Because they understand where different opinions regarding divestment come from, the PWG
members will be more tolerant of other arguments. Not only will this help diminish the
possibility of future arguments surrounding the issue of divestment, it will also help prepare the
PWG members for the CRC meetings.

The Economic Input-Output Life Cycle Assessment (EIO-LCA) method is used by economists to
measure the costs and environmental impacts of economic activities, such as divesting (Ritchie,
2014). Though this method was developed by Wassily Leontief in the 1930s, it was rarely used
until recently. The computational power at the time was not enough to do the complex matrix
algebra associated EIO-LCA models quickly enough for the information gathered to be useful.
However, these calculations are able to be done today with the use of computers (Matthews,
2014).

The EIO-LCA method can be represented by the formula xdirect = (I+A)y (Matthews, 2014).
The following table describes what each of the variables in this formula represent.
 Variable Definition
xdirect xdirect is the resulting total output resulting from the inputs.
I The variable I represents a vector, or value, of environmental
effects.
A The variable A is used to represent a matrix, or table,
generated using the economic input and output data. The rows
of the matrix show the amount of output from industry
required to produce one dollar of output from industry.
y The variable y represents a vector, or value, of final demand
of goods in the economy.
(Matthews, 2014)

The complexity of the EIO-LCA calculations leads to uncertainty surrounding the information
gathered from this method. First, many assumptions go into creating the vectors for the
environmental effects (I) and materials consumption (y). One assumption is that imports have the
same production characteristics as products made within the country being evaluated, and
therefore the same environmental impact from production activities (Matthews, 2014). This can
effect the reliability of the calculations.

Say, for example, there are two coal plants: one located in country A, and another located in
another country B. Country A has a highly regulated coal industry, whereas country B does not.
Therefore, coal mining in country A would have less of an environmental impact than coal
mining in country B. However, if country A is the country being evaluated, then it is assumed
that any imported coal mined country B has the same environmental impact as coal mined in
country A. This would lead to inaccurate calculations in the EIO-LCA models.

Other sources of uncertainty come from poor data. Perfect data is not always available for
these calculations, and economists often have to make due with what they can find. Some
examples of data that can lead to increased uncertainty include:

Old data
Uncertainty inherent in original data
Incomplete original data
Aggregated original data (data that has been summarized)
Aggregation of sectors (data combined from across different industries)
(Matthews, 2014)
These uncertainties in the data can lead to disagreements over how to interpret the findings. This
leads to many different opinions regarding the same data, contributing and leading to
controversy.

Shadow Impact Calculator

The purpose of this section is to prepare the PWG members for the CRC meetings by giving
them an understanding of where controversies surrounding divestment come from. This section
will show how the technical aspect of fossil fuel divestment economics can lead to controversy
surrounding the topic. Shadow Impact Calculators are often used to display the economic and
environmental effects of fossil fuel divestment, but large amounts of uncertainty in the data used
to create these models can affect the reliability of the information provided. Disagreements and
controversies can arise over whether or not the information displayed is reliable. This section
will show how what may appear to be factual can actually be controversial, helping the PWG
members understand how different interpretations of the same data can be reasonable. Not only
will this help diminish the possibility of future arguments surrounding the issue of divestment, it
will also help prepare the PWG members for the CRC meetings.

The data derived from the EIO-LCA can be used to develop what is know as a Shadow Impact
Calculator. A Shadow Impact Calculator is a tool used for examining the potential
environmental impacts of investment decisions, including divesting.

The following graph depicts the shadow results of various industries. The larger the bubble, the
larger the environmental impact for that industry is. For example, the environmental impact of
the steel industry is much larger than the environmental impact of the food processing industry.
Organizations and businesses looking to divest from environmentally unfriendly businesses
would likely be looking to divest funds from industries with larger bubbles (Ritchie, 2014).
The industries shown are places on a a plane depicting stock prices and returns. The y-axis
(vertical) shows the average earnings per share for an industry (Price/EPS), and the x-axis
(horizontal) shows the average Beta for an industry. The earnings per share represents the
percentage of a companys earnings allocated to one share of stock. Investors seeking high
returns would want to invest in industries on the upper portion of the graph. Beta represents how
volatile the stock is, or how much the price of the stock fluctuates (Koba, 2012). Investors
seeking stable investments would want to invest in industries towards the left of the graph
(Ritchie, 2014).

The information displayed on this graph can be used by investors to make investment and
divestment decisions based on environmental impact, stability, and returns. However, the
environmental impact displayed on this graph is derived from data analyzed using the EIO-LCA
method. As previously discussed, there are many uncertainties that lead to inaccuracy in this
data. Because of this, the information on this graph, which appears to be factual on the surface, is
actually debatable. This is only one way data related to the environmental impact of investment
activities is calculated and interpreted. However, the questionability seen while analyzing this
method are true across the board. Often times, accuracy of data relating to the economic impacts
of fossil fuel divestment is up for debate due to the complex nature of the calculations
(Matthews, 2014). This opens the door for controversy to develop around this topic.

The Controversial Element

There have been many arguments among PWG members regarding the topic of divestment. The
CRC is to hold a series of meetings that will deal with the issue of divestment for BBI. The
company wants to make sure the employees are properly informed regarding controversial
divestment topics in order for them to be prepared for the meetings. The following section will
establish a genuine controversy surrounding fossil fuel divestment economics. It will do this by
first demonstrating why some believe the economic effects are negative and then discussing why
others believe the effects are positive. The PWG members will be more tolerant of other
opinions, and less likely to argue, if they understand that agreements both for and against
divestment are valid and supported. This understanding will also help prepare them for the CRC
meetings.

The economic effects of fossil fuel divestment are controversial. There are many disagreements
regarding what the impacts of fossil fuel divestment are on the economy. Often, these
disagreements result from the complexities regarding the data that were previously discussed.
This section will describe the controversies surrounding how fossil fuel divestment effects
divesting companies. Many people disagree on what the effects are and how they impact
companies. The purpose of this section is to establish that there is genuine controversy
surrounding fossil fuel divestments economic effects, and the larger topic of divestment as a
whole.
There is little debate over whether or not divesting from fossil fuels will have an effect on a
companys stock returns. However, there is debate surrounding whether these effects will be
beneficial or detrimental to the divesting companys portfolio. First, this section will discuss the
reasons why some people believe the effects of fossil fuel divestment will be negative. Then, the
section will discuss why others believe the opposite.

The Effects are Negative

Many believe that divesting from fossil fuels is a poor economic decision for businesses because
of the high initial costs and long-term loss of returns that will result. For example, the National
Association of College and University Business Officers reports that university endowments
hold approximately $23 billion in energy-related assets. If all of these assets were divested, up to
$40.2 million in processing costs alone would be incurred.These high initial costs alone deter
many from divesting, regardless of what the long term effects might be (Fischel, 2015).

(Fischel, 2015)

Not only are investors turned off by the initial costs of divestment, but they also fear the long-
term loss of potential income from their portfolios. As shown in the chart, the divested portfolio
has constantly lower returns than the non-divested, risk-adjusted portfolio. Additionally, the
difference between the returns on these two portfolios have seemingly been increasing in recent
years. Many advisors do not think divesting is a sound economic or financial decision because of
the long-term losses on potential profit that they will incur (Fischel, 2015).

It is also believed that over a 10-year period, an initial portfolio of $1,000,000 could experience
average losses of over $67,000 simply due to increased costs of portfolio management. These
additional costs will result in lower return rates for investors. Additionally, many investors
purchase stock in fossil fuel corporations because they have proven themselves to be stable
investments according to past data. Switching from fossil fuel investments to another industrys
stock could decrease the stability of investment portfolios. This exposes investors to greater
financial risks (Fischel, 2015).

The Effects are Positive

Though there are short term costs related to the divestment from fossil fuels, many believe that
the long-term benefits outweigh the initial loss. Al Gore has said, If you're a long-term investor
and you do not take into account the stranded-assets potential for carbon-based equities and debt
instruments, in my view you're making a mistake (Fossil Free MIT, 2015).

Stranded assets are assets that lose economic value before the time when the loss was
anticipated. Many believe that carbon assets, including fossil fuels, have an increasing chance of
becoming stranded assets. This is due to three main risks:

1. regulation: Increased governmental regulation on fossil fuels could decrease their value.
The threat of increased regulation alone increases the risk associated with fossil fuel
investments.
2. market forces: In recent years, many alternative sources of fuel have been developed.
Fossil fuels have to compete with these newer green energy sources. This increased
competition poses a threat to the economic value of fossil fuels. There is also a risk that
these sources of energy could make fossil fuels obsolete.
3. sociopolitical pressures: Divestment campaigns, environmental advocacy, protests, and
changing public opinion could result in carbon-based companies losing their ability to
operate. This would result in carbon-based fuels, such as fossil fuels, losing their
economic value.

The chance that fossil fuels may become stranded assets and lose their value is reason enough for
many to choose to divest from fossil fuels. These three factors make fossil fuels too risky of an
investment (Gore, 2015).
Many believe that investors who hold on to stock in fossil fuel companies will experience
harmful effects long term. The fear many investors have regarding fossil fuel investments is due
to what many refer to as the carbon bubble. The following graph demonstrates this concept and
compares it to the housing bubble which burst in 2008, resulting in the housing crisis (Pfund,
2014).

the Carbon Bubble & the Housing Bubble

(Pfund, 2014)

The amount of fossil fuels available in the reserves of fossil fuel companies far exceeds the
amount that can safely be burned. As shown in the graph above, around 60-80% of the fossil
fuels in these reserves cannot be burned in order to remain below 2 C of global warming.
Because of this, around 60 to 80 percent of fossil fuels are considered to be unburnable (Wright,
2015). Though these fossil fuels are considered unburnable, they are still listed as assets by fossil
fuel companies. These assets give the companies value that they do not really have access to.
This inflates stock prices for these companies. This inflation in the stock prices makes
investment in these companies less stable than they appear to be longterm. Many investors fear
that this bubble will eventually pop when the fossil fuel companies are unable to tap into the
assets they claim to have on paper. The effects would be similar to those of housing crisis, but on
a much larger scale (Fossil Free MIT, 2015).

Some reports have shown that investors have already lost possible funds due to not divesting
from fossil fuels. According to the MSCI World Energy Index, fossil fuel stocks have lost 30
cents on the dollar in the last 21 months. For organizations with large portfolios, this can add up
to a lot of money (Fleishman, 2015). HSBC has warned that the value of fossil fuels could be
reduce by anywhere between 40 and 60 percent within the coming years (Fossil Free MIT, 2015).
Investing in fossil fuel companies that rely solely or heavily on constantly replenishing reserves
of fossil fuels is becoming a very risky decision (Fleishman, 2015).

The stock market always has natural peaks and valleys, and it is expected that stock prices will
go up and down. Many long-term investors want to hold onto these stocks, hoping that the price
of fossil fuels will increase again. However, divestors see this as a sign that fossil fuels are no
longer the safe investment that they once were. These people are also taking into account the
previously mentioned risk factors of regulation, market forces, and sociopolitical factors. They
believe that these risk factors could affect fossil fuel stock prices negatively, and in the long-run,
these investments will cost them money (Fleishman, 2015).

The economic rationale behind many divestors decisions to abandon fossil fuel investments is
that by doing so they are avoiding the negative consequences they would incur had they not
divested. These companies believe that their decision to divest will increase the long-term
stability of their investments. Some believe that fossil fuels are old technologies that will prove
to be poor long-term investments as cleaner energy sources gain popularity. California State
Senator Kevin de Len was a major player in Californias decision to divest its pension plans
from fossil fuel companies. He said, Coal is a losing bet for California retirees. Last year, the
Californias pensions systems lost more than $5 billion on their fossil fuel holdings. These losses
played a huge role in Californias decision to divest (Fleishman, 2015). The state believes that
green energy sources, such as wind power, have more of a future than fossil fuels (Mergerian,
2015).

One of the largest concerns investors have about divestment are the long-term costs of fund
management. Typically, investment funds are managed by a third party. Because of the additional
time and effort the third party would need to put into a divested portfolio, divestment could result
in additional fund management fees being incurred. However, recent studies have predicted that
there could be a change in market norms due to recent sociopolitical pressures. Portfolio
management companies are expected to start offering additional options which do not include
investments in fossil fuel companies. Meaning, additional fund management costs due to
divestment would no longer be an issue. As time passes, many believe that divestment will
become easier and more economically feasible, while fossil fuel investments become less and
less stable (Fossil Fuel MIT, 2015).

Conclusion

The economic effects of fossil fuel divestment is a technical and complex topic. Some of these
concepts include economic inputoutput life cycle assessment models (EIO-LCA), shadow
impact calculators (SICs), and endowment carbon shadows. Often times, accuracy of data
relating to the economic impacts of fossil fuel divestment is up for debate due to the complex
nature of the calculations. This leads to uncertainty surrounding the data that is collected. These
uncertainties open the door for multiple analyses of the same information. This leads to
disagreements and controversies surrounding the topic. Many economists say the negative
economic costs, including loss of income, make fossil fuel divestment a poor financial and
economic decision for investors. However, others, such as California State Senator Kevin de
Len, believe that fossil fuels are old technologies that will prove to be poor long-term
investments as cleaner energy sources gain popularity. Additionally, others fear fossil fuels are a
risky investment due to what is called the carbon bubble. The long-term effects of fossil fuel
divestment are under debate, and economists, politicians, and investors are unable to come to a
consensus on this topic.
 Works Cited

Fischel, D. (2015, February 9). Fossil Fuel Divestment: A Costly and Ineffective Investment
Strategy. Retrieved October 21, 2015, from http://divestmentfacts.com/pdf/
Fischel_Report.pdf

Fleishman, B. (2015, November 16). Why fossil fuel stock prices are doomed. Retrieved
December 3, 2015, from http://gofossilfree.org/why-fossil-fuel-stock-prices-are-doomed/

Fossil Free MIT. (2015). Economics. Retrieved October 28, 2015, from http://www.
fossilfreemit.org/economics/

Gore, A., & Blood, D. (2013, October 29). The Coming Carbon Asset Bubble. Retrieved
December 3, 2015, from http://www.wsj.com/articles/SB
10001424052702304655104579163663464339836

Koba, M. (2012, January 19). Alpha and Beta: CNBC Explains. Retrieved November 19, 2015,
from http://www.cnbc.com/id/45777498

Matthews, S., Legowski, M., Ready, R., Garrett, J., Sin, M., Knupp, J., Sharrard, A. (2014,
February 11). EIO-LCA-Economic Input-Output Life Cycle Assessment. Retrieved
November 19, 2015, from http://www.eiolca.net/Method/

Mergerian, C. (2015, October 8). California pension funds to drop coal-mining companies.
Retrieved November 19, 2015, from http://www.latimes.com/politics/la-pol-sac-
california-pension-divest-coal-20150930-story.html

Pfund, N. (2014, August 1). INVESTING FOR IMPACT. Retrieved November 19, 2015, from
http://www.nacubo.org/Business_Officer_Magazine/Magazine_Archives/
JulyAugust_2014/Investing_for_Impact.html

Ritchie, J., & Dowlatabadi, H. (2014). Understanding the shadow impacts of investment and
divestment decisions. Ecological Economics, 106132-140. doi:10.1016/j.ecolecon.
2014.07.005. Retrieved October 21, 2015, from http://0-search.ebscohost.com.
helin.uri.edu/login.aspx?direct=true&db=edselp&AN=S0921800914002079&site=eds-
live

Wright, C. (2015, February 13). Will The Carbon Bubble Be The Next Financial Crisis?
Retrieved November 19, 2015, from http://www.forbes.com/sites/chriswright/
2015/02/13/will-the-carbon-bubble-be-the-next-financial-crisis/