Should Endowments Divest Their Holdings in Fossil Fuels? No: The Symbolic Act Would Achieve Little and Cost Much

Student activists are pressing colleges and university endowments to divest their holdings in fossil-fuel companies, because the combustion of coal, oil and natural gas contribute to carbon-dioxide emissions that—along with other greenhouse gases—cause global climate change.

While the students' concerns are understandable, I believe the message from the divestment movement is fundamentally misguided.

We need to focus on actions that will make a real difference, as opposed to actions that may feel or look good but have little real-world impact, particularly when such symbolic actions have opportunity costs—that is, they divert us from what really matters. And what really matters in addressing climate change will be enlightened public policies at the international, national and sub-national levels that will reduce greenhouse-gas emissions and the risk of climate change. This is where research institutions can and should wield their influence.

On Oct. 3, 2013, after many months of assessment, discussion and debate, Harvard President Drew Faust announced that Harvard's governing boards didn't believe that "university divestment from the fossil-fuel industry is warranted or wise." Responding in the Nation a few days later, two of the student leaders at Harvard noted that "we do not expect divestment to have a financial impact on fossil-fuel companies.…Divestment is a moral and political strategy to expose the reckless business model of the fossil-fuel industry that puts our world at risk."

I agree with the students that fossil-fuel divestment by the university wouldn't hurt the industry financially, and I also agree with their implication that it would be of symbolic value only. It is precisely because of this that I believe President Faust announced the right decision.

Symbolic, Not Effective

If divestment would at best be a symbolic action, without direct and effective financial impacts on the industry—or, more important, on global CO2 emissions—then a major problem arises. Symbolic actions often substitute for truly effective actions by allowing us to fool ourselves into thinking we are doing something meaningful about a problem when we are not.

But aren't the beneficial impacts of a moral crusade worth the opportunity costs of symbolic actions? The answer, in my view, is "No."

Climate change is fundamentally a scientific, economic and political challenge. Viewing it as a moral crusade will play into and exacerbate the ideological divide and political polarization that has paralyzed Washington on this and other issues, diminishing the prospects for effective climate policy. Whatever moral statement divestment might make isn't worth further disintegration of the climate-policy process.

As to whether there is a financial risk associated with ignoring the divestment movement, that reasoning is flawed. Fossil-fuel asset prices are unlikely to be affected by divestment, and the market already prices in the probability of future policy action on climate change.

Impeding Change

And even if divestment were to reduce the industry's financial resources, this would only serve to reduce fossil-fuel companies' efforts to develop emissions-cutting technologies such as carbon capture and storage. It also could slow development of new renewable energy sources by fossil-fuel companies pursuing sensible diversification strategies. Also, keep in mind that a major reason for recent declines in U.S. carbon emissions is our increased use of natural gas (a fossil fuel) instead of coal to generate electricity.

The divestment strategy focuses exclusively on investment, but emissions are linked with the use of fossil fuels, which in our economy is due to the interaction of the supply of energy resources and the demand for energy services. The most effective public policies recognize this, and thereby work through the market.

The real contributions of great universities to the fight against climate change will be through our products: research, teaching and outreach to policy makers. That is how we have made a difference on other societal challenges, and it is how we will make a real difference on this one.

Dr. Stavins is the Albert Pratt professor of business and government at the Harvard Kennedy School, a research associate of the National Bureau of Economic Research, and a university fellow of Resources for the Future. He served as chairman of the EPA's Environmental Economics Advisory Board under Presidents Bill Clinton and George W. Bush, and has served as a lead author in three rounds of the Intergovernmental Panel on Climate Change. Email him at reports@wsj.com.