Knowledge Asymmetries and Climate Finance: An Inquiry into Environmental Market Failures and Political Legitimacy

Abstract

This paper examines how asymmetric information distorts climate-related financial markets and undermines democratic legitimacy in political institutions, contributing to epistemic climate injustice. Building upon canonical theories of information economics, I refine the classical concepts of adverse selection and moral hazard to accommodate the distinctive features of climate risk: deep uncertainty, cascading fluctuations over time in trend and cyclicality, systemic feedback loops, and intergenerational trade-offs. I show how informational gaps generate market failures in the pricing and allocation of green assets and climate-linked securities, demonstrating that, for some agents, climate modelling and verification mechanisms produce systematic mispricing of green assets, leading to inefficient capital misallocation that cannot be remediated without recourse to new forms of global governance. I propose a multi-pronged normative framework for democratising climate knowledge production through democratic changes that amplify deliberative processes using intergenerational mechanisms based on the institutionalisation of access to information. This article offers a roadmap for mitigating informational asymmetries while advancing a substantive global response to climate change.