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Endowments Divesting Of Oil Stocks Threatens The University Mission While Doing Nothing To Reduce Carbon Emissions

This article is more than 3 years old.

A good number of the country’s colleges and universities had a precarious financial outlook before the pandemic wreaked havoc with their budgets, and many of them will not survive if the Covid-19 pandemic results in an extended period without a full house of tuition-paying students. 

And in an apparent attempt to make a bad situation even worse, activists agitating for universities to divest their shrinking portfolio of politically incorrect companies threaten to exacerbate their fiscal woes. 

The biggest problem facing schools pre-pandemic is that the cohort of college-age citizens has begun declining and will continue to do so for the foreseeable future, leaving institutions without strong national reputations or billion dollar endowments scrambling to attract their share of the market in a shrinking pool. The less well-known liberal arts colleges and smaller regional public universities are most at risk: their students tend to have the least allegiance to pursuing a college degree and are more likely to delay or give up on college altogether if it becomes more difficult to accomplish. 

Despite the constant hand wringing about the high cost of college, very few schools have the leverage to extract more tuition from their students, and they must provide generous financial aid to most of their students to keep enrollment sufficiently high. The high listed tuition prices for Ivy League schools are as relevant to the affordability of college as the cost of a Porsche is to the affordability of automobiles: A student coming from a middle class family attending a school near his home can expect to pay well below full tuition. 

In the last few years liberal arts schools have begun to close their doors in increasing numbers. In my home state of Illinois, several private and public universities have seen their numbers decline significantly and several are on the precipice of collapse. 

And of course, the recent pandemic has greatly exacerbated the problems faced by colleges. Few are in position to forego a semester of tuition, but that's precisely what many schools are forced to contemplate if the Covid-19 epidemic is not brought under control soon.

Many schools have also become especially dependent on tuition from foreign students, who typically pay full tuition. However, foreign students are having trouble obtaining visas to return to the U.S. and continue their schooling even if their college does open on time. The Trump Administration’s recent announcement that it would bar foreign students from remaining in the U.S. unless they are taking at least some of their classes in-person rather than online promises to further reduce tuition from foreign students. 

The situation has forced colleges across the country to lay off faculty, drop sports, and greatly reduce the services they can offer students. 

At the same time that many colleges are facing an existential threat, activists across the country have decided to make things worse for them by renewing efforts to push college endowments to divest of stocks in energy companies or other concerns deemed to be politically problematic. 

Such actions impose costs on colleges—and their students—at a time they can least afford it while doing nothing to hasten the advent of a carbon-free economy. 

It is hard to discern any potential impact on the environment from such an empty gesture. The price of such stocks may slide a bit if no college were to hold it in an endowment, but that’s probably not about to happen, and even if that were to occur it’s hard to see why that would impact the behavior of oil companies all that much if demand for its product still exists. 

A hasty divestment brought about by student activists will impact a school’s endowment. While oil stocks have been especially beaten down in 2020 thanks the struggle of OPEC+ to reach a production agreement and the Coronavirus pandemic destroying a significant chunk of demand, oil companies have traditionally been a steady and dependable stock that pays a significant dividend. Losing such a base means that a portfolio that sensibly balances risk and return can take less risk and, thus, should expect a lower long-run return on its investment. 

For instance, the president of George Washington University said that they estimate its divestment will “only” cost it about $1 million in the next five years—even though it had already divested itself of almost 90% of its fossil fuel holdings the previous five years. Sacrificing a projected seven figure investment gain—and in reality probably much more—simply to appease a vocal cohort of students is ridiculous, especially when the University’s in the process of cutting millions of dollars from the rest of its budget. 

While we all may wish fervently to the contrary, the world is going to need oil for at least the next generation or two, and our emphasis at this point should be to encourage policies that reduce the emissions that occur when it is consumed and to nudge firms to substitute away from oil and coal when it can be cost-effective to do so. That is the reason that so many economists are in favor of imposing a carbon tax, which would properly incentivize companies that produce, refine, or consume it to mitigate emissions.

Colleges are in terrible financial shape and to insist they fritter away millions in some empty gesture is misguided folly. There are many better ways to reduce carbon emissions than one that imposes a cost on students at the worst possible time to do such a thing.

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