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.

November 20, 2015

Contents
Executive Summary .3
Introduction ..4
The Technical Element ....4
The Controversial Element ..7
Conclusion..10
Works Cited ...11
 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 educate Dravo Engineerings non-technical staff so that they
understand relevant issues and controversies surrounding fusion power. 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

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 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 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

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). Many agree with his
point of view and 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 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 60-80% 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).

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. The state
believes that green energy sources, such as wind power, have more of a future than fossil fuels
(Mergerian, 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

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

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/
 Memorandum

TO: Janet Hopkins, CEO

Ralph Kramden, COO
FROM: Amanda Biernacki, Research Consultant
DATE: November 20, 2015
SUBJECT: Formal Report

Introduction

My purpose in writing this memo is to gain your approval for the formal report on the economic
effects of fossil divestment by explaining a deviation in the final report from the original outline
sent to you on October 22, 2015.

The original outline contained a subsection that would discuss the controversies related to the
economic effects fossil fuel divestment has on fossil fuel companies. As my research progressed,
I found that reasonable controversy surrounding this topic does not exist. Reputable research
showed that the general consensus on this topic was that fossil fuel divestment did not impact
fossil fuel companies in any significant way economically or financially.

The purpose of the report was to accurately inform the PWG members on relevant controversies
surrounding divestment in order to prepare them for the CRC meetings. Including this topic as a
genuine controversy would have misinformed your employees, thus not fulfilling the purpose of
the report. For this reason, the section on controversies surrounding fossil fuel divestments
impact on fossil fuel companies was removed. A copy of the updated outline has been attached to
this memo.
Updated Outline

I. Introduction
A. Purpose: to ensure that the PWG members are educated about important
divestment issues
B. Introduce topic of the economics of fossil fuel divestment
C. Audiences interest education will prepare the employees for the CRC
meeting regarding divestment and help avoid possible future conflicts
surrounding this topic.
D. Roadmap
1. The technical element of the economics surrounding fossil fuel
divestment
2. The controversial element of the economics surrounding fossil
fuel divestment
II. Technical element
A. Inputoutput life cycle assessment models
1. What they are and how they are used
2. How they can measure the economic effects of fossil fuel
divestment
B. Shadow Impact Calculator
1. What it is and how it is used
2. How it can measure the economic effects of fossil fuel
divestment
III. Controversial element:
A. Effect on divesting companies
1. The effects are negative
a. High initial costs of divesting
b. Long-term loss of investment income
c. Decrease in stability of investments
2. The effects are positive
a. Initial costs outweighed by long-term benefits
b. Long-term increase in investment income
c. Increase in stability of investments
B. Effect on fossil fuel companies
1. There is little to no effect
a. Stock value remains the same
b. No financial impact
2. There is a beneficial effect
a. Stock value decreases