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Green finance innovation for net zero target in China

ZHANG WEI And LIU XUEMENG | 2021-08-05 | Hits:
(Chinese Social Sciences Today)

Photovoltaic power generation to facilitate the realization of carbon neutrality in Ganzhou City of Jiangxi Province Photo: CFP


In September 2020, China announced to the world that it aims to “have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060” (the 30·60 goal).
 
Reaching peak carbon emissions and realizing carbon neutrality aims at reshaping the energy structures and industrial structures of China, which is a systematic task, touching upon green transformations of many aspects of socioeconomic development. Innovation and developing green finance are significant guarantees for the realization of the 30·60 goal. Based on the calculation of the National Center for Climate Change Strategy and International Cooperation, to realize carbon neutrality, newly added climate investment will scale up to 139 trillion yuan by 2060. 
 
Some research indicates, to realize carbon neutrality, China needs green investment at scales beyond hundreds of trillions of yuan in the future three decades and beyond. These circumstances indicate that enormous green investment in China is needed to realize the 30·60 goal, which will make new requirements for the development of green finance. 
 
Solid foundations
In recent years, China has established a whole set of regulation framework centering on green finance. China is one of the global forerunners in green finance development, with its outstanding green loans the largest globally and its green bond scale ranking the second globally. As a capital-intensive economic activity, the development of green finance requires large amounts of investment. Great achievements in China’s socioeconomic development have cemented a solid foundation for the growth of green finance. Particularly, since the 18th CPC National Congress in 2012, the vitality of China’s economy has been greatly realized. With accelerating economic growth, the financial industry has grown rapidly and fiscal revenues have increased year by year, which provides an economic foundation for employing fiscal and taxation polices to guide financial capital to carbon neutrality projects. 
 
China’s financial industry enjoys a sound realistic foundation to promote carbon neutrality. In order to cope with global climate change, some financial institutions in China have made some explorations in recent years, from pledge financing of emission rights, financing of energy-saving projects, to the attempts of securitization of carbon emission rights and green factoring, which all reflect a willingness for participation and an innovative spirit in these financial institutions. 
 
The development of green finance has gradually become a practice of social responsibility, which provides a practical basis for China’s financial industry to help carbon neutrality. The whole society attaches great importance to the development of green finance, which provides a stable environment for the development of green finance in China. 
 
After reform and opening up, China has gradually established a basic economic system maintaining the dominant role of public ownership while developing other forms of ownership. Developingthe dominant role of public ownership means that China’s system should be people-oriented and benefit the people, which makes green development and ecological construction necessary  , gives a broad space for the development of green finance, and also provides a necessary guarantee for the reform, innovation, and transformation of the financial industry. 
 
Green finance has both public and commercial attributes. With the gradual improvement of economic marketization, the commerciality of green financial business is becoming stronger and stronger, but there is always a minimum threshold.
 
The guidance and support of the government is indispensable for the development of green finance at the initial stage, for instance, in strengthening the environmental regulations, issuing green finance policies, and in carrying out revolutionary innovation experiments. Those measures have expanded the requirements of green finance, and have reduced the cost of development exploration.   
 
Path forward
The 14th Five-Year Plan (2021–2025) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035 points out that green finance should be developed vigorously. 
 
Even though China’s financial industry has certain foundations for promoting carbon neutrality, the support for carbon neutrality will encounter certain challenges, which requires the bridging of green finance. 
 
The pathways for green finance to facilitate carbon neutrality can be promoted through the following aspects.   
 
First is to strengthen the system construction of green finance to support carbon neutrality.  
The formation of a unified action guide for the development of green finance should be promoted, such as the issuance of the “guiding opinions on supporting carbon neutrality in China’s financial industry” and rules on implementation. In view of some content contrary to carbon emission reduction in the current green financial standards and green product standards, it is necessary to systematically revise the green financial standards and green product standards according to the requirements of carbon neutrality. As information on carbon emissions of enterprises is a significant basis for guiding the decisions of financial institutions, while financial institutions’ carbon emissions information signifies their preferable projects and carbon footprints, the carbon emissions information disclosure systems for enterprises and financial institutions should be introduced.
 
The second is to strengthen the infrastructure construction of green finance to support carbon neutrality. A carbon market is the “link” between green finance and carbon neutrality, an important area for green finance to empower carbon neutrality. 
 
At present, China has piloted the construction of eight regional carbon markets, which have accumulated experience for the construction of a standardized national carbon market. 
 
It is necessary to gradually strengthen the construction of the national carbon market according to relevant plans, elevate it to the core position of the green financial system, and encourage financial institutions to develop green financial products based on the features of the carbon market. 
 
Meanwhile, the attributes of carbon emission rights should be clarified and the carbon market should be incorporated into the financial market and capital market for supervision. We can consider applying certain experience of development and supervision of financial markets to that of carbon markets.
 
The third is to optimize the enterprises’ environment so that green finance supports carbon neutrality. 
 
Financial institutions should be guided to set up carbon neutral business departments or similar departments, uniformly undertaking a carbon review of all financing matters, supervision of financing and post-financing operations of carbon neutrality projects, improving the organization and overall planning ability of financial institutions, and strengthening business training related to carbon neutrality for financial institutions’ personnel. Financial institutions should strengthen their risk assessment of climate financing, carry out stress testing, establish an early warning system, and formulate response plans and operating procedures. 
 
Further, they must innovate and explore various types of risk sharing associations or strategic alliances to improve the risk resilience of the carbon neutrality-related projects of financial institutions.
 
We should establish and improve incentive mechanisms for the development of green finance. 
According to relevant theories, fiscal policy tools such as guarantees, interest subsidies, and monetary policy instruments such as deposit reserve ratios and refinance rates are beneficial to the development of green financial products, but most of these financial policy tools are suitable for the green financial products only at their initial stage. 
 
With the development of green financial products, an exit opportunity for financial policy instruments shall be chosen. Fiscal policy instruments supporting green financial products development is selective or periodical, while monetary policy instruments support green financial products universally or continuously. Meanwhile, it is necessary to subdivide green financial products, implement policies by classification, and coordinate financial instruments to allow green finance to better promote carbon neutrality. 
 
Fifth, the low-carbon goal should be highlighted while vigorously developing green finance. In fact, carbon finance is differentiated from green finance. Certain projects supported by green finance may not be low-carbon, while projects supported by carbon finance may not be green. 
 
Therefore, the financial characteristics of the carbon market shall be strengthened, combining carbon market construction with the realization of carbon neutrality, developing carbon financial products based on the carbon market. This requires the improvement of a unified domestic carbon market and the cultivation of intermediary institutions. Financial institutions should be encouraged to carry out carbon forward, carbon swap, and carbon futures option business.
 
Zhang Wei and Liu Xuemeng are from the School of Economics and Management at China University of Geosciences, Wuhan. 
 
 
Edited by ZHAO YUAN