Fossil fuels and higher education in Texas

Photo by Jerod Foster for The Texas Tribune

The fossil fuel divestment movement has picked up steam in recent months. In November 2017, Norway announced plans to consider dropping oil and gas stocks from its $1 trillion sovereign wealth fund. Last month, New York City announced a goal to divest $5B in fossil fuel assets from its $189B pension funds within five years. Even in major oil-producing states like Alaska, there have been calls to move on from fossil fuels. These developments call into question the future of the Texas Permanent University Fund (PUF), which derives massive revenues from oil and gas production. There are both moral and financial justifications for the Texas PUF to diversify away from fossil fuels, but it is also conceivable that revenues from these assets could contribute to a more sustainable energy system.

The PUF was established in the Texas Constitution in 1876. As its name implies, a portion of the annual revenues from the PUF is made available to the University of Texas and Texas A&M University systems on a two-to-one basis. When it was created, the PUF was mostly comprised of dry, low-value grazing land in West Texas. Almost fifty years later, Carl G. Cromwell drilled the Santa Rita oil well on PUF land, and oil production has been a major source of revenue for the fund ever since.

Fossil fuel divestment is an aspect of the “keep it in the ground” movement promoted by activists such as Bill McKibben with the goal of limiting emissions that contribute to climate change. Divestment is the opposite of investment, i.e., the selling of stocks, bonds and other assets. Some have argued that while divestment may be effective for raising public awareness, its financial impact is more dubious. If an entity sells its fossil fuel-related stocks and bonds while they are still perceived to be valuable, those assets will just be picked up by another entity that doesn’t share the same ethical concerns with little or no effect on the share price.

Despite the reasons to be skeptical about the financial impact of divestment by itself, movements like “keep it in the ground” have also sought to reduce the perceived value of fossil fuels by advancing a concept called the “carbon budget,” the limit on new carbon emissions allowed if we are the avoid the 2°C warming threshold emphasized by the Intergovernmental Panel on Climate Change and the Paris Agreement. To stay within this carbon budget, most of the proven reserves of fossil fuels worldwide will have to stay in the ground. Such a dramatic decrease in fossil fuel consumption would severely reduce the revenues earned by fossil fuel producers and result in trillions of dollars of stranded assets. Even if society fails to stay within the carbon budget, the impressive drop in costs for wind, solar PV and batteries will reduce demand for fossil fuels for power generation and transportation, thus reducing the rationale for holding onto fossil fuel assets.

If the trends described above continue, it may be financially prudent for the PUF to diversify its portfolio away from fossil fuels. If such assets are still going to be valuable for some time, however, it would be counterproductive to divest from fossil fuels rather than putting those revenues to good use. Rather than divesting, revenues from fossil fuel production could be directed towards research and development programs focused on improving the performance and reducing the cost of low carbon energy sources and energy storage. Such a strategy would turn the perceived problem of the PUF’s reliance on fossil fuels into part of the solution for reducing demand for fossil fuels long-term.

The views expressed in this article are the author's own.

*Editor's note: An earlier version of this column misstated New York's actions on fossil fuel investments; that state set a goal of divesting.

The University of Texas has been a financial supporter of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune's journalism. Find a complete list of them here.

Andrew Reimers

Energy systems analyst