In his cover story for The Nation (“The New Abolitionism”), editor-at-large and MSNBC host Christopher Hayes wrote an engaging and passionate argument for radical action to fight climate change, endorsing the efforts of environmentalist Bill McKibben and others to block the Keystone XL pipeline and to pressure investors to divest from fossil fuels, all toward the ultimate goal of leaving these resources in the ground, unburned. While a laudable goal, divestment is not an optimal one; definitive climate action requires further steps, and the reasons why are worth further exploration.

The argument that Hayes puts forth is, at first glance, compelling. Climate change is a critical threat to our standard of living. Climate change is fueled in large part by the aggressive pace of carbon emissions, resulting from the burning of fossil fuels (coal and oil, principally). To avoid truly catastrophic effects, many climate scientists say we need to leave a great deal of the existing fossil fuel resources in the ground. But, due to the lack of market forces or government policy disincentivizing the practice, fossil fuel companies continue to explore and drill, bringing these products to market, where we happily consume them in our cars and homes.

Hayes believes the divestment movement can break this chain by targeting what he sees as the Achilles’ Heel of the fossil fuel industry: its large capital requirements. As journalist Steve Coll ably demonstrated in his book Private Empire: ExxonMobil and American Power, profit-seeking companies live for booked reserves—the pools of oil they can declare to investors as under their effective control. New exploration for these reserves is expensive and risky, but the payoff is worth it. Investors direct money toward giants like ExxonMobil and smaller “wildcat” outfits who pioneered hydraulic fracturing because the cash flow return of their resource extraction is lucrative and, absent external shocks such as recessions, demand for the product is more or less steady. If investors start retreating from purchasing shares in these companies, based on the logic that their money is being misspent, their business model will falter. Institutional investors, such as pension funds and university endowments, would send a clear signal that the spigot is off for high-carbon offenders.

Unfortunately for climate hawks, this process may be much more difficult and less linear than Hayes lets on. According to a study (“Stranded assets and the fossil fuel divestment campaign”) from the University of Oxford’s Stranded Assets Programme (SAP), these companies have a great deal of built-in resilience, and the effects of a divestment campaign will not be painful enough to fundamentally change the industry on its own.  

One reason is the sheer scale of investments, and how neutral investors view equities subject to a divestment campaign. SAP’s report looked at the total amount of assets deployed into equity markets by U.S. university endowments. Out of the nearly $400 billion in assets under management by U.S. universities, only 2 percent (almost $10 billion) of that was invested in fossil fuels. The ratio roughly holds the same for pension funds. In comparison, the market value of ExxonMobil alone at the end of 2013 was $442 billion. Thus, as the SAP authors conclude, immediate sales of even those combined resources would not be enough to inflict serious price declines.

Part of this is because, in markets with very little friction, such as equities exchanges, other buyers are out there. Those divested shares would wind up back on the market, where they would no doubt be snapped up by individual investors and hedge funds who are much less concerned with environmental issues (or who do care, but do not see divestment as the optimal path). As Megan McArdle pointed out in her response to Hayes, the demand-side of the ledger is extremely robust, and it would be hard to imagine the stigma surrounding the oil industry would be deeply felt enough to chase away investors universally. This point leads into another reason climate hawks should be realistic about divestment’s limitation: the international dimension of fossil fuels. If achieving universal divestment of fossil fuel companies within the United States would be extremely difficult, replicating that success globally would be well-near impossible.

While ExxonMobil, Shell, and BP are gargantuan multinational corporations, they are dwarves compared to state-owned enterprises, that, in most cases, can happily ignore shareholder activism, as long as they deliver revenue to their principal stakeholder (that is, their government’s treasury). To return to McArdle, she is absolutely right to point out that forgoing extraction means denying a source of wealth and major input to the global economy. One may strain to sympathize when that means depriving BP of revenue, but for poorer countries it is a different story.

The report offers one area for hope. Of all of the fossil fuel industries that SAP covered, coal is the one most vulnerable to divestment, since its companies have smaller market capitalizations and, with the advent of cheaper natural gas, it may no longer be seen as a growth industry by neutral investors. That sentiment will likely accelerate with the introduction of the Environmental Protection Agency’s rules on emissions from existing power plants. In these circumstances, a divestment campaign would actually be an effective strategy for convincing investors not to plow more money into their stocks. 

Action against oil will remain a harder slog, and for longer. For the oil industry, divestment may be effective if it offers an avenue for support of restrictive legislation (tighter fuel economy standards or a carbon tax). After all, as ExxonMobil freely admitted in their report on carbon asset risk, it is government constraints (and, conversely, investment) decisions that will really and truly impact the fossil fuel industry. In order to achieve the sort of carbon reversal climate scientists say is necessary to avoid truly harmful effects, we would need a carbon price of around $200 per ton by 2050, almost an order of magnitude higher than the upper bound of what most governments in the world today have deployed. I do not doubt Hayes would be happy if this were the case, but I find it strange it is not a larger part of his original argument.

So, far from being a tool to exploit the weak link in the fossil fuel industry, divestment can, at best, be the harbinger of action in the one place where, so far, it has been so woefully lacking: Congress. The impasse in the legislature is unlikely to change in the near-term, which is why you see the Obama administration focusing so heavily on executive action. Unfortunately, the only policy that would satisfy the universality criteria necessary to compel action on climate would be a price on carbon. Whether divestment is really the first step to getting us there remains a doubtful proposition.