By Garvin Jabusch, Green Alpha Investments
CO₂ emissions directly increase the amount of energy trapped in Earth’s atmosphere. This isn’t abstract—it’s physical reality. More emissions mean more energy retained. More energy means more extreme atmospheric behavior. Storms intensify, heatwaves extend, droughts deepen, flights experience more and worse turbulence. This first principle drives everything that follows.
These extremes create direct physical risks to all categories of human-owned assets. Heat, wind, and water destroy capital. Flooded homes lose value. Overheated cities become desperate. We’re watching entire asset classes degrade in real time, translating to business interruption and systemic market devaluation.
The insurance industry, which has historically managed these risks, is approaching mathematical breakdown. At 1.5°C, 2°C, 3°C of warming, the premiums required to cover climate risks exceed what people or companies can pay. This isn’t speculation—State Farm and Allstate have already exited California’s home insurance market due to wildfire risk. Entire regions are becoming uninsurable.
Without insurance, the rest of the financial system unravels. An uninsurable house can’t be mortgaged. Banks won’t issue loans for unprotectable assets. Credit markets freeze. This isn’t just about housing—it applies to infrastructure, transportation, agriculture, and industry. The economic value of entire regions will begin vanishing from financial ledgers.
The Conservative Counter-Argument Has Merit—In Theory
Critics of this catastrophist view make valid points about market adaptability. They correctly note that insurance withdrawal from high-risk areas represents rational market functioning, not system failure. When insurers exit, it signals that regulatory price caps prevented actuarial accuracy. For example, Florida’s private insurance market thrives despite hurricane exposure when risk-based pricing is allowed.
They point to historical precedent: capitalism survived the London Fire of 1666 (which birthed modern insurance), the Dutch building below sea level, post-WWII reconstruction, and the 2008 financial crisis. Markets are antifragile—they strengthen under stress.
The technology argument is particularly compelling. Solar costs dropped 90% in a decade. Nuclear fusion attracts massive private investment. Carbon capture follows similar early-stage cost curves. Markets don’t need perfect solutions, just profitable ones at each temperature increment. And the transition is already happening—renewable energy wins on cost, not on climate concern. EVs take market share because they’re better products.
This market optimist view suggests that financial innovation will create new risk management tools: adjustable-rate climate mortgages, resilience bonds, blockchain-enabled granular risk sharing. The financial sector won’t disappear—it will evolve.
But There’s an $8 Trillion Problem
Here’s where both arguments collide with reality: global fossil fuel subsidies total an estimated $7 trillion annually when including externalities (IMF calculation), or about $1.3 trillion in direct subsidies alone. This represents the greatest market distortion in human history.
These subsidies destroy the elegant logic of both positions. For climate advocates, they explain why the transition isn’t happening despite renewables being cheaper—we’re literally paying to keep fossil fuels competitive against superior technology. For market advocates, you can’t claim efficiency while defending $7 trillion in price distortion. That’s not free market capitalism; it’s central planning with extra steps.
The subsidy problem creates a political economy death spiral. Subsidies create regional dependency. Dependency creates political power. Political power protects subsidies. Protected subsidies delay transition, making eventual adjustment more catastrophic. This isn’t market adaptation—it’s political calcification.
The Insurance Crisis Becomes Unsolvable
With $8 trillion maintaining artificially high emissions, insurers face an impossible equation. They must price climate risks that are artificially accelerated while competing against subsidized moral hazard—cheap energy encourages development in risky areas. Governments socialize losses through disaster relief while privatizing fossil fuel profits.
No amount of financial innovation can solve a problem where losses are systematically subsidized to grow faster than premiums can rise. We’re simultaneously funding both the arson and the fire department—paying $8 trillion to increase emissions while spending hundreds of billions on disaster relief.
The Market Wants to Transition—Politics Won’t Let It
Whenever subsidies briefly equalize, renewable investment soars. The market signal is clear: capital wants to flow toward better technology. But political capture maintains the distortion. The regions and workforces dependent on subsidized fossil fuels vote to maintain their subsidies, even as climate costs mount for everyone else.
This reveals the fundamental dishonesty in many market-based arguments against climate action. If conservatives truly believed in market resilience and creative destruction, they’d advocate for immediate elimination of all energy subsidies, fossil fuels and renewables alike, letting stranded assets strand without bailouts, and letting the best tech win on its (market based!) merits.
The fact that most don’t reveals this isn’t about market efficiency—it’s about protecting incumbent interests. This isn’t market adaptation—it’s political calcification. The market wants to transition (see: renewable investment trends whenever subsidies briefly equalize), but politics won’t let it.
Where Capital Preservation Really Leads
At Green Alpha, we’ve long argued that investing in the economy we need, not the one we’ve inherited, isn’t about values—it’s about creating value. The $8 trillion subsidy distortion creates massive mispricing throughout the economy. Fossil assets appear profitable only because their true costs are externalized. Renewable assets appear less profitable because they’re competing against subsidized alternatives.
Smart capital should recognize this distortion won’t last forever. Physical reality has a way of asserting itself regardless of political preference. Either we remove subsidies gradually and allow smooth market transition, or climate impacts force chaotic repricing. There’s no third option where subsidies continue indefinitely while climate risks accelerate—that mathematical impossibility is what breaks the insurance industry and, with it, the financial system.
The Path Forward: Price Signals Must Reflect Reality
The solution remains simple in concept but politically complex in execution: end energy subsidies. This isn’t radical environmentalism—it’s basic market economics. Let price signals reflect true costs. Let creative destruction work. Let superior technology win on merit, not despite handicaps.
For investors, this means positioning ahead of the inevitable repricing. For companies, it means building resilience against both climate impacts and stranded asset risk. For policymakers, it means having the courage to remove market distortions even when politically difficult.
The question isn’t whether capitalism can survive climate change—properly functioning markets would have already solved this. The question is whether democracy can survive fossil fuel industry capture long enough to let markets do their job.
Because ultimately, this isn’t about saving the planet. The planet will be fine. This is about saving the conditions under which markets, finance, and human civilization can continue to operate. And that means ending the $7 trillion lie that fossil fuels are cheap.
The transition will happen. The only question is whether it happens through foresight or force, through markets or through catastrophe, through portfolio allocation or through systemic collapse. At Green Alpha, we’re betting on foresight. But with $8 trillion still distorting price signals, we’re hedging against force.
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Note on subsidy calculations: The International Monetary Fund identifies two types of fossil fuel subsidies. Explicit subsidies represent direct government support through underpricing relative to supply costs—these totaled $1.3 trillion in 2022. Implicit subsidies include unpriced environmental externalities such as climate damages and air pollution health costs. Together, these reached $7 trillion in 2022, or 7.1% of global GDP. Some analyses project this could reach $8.2 trillion by 2030. While economists debate whether externalities should be termed “subsidies,” both represent real economic distortions preventing efficient market pricing of energy. See Black et al. (2023) for methodology.
Bibliography
Primary Sources
Black, Simon, Antung Liu, Ian Parry, and Nate Vernon. 2023. “IMF Fossil Fuel Subsidies Data: 2023 Update.” IMF Working Paper 2023/169. International Monetary Fund, August 24. https://www.imf.org/-/media/Files/Publications/WP/2023/English/wpiea2023169-print-pdf.ashx
Black, Simon, Ian Parry, and Nate Vernon-Lin. 2023. “Fossil Fuel Subsidies Surged to Record $7 Trillion.” IMF Blog, August 24. https://www.imf.org/en/Blogs/Articles/2023/08/24/fossil-fuel-subsidies-surged-to-record-7-trillion
International Institute for Sustainable Development (IISD). 2024. “The Cost of Fossil Fuel Reliance: Governments provided USD 1.5 trillion from public coffers in 2023.” https://www.iisd.org/articles/insight/cost-fossil-fuel-reliance-governments-provided-15-trillion-2023
International Monetary Fund. 2023. “Fossil Fuel Subsidies.” Climate Change resource page. https://www.imf.org/en/Topics/climate-change/energy-subsidies
Additional Context and Analysis
Parry, Ian, Simon Black, and Nate Vernon. 2021. “Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies.” IMF Working Paper 2021/236. International Monetary Fund, September 24. https://www.imf.org/en/Publications/WP/Issues/2021/09/23/Still-Not-Getting-Energy-Prices-Right-A-Global-and-Country-Update-of-Fossil-Fuel-Subsidies-466004
Ritchie, Hannah. 2025. “How much in subsidies do fossil fuels receive?” Our World in Data, January 27. https://ourworldindata.org/how-much-subsidies-fossil-fuels
Earlier IMF Assessments (for historical context)
Coady, David, Ian Parry, Nghia-Piotr Le, and Baoping Shang. 2019. “Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates.” IMF Working Paper 2019/89. International Monetary Fund, May 2. https://www.imf.org/en/Publications/WP/Issues/2019/05/02/Global-Fossil-Fuel-Subsidies-Remain-Large-An-Update-Based-on-Country-Level-Estimates-46509
Key Data Points for Quick Reference
- $7 trillion: Total fossil fuel subsidies in 2022 (IMF calculation including externalities)
- 7.1%: Percentage of global GDP this represents
- $1.3 trillion: Explicit subsidies in 2022 (direct government support)
- $1.5 trillion: Government support in 2023 (IISD calculation)
- 18%: Share of total subsidies that are explicit
- 82%: Share that are implicit (environmental costs)
- 60%: Portion due to undercharging for global warming and air pollution
- $8.2 trillion: Projected subsidies by 2030 if current trends continue
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At the time this article was written and published, Green Alpha client portfolios did not hold positions in Allstate (ALL) or State Farm.