We study the interaction of political and financial frictions in shaping environmental policy. We build a general equilibrium asset pricing model where investors with heterogeneous preferences for carbon reduction (“green” or “brown”) bargain over a carbon tax, which in turn influences portfolio decisions and real investment. We show that the politically-determined equilibrium is generically inefficient. Because political agreements cannot dictate subsequent private capital allocations, the carbon tax disproportionately imposes welfare costs on brown investors, leading to a low carbon tax and systematic under-investment in green technology relative to the Pareto frontier. In a two-country extension with integrated financial markets, this inefficiency is compounded by a financial leakage channel: unilateral climate policy can be counterproductive, as capital and pollution shift to the untaxed jurisdiction, potentially increasing aggregate global emissions. Our results highlight that a carbon tax alone is insufficient when capital is mobile and policy is endogenous, suggesting that complementary policies targeting international capital flows may be necessary to enable effective climate action.