This chapter discusses how decarbonisation will affect capital markets and how capital markets can support decarbonisation. One notable focus is on the risk of ‘stranded assets’, that is assets that lose value because of decarbonisation, and the potential implications for financial stability. The chapter also analyses how capital markets can become a key enabler of decarbonisation, also thanks to new sustainable finance instruments such as green bonds.

Two preliminaries: US experience points to the unprecedented challenge of the rapid, drastic energy transition we face, and the labor needed to accomplish it should regarded as a cost, not a benefit. This chapter thus encourages skepticism regarding claims that the cost of meeting carbon goals will be minimal and proposes questions that should be asked of optimistic studies. The most reliable analyses draw on integrated assessment models, which show we can achieve a two-thirds chance of limiting warming to 2° at moderate cost only by greatly overshooting corresponding carbon budgets, followed by decades of negative emissions using yet-to-be developed carbon removal technologies. Not predicating policy on these technologies, however, results in very high costs. Even so, these models don’t include the likelihood that much of the existing capital stock will be uneconomic to operate at high carbon prices, a potential source of enormous disruption. The closest analogy we have is the post-1989 shock in Eastern Europe when economic opening caused widespread shutdowns. It is important to be honest about costs: rosy forecasts are unconvincing, fail to prepare us for the problems we’ll need to solve and obscure the political economy of policy change.

To understand why so little is being done about climate change, we need to draw on political economy: Who would pay the cost of adhering to a carbon budget, and what say do they have over policy? The cost of capital write-offs discussed in Chapter 5 will be borne primarily by wealth-holders, who have disproportionate political influence in nearly all countries. Although public attention has focused on fossil fuel industries, a wide range of businesses have quietly resisted emission-cutting regulations and ensured that adopted policies would have ample loopholes. The other main cost, much higher energy prices, would be borne regressively by households. To forestall their opposition and protect living standards, it is essential that most carbon revenues be returned to them, ideally as per-capita rebates. The net effect of carbon pricing and rebating would be strongly progressive. Since it is neither feasible nor desirable to compensate wealth-holders for capital losses, however, effective action against catastrophic climate change requires broad, determined collective action to rebalance political power away from control by capital.

Trump’s America First Energy Plan, which focuses on oil and gas expansion and rolling back regulations, promised to insulate the US economy from the volatile global oil market. In reality, the US shale oil industry, operating within the global oil markets, suffered contractions when oil supplier nations’ price wars caused global oil prices to crash. While the plan promised to bring Americans jobs and prosperity, predicating economic development on oil and gas extraction is a dubious strategy for several reasons. The shale industry, which contributed to the recent boom and expected future production, suffers from a shaky financial foundation. Even prior to COVID-19, traditional investors had begun cutting lending to shale companies and bankruptcies were accelerating. In March 2020, under Congress’s COVID-19 financial rescue package, the Trump administration executed a bailout for the oil and gas industry that shifted financial losses to American taxpayers without securing companies’ agreements to keep workers employed. The bailout replicates the decades-long economic model of the industry, which privatizes profits to the companies, while socializing the costs from the industry, through tax preferences and subsidies for the industry and through various laws that favor extraction over those that suffer from the industry’s adverse impacts.

Chapter 7 examines both fiscal barriers and incentives to corporate climate action. Barriers such as fossil fuel subsidies and relative political inaction on that issue (at the World Trade Organization and other fora) and on the issue of carbon taxes are assessed. In contrast, the picture at the institutional investor level looks more active, with investors becoming increasingly concerned about the risks of climate change to fiscal stability. Issues of stranded assets, divestment, short-termism and financial regulatory developments are covered. In addition, some limited climate litigation initiated by investors (and its mixed results) is assessed. Varying jurisdictional approaches to sustainable investing from the SEC in the United States to the Bank of England in the United Kingdom are highlighted. Recent statements by Lord Sales at the Anglo-Australasian Law Society, as well as by the institutional investor BlackRock, in 2019 are indicative of a changing approach to climate investing. Regulatory developments requiring climate risk disclosure by the Department for Works and Pension, guidance by the Financial Conduct Authority and the focus on ESG investing in the EU, all signal the slow greening of capital in the context of climate change.