Climate Economics and Sanctions

Economists describe emissions as history’s greatest market failure: burning carbon imposes costs — heatwaves, floods, crop failures — on people who were never part of the transaction. The textbook remedy is carbon pricing: make emitters pay, via either a carbon tax or a cap-and-trade market like the EU’s Emissions Trading System. The EU has gone furthest, adding a Carbon Border Adjustment Mechanism (CBAM): since January 1, 2026, importers of cement, iron and steel, aluminum, fertilizers, electricity and hydrogen must be authorized and report the emissions embedded in those goods, then buy and surrender certificates priced off the EU carbon market from 2027 for 2026 imports (Section 1.21: Energy and Commodities as a Financial System). That effectively exports the EU’s carbon price to trading partners, a serious matter for Indian steel and aluminum exporters.

Two concepts matter for finance. Stranded assets: if the world honors its climate targets, a large share of proven coal, oil, and gas reserves can never be burned — meaning assets on energy companies’ books may be worth far less than stated. Green finance: the counter-flow of capital into the transition — green bonds (debt earmarked for climate projects, a market now well past the trillion-dollar mark cumulatively), sustainability-linked loans, and sovereign green bonds, which India began issuing in 2023.

India embodies the transition’s central tension. It is simultaneously one of the largest emitters (by total, though far below rich countries per person), highly climate-vulnerable, still coal-dependent for most electricity, and one of the fastest builders of renewable capacity on Earth, targeting 500 GW of non-fossil capacity by 2030 and net zero by 2070, both announced at the COP26 summit in November 2021. By August 31, 2026, non-fossil sources (solar 168.0 GW, wind 58.5 GW, large hydro 52.1 GW, nuclear 8.8 GW, plus small hydro and bio-power) reached 304.3 GW, or 304.3 ÷ 554.5 = 54.9% of India’s installed power capacity, leaving 195.7 GW to add. The target is for capacity, not output: a solar plant generates only part of the day, so non-fossil sources supply a smaller share of the electricity actually produced than of capacity. The developing world’s argument — that those who industrialized first should finance the transition of those industrializing now — runs through every global climate summit, usually under the heading of climate finance.

Three chapters of this guide converge here: foreign exchange reserves (1.7) and — ahead of you — the dollar’s reserve-currency role (2.5) and SWIFT messaging (3.5). Sanctions weaponize all three. In February 2022, after Russia invaded Ukraine, Western allies executed the most sweeping financial sanctions ever applied to a major economy: selected Russian banks were cut off from SWIFT (a list the EU widened step by step, and in July 2025 the EU extended a full transaction ban to dozens more Russian banks), and — most consequentially — hundreds of billions of dollars of Russia’s own central bank reserves, held in Western financial institutions, were immobilized; about €210 billion of them sit in the EU alone. A war chest built over decades became unusable overnight. Since 2024 the windfall profits those immobilized assets earn have been channeled to Ukraine, including to service about €45 billion of EU and G7 loans, and the EU has decided the assets stay frozen until Russia ends the war and compensates Ukraine.

The toolkit is layered: asset freezes on individuals and entities; bans on trading with sanctioned firms; exclusion from payment systems; secondary sanctions, which threaten third-country banks with losing US market access if they deal with sanctioned parties — the mechanism that gives US sanctions global reach, because nearly every international dollar payment ends up passing through US banks (Section 3.5: How Money Crosses Borders — SWIFT and Correspondent Banking traces that plumbing); and novel instruments like the G7’s oil price cap, which used Western dominance of shipping insurance to cap the price at which Russian crude could travel (initially $60 a barrel; in July 2025 the EU switched to an automatic cap set below the market average, first $47.60, and revises it periodically).

India sat at a fascinating junction: it declined to join the sanctions, purchased Russian crude at steep discounts (saving billions in import costs and becoming, at points, Russia’s largest seaborne oil customer), yet had to engineer payment workarounds — rupee-dirham mechanisms, third-country intermediaries — precisely because the normal dollar plumbing was mined. The lasting global lesson: reserves held in someone else’s system are ultimately promises, not possessions. That realization quietly accelerated central-bank gold buying worldwide and every de-dollarization conversation covered in chapter 2.6: BRICS and the Challenge to Dollar Dominance.