Dielectric screening plays a vital role in determining physical properties at the nanoscale and affects our ability to detect and characterize nanomaterials using optical techniques. We study how dielectric screening changes electromagnetic fields and many-body effects in nanostructures encapsulated inside carbon nanotubes. First, we show that metallic outer walls reduce the scattering intensity of the inner tube by 2 orders of magnitude compared to that of air-suspended inner tubes, in line with our local field calculations. Second, we find that the dielectric shift of the optical transition energies in the inner walls is greater when the outer tube is metallic than when it is semiconducting. The magnitude of the shift suggests that the excitons in small-diameter inner metallic tubes are thermally dissociated at room temperature if the outer tube is also metallic, and in essence, we observe band-to-band transitions in thin metallic double-walled nanotubes
