A better understanding of the role of new energy and green finance to help achieve carbon neutrality goals,with special reference to China

Abstract

Carbon neutrality is an important policy in the current global response to climate change and has been widely recognized by various industries. In the process of promoting carbon neutrality, new energy plays a pivotal role. In this study, the definition and connotation of new energy and its role and specific operation in the energy transition of carbon neutrality are firstly explained. Promoting new energy development requires significant green and low-carbon investments. Taking China as an example, this paper analyzes the opportunities brought by the carbon neutral process to the field of green finance and analyzes the main features and development trends of green finance in China at present. Then this paper proposes policy recommendations to strengthen the development of green finance in China in terms of improving the green financial policy system, enhancing the supply capacity of green financial services, and optimizing the supporting environment for green financial development. Finally, this paper analyzes the measures and experiences of the United States in promoting low-carbon development and proposes countermeasures for China's low-carbon development on the basis of the five major relationships that need attention in China's carbon-neutral process. That is, strengthen the top-level design and improve the regulatory policy system; optimize the energy structure and increase the proportion of clean energy; optimize the industrial structure and reduce energy consumption in key industries; build a complete low-carbon technology system and promote low-carbon technology research and development and demonstration applications, and encourage local conditions to explore low-carbon development paths. The development of green finance can contribute to the advancement of new energy technologies, thus contributing to the achievement of carbon neutrality goals.

Keywords

carbon neutrality new energy green finance climate change Paris agreement China

Introduction

Climate change is one of the most serious problems facing the world today,^1,2 seriously threatening the survival and development of human society.^3,4 There is a large gap between the current international emission reduction commitments and the achievement of the long-term goals set out in the Paris Agreement.⁵

In 2018, the United Nations Intergovernmental Panel on Climate Change released the Special Report on Global Warming of 1.5°C.² The report pointed out that countries’ autonomous contributions and emission reduction commitments are seriously insufficient, and the global temperature is expected to rise by 2.9–3.4°C in 2100, dealing a devastating blow to human society, and controlling the temperature increase to 1.5°C requires various national, city, industry and household level to rapidly promote behavioral changes, technological upgrades and systemic changes, especially to bring into play the development of new energy and green finance.² The 2020 Emissions Gap Report released by the United Nations Environment Programme states that global greenhouse gas emissions have increased by an average of 1.4 percent per year since 2010.⁶ Global greenhouse gas emissions, including those caused by land-use change, reached a record high of 59.1 billion tons of carbon dioxide equivalent in 2019, and global surface temperature is expected to rise by more than 3°C by the end of the 21st century, making it urgent for countries to strengthen climate protection actions.^7,8

From the perspective of China's practice, China has always attached great importance to addressing climate change and has repeatedly and explicitly put forward carbon emission reduction targets and requirements.⁹ The Chinese government is committed to achieving carbon neutrality and has formulated policies to actively promote the process of carbon neutrality. China has repeatedly made clear its emission reduction targets and requirements.¹⁰ At the Copenhagen Climate Conference in 2009, the Chinese government stated that by 2020, it would achieve the goal of reducing carbon dioxide emissions per unit of GDP by 40–45% compared to 2005,¹¹ that non-fossil energy would account for 15% of primary energy consumption, and that forest stock would increase by 1.3 billion cubic meters compared to 2005.¹² At the 2015 Paris Climate Conference, the Chinese government proposed that by 2030, carbon dioxide emissions should be reduced by 60–65% relative to 2005 and aim to reach the peak, non-fossil energy should account for 20% of primary energy consumption, and forest stock should increase by 4.5 billion cubic meters compared to 2005.¹³ In September 2020, Chinese President Xi Jinping proposed at the 75th General Debate of the United Nations General Assembly that China will increase its national contribution, adopt stronger policies and measures, and strive to peak carbon dioxide emissions by 2030 and achieve carbon neutrality by 2060 (hereinafter referred to as the “3060” target).¹⁴ At the UN Climate Ambition Summit in December 2020, China further proposed that by 2030, China's carbon dioxide emissions per unit of GDP will drop by more than 65% compared to 2005, the share of non-fossil energy in primary energy consumption will reach about 25%, forest stock will increase by 6 billion cubic meters compared to 2005, and the total installed capacity of wind and solar power will reach more than 1.2 billion kilowatts.¹⁵ These carbon emission reduction measures and requirements provide important strategic guidance for China's efforts to build a carbon neutrality country.^16–18

By the end of 2019, China reduced its carbon intensity by about 48.1% compared to 2005, and the share of non-fossil energy in primary energy consumption reached 15.3%, fulfilling China's foreign commitments by 2020 ahead of schedule and laying a solid foundation for 100% implementation of the country's autonomous contribution and efforts to achieve the peak target and carbon-neutral vision.¹⁹ However, China is still the world's largest emitter of carbon dioxide,²⁰ accounting for about a quarter of global carbon dioxide emissions.¹⁹ Achieving carbon neutrality in China will require significant green, low-carbon investments, the vast majority of which will need to be made through the financial system to mobilize social capital.^21,22

Therefore, it is of great scientific and practical value to understand and play the role of new energy in the process of carbon neutrality compared to fossil energy.^23,24 What type of new energy is involved in this question? What is the role of new energy in the energy transition? What exactly is the role of new energy in the carbon neutrality process and how does it work? These are key questions for understanding the relationship between new energy and carbon neutrality. In order to promote new energy reform and innovation, a large amount of green and low-carbon investment is needed. Therefore, how to understand the opportunities that the carbon neutrality process brings to China's green finance? What is the current development of green finance in China? How to further enhance the quality development of green finance in China? From a global perspective, what are the dimensions of the relationship that should be concerned in China's current drive for carbon neutrality? These are all key questions to understand the relationship between green finance and carbon neutrality.

To answer the above questions, the following logical framework is designed in this paper. Firstly, this paper tries to answer the question of the role of new energy in the process of carbon neutrality by analyzing the concept and connotation of new energy, new energy as the protagonist of the third energy conversion, and the dominant position and role of new energy in the carbon neutrality. Secondly, this paper elaborates the possible opportunities brought by the carbon neutrality process to the development of China's green finance in terms of environmental, social and governance and climate change risk management, industrial structure and carbon market development, analyzes the comprehensive features and development trend of China's green finance development, and further proposes countermeasures for the development of China's green finance in terms of green financial policy system, green financial service supply capacity and green financial development support environment. Thirdly, this paper elaborates the five major relationships that need to be balanced to promote the carbon neutrality process from the perspective of long-term top-level design, namely, the relationship between long-term goals and short-term actions, overall and local carbon peaks, administrative and market mechanisms, technology-driven and structure-driven, and carbon emission reduction inputs and output benefits. Finally, this paper summarizes the relevant measures and experiences of the United States in promoting low-carbon development and proposes countermeasures to promote low-carbon development in China at present. This paper tries to understand the role of new energy and green finance in the process of carbon neutrality and the long-term top-level design and short-term actions to promote carbon neutrality in China through the above-mentioned settings（Figure 1）.

Figure 1.

The logical framework of this paper.

Therefore, the objective of this paper is to understand the potential role of new green energy sources in the context of carbon neutrality goals, and how the development of green finance may contribute to the achievement of carbon neutrality and the development of new energy sources. What measures need to be taken by the government to achieve and enhance the corresponding role of new energy and green finance in the carbon neutrality process. Through the analysis of the above topics in this paper, we try to make the global audience understand the inherent relationship between new energy and green finance and carbon neutrality.

The role of new energy in the carbon neutrality process

The connotation of the concept of new energy

New energy refers to non-fossil carbon-free, renewable and clean energy that is developed and utilized on the basis of new technologies to replace traditional energy sources, and the main types are solar energy, wind energy, biomass energy, hydrogen energy, geothermal energy, ocean energy, nuclear energy and new material energy storage.²⁵ Compared with traditional carbon-containing fossil energy sources such as coal, oil and natural gas, they are significantly different in terms of theoretical technology, utilization cost, environmental impact and management methods.²⁶ With the rapid development of new energy technology and the continuous progress of the Internet, artificial intelligence, new materials and other technologies, the new energy industry is in a breakthrough period and gradually entering the golden development period.²⁷ Developing new energy and promoting energy structure transformation are the keys to achieving carbon neutrality.²⁸ The accelerated pace of new energy development and utilization has become a new driver of global energy growth, and will gradually replace fossil energy and play a key role in the process of carbon neutrality.^29,30

New energy: The protagonist of the third energy transition

From the history of energy development in the world, the history of human energy use has experienced two transitions from fuelwood to coal and from coal to oil and gas and is undergoing the third transition from fossil energy to new energy. New energy is clean, low-carbon, and in line with the development needs of the carbon neutrality process, and will take the lead in the third energy transition.²⁷ Since 1925, global energy has become cleaner and the development of new energy other than biomass has accelerated. While global energy demand increases 10-fold from 1.4 billion tons of oil equivalent to 14.4 billion tons of oil equivalent from 1925–2019, the share of new energy sources in global energy increases 24-fold from 0.6% to 15.1%.³⁰ In the past 10 years, the global energy technology change has accelerated significantly, and the cost of photovoltaic power generation, wind power, etc. have dropped significantly, accelerating the green transformation of the energy system. Since 2010, the levelized cost of electricity for photovoltaic, solar thermal, onshore wind and offshore wind has declined by 82%, 47%, 39% and 29%, respectively, in 2019, according to the report of the International Renewable Energy Agency.²⁶ In 2019, 56% of the new large-scale installed capacity of new energy generation coming online could be achieved at a cost lower than the cheapest fossil fuel generation.²⁴ From 2010 to 2019, photovoltaic power generation will increase from 32 billion kw-h to 699 billion kw-h, an annual increase of 240%; wind power generation will increase from 342 billion kw-h to 1404 billion kw-h, an annual increase of 45%.³¹

New energy: leading the way in the carbon neutral process

From the perspective of energy production and consumption structure, world energy has formed a pattern of coal, oil, gas and new energy. The study predicts that 2030 will be a turning point for new energy, with the cost of many new energies falling to compete with fossil energy and the trend toward decarbonization of energy continuing to strengthen.^31,32 Global primary energy is expected to peak at 15.6 billion tons of oil equivalent in 2030, with an average annual growth rate of 1.2%, of which coal accounts for 19%, oil for 28%, natural gas for 26% and new energy for 27%.²³ Oil demand is expected to slow down in 2025 and enter a stable period by 2030. Natural gas may become the only fossil energy source expected to maintain growth due to its low-carbon attributes. After 2030, the cost of new energy is expected to be lower than that of fossil energy. The world's total primary energy consumption is expected to remain at a relatively stable level in 2030–2050.¹⁹ By 2050, the world's primary energy consumption will be basically the same as that in 2030, of which coal will account for 4%, oil for 14%, natural gas for 22% and new energy for 60%, and the world's energy consumption structure will undergo fundamental changes, with new energy surpassing coal, oil and natural gas to become the main energy source.¹²

The important role of new energy in the carbon neutrality process

Solar, wind, hydro, nuclear and hydrogen energy are the mainstays of new energy, helping the power sector to achieve low carbon emissions. Since 2019, the average cost of new energy generation has been lower than the cost of gas-fired generation, but the overall level is still 16% higher than that of coal generation.⁶ It is expected that by about 2030, most new photovoltaic and wind power projects will have lower average investment levels than new coal power plants, and almost all Asia-Pacific markets can achieve lower costs for photovoltaic and wind power generation than coal power generation. By 2050, new energy generation is expected to meet 80% of global electricity demand, with photovoltaic and wind power accounting for more than half of total power generation.² Traditional fossil hydrogen production is called gray hydrogen and renewable energy hydrogen production is called green hydrogen. Green hydrogen is the backup of new energy, helping to further reduce carbon emissions in industry and transportation. The cost of electricity accounts for 60% to 70% of the cost of hydrogen production from electrolytic water, and the cost of green hydrogen will drop rapidly as the price of electricity drops significantly.²⁶ By about 2030, green hydrogen is expected to be more cost-effective than fossil fuel hydrogen production. By 2050, the proportion of global hydrogen energy in end-use energy consumption is expected to reach 18%, and the green hydrogen technology will be fully mature for large-scale use in areas where it is difficult to achieve zero emissions through electrification, mainly including industrial hydrogen for steel, oil refining, ammonia synthesis, and long-distance transportation such as heavy trucks and ships.²⁹ Artificial carbon conversion technology is a bridge between new energy and fossil energy, effectively reducing carbon emissions from fossil energy, converting excess electricity into chemical products or fuels for storage, and playing a role in peak shaving and valley filling for the new energy grid. Electric-to-gas conversion, the main form of artificial carbon conversion that transforms carbon dioxide to methane, is seen as the key to Europe's energy transition. It is expected that by 2050, 10% to 65% of the EU's energy consumption in the industrial sector will come from electric-to-gas conversion, and 30% to 65% of the energy in the heating sector and transportation sector will come from electric-to-gas conversion.³⁰

Opportunities for China's green finance through carbon neutrality

Achieving carbon neutrality requires a large amount of green, low-carbon investment, the vast majority of which needs to be achieved by mobilizing social capital through the financial system.

Increased focus on strengthening environmental, social and governance and climate change risk management

The risks brought by climate change mainly come from physical risks and transformation risks, among which transformation risks are the main climate risks faced by financial institutions, i.e. financial risks brought by changes in climate policies, regulatory requirements, technological changes and market sentiments arising from green and low-carbon transformation, and manifested as credit risks, market risks, liability risks and reputation risks of banking financial institutions.²⁹ For example, fossil energy and high-carbon industries such as coal, coal power and oil are subject to more stringent policy restrictions, resulting in business restrictions, higher costs, lower efficiency and higher risks for related companies, which have a serious negative impact on the asset quality of financial institutions.³⁰ With the green transformation in full swing under the carbon neutrality vision, the climate risks faced by banking and financial institutions will become more prominent and financial institutions will pay more attention and strengthen their environmental, social and governance risk management. On the one hand, it integrates environmental, social and governance and climate change risk management into the scope of comprehensive risk management, formulates and improves relevant policies, systems and process management, and effectively identifies, evaluates, prevents and controls potential risks in business areas, etc. On the other hand, it takes the initiative to strengthen climate change-related information disclosure, discloses its initiatives and effectiveness related to green finance business and environmental risk management through various channels, and continuously enhances the brand image of responsible financial institutions while strengthening external constraints.

Proactive adjustment of business direction and asset structure

The carbon peak target and carbon neutrality vision will drive the accelerated restructuring and fundamental transformation of energy, industry and economy from the source. In the future, it is expected that Chinese authorities will introduce a series of powerful policy initiatives in key areas such as energy, industry, transportation, construction, agriculture and land use to reduce the proportion of fossil energy consumption and vigorously develop renewable energy, which will usher in significant development opportunities in green and low-carbon fields such as clean energy, green transportation, new energy vehicles, green buildings and digital economy. In early 2021, China's Ministry of Finance issued a new “Commercial Bank Performance Evaluation Measures”, which added the assessment of “serving national development goals and the real economy”, including a 6% weighting for the assessment of the green credit ratio.¹⁹ Thus, it seems that banking financial institutions need to optimize and adjust their key business directions and asset structures, accelerate the compression or withdrawal of business in high-carbon industries, and tilt towards green and low-carbon industries.³⁰ In addition, the development of green finance by banking financial institutions under the carbon neutrality target will focus more and highlight the financial support in the field of addressing climate change, and the proportion of climate finance such as climate credit and climate bonds will show a gradual increase. Data show that by the end of 2018, China's climate credit balance exceeded RMB 6 trillion, accounting for more than 70% of the total green credit balance; green bonds issued domestically related to climate finance exceeded RMB 130 billion, accounting for about 60% of the proportion of green bonds.¹⁹

Carbon financial market construction and the broadening of green financial development space

China has launched carbon emissions trading pilots in several regions, but a national carbon market has not yet been established. In January 2021, China's Ministry of Ecology and Environment issued the Measures for the Administration of Carbon Emissions Trading (for Trial Implementation), which clearly proposed to organize the establishment of a national carbon emissions registry and a national carbon emissions trading agency, and the construction and trading of a unified national carbon emissions trading market will be accelerated.¹⁹ In the future, with the gradual development and maturity of China's carbon market, the scope of industries covered and trading varieties will be gradually expanded, and the carbon finance business space of financial institutions will also be gradually broadened. The Study on China's Long-Term Low Carbon Development Strategy and Transition Pathway, published by Tsinghua University's Institute of Climate Change and Sustainable Development in collaboration with 18 research institutions in China, concluded that achieving the 1.5°C goal-oriented transition pathway would require a cumulative new investment of approximately RMB 138 trillion, or more than 2.5% of GDP per year.¹² The carbon neutrality process will lead to an average annual green economy investment of over trillions of dollars from 2020–2060, providing significant new investment opportunities for the financial sector.²³

Development characteristics and trends of green finance in China

Green finance becomes a mainstream trend in the financial industry

In recent years, the development of green finance in China is becoming a mainstream trend in the domestic financial industry, driven by “top-down” policies that uphold environmental, social and corporate governance investment concepts. Many banking financial institutions in China have gradually established and improved strategic planning, organizational structure, incentives and constraints, resource allocation, and information disclosure for the development of green finance. For example, China Post and Reserve Bank is committed to building a world-class climate-friendly green bank, incorporating the development of green finance into the bank's medium- and long-term development strategy, issuing the Three-Year Plan for Strengthening the Construction of Green Bank, and setting up a green bank leadership team and green finance franchise branches such as green sub-branches.¹⁹ Some Chinese banks have responded positively to join the International Sustainable Development Initiative. So far, six Chinese banks, namely Industrial Bank, Bank of Jiangsu, Huzhou Bank, Chongqing Rural Commercial Bank, Mianyang Commercial Bank and Guizhou Bank, have announced to join the International Sustainable Development Initiative.¹⁹

Green finance market size continues to expand

In recent years, China's green finance has developed rapidly and the market scale has continued to expand. As of the first half of 2020, China's green loan balance grew from RMB 5.2 trillion yuan at the end of 2013 to RMB 11.02 trillion yuan, ranking first in the world; the stock size of green bonds was RMB 1.2 trillion yuan, ranking second in the world.¹⁹ By the end of August 2020, the carbon market in the pilot areas covered more than 20 industries such as iron and steel, electric power and cement, and nearly 3000 enterprises, with a cumulative turnover of more than 400 million tons and a cumulative turnover of more than RMB 9 billion yuan, making it the second-largest carbon market in the world in terms of quota turnover.¹⁹ At the same time, China's green finance market has huge potential.²⁵ According to available studies, China will need to invest a cumulative RMB 90 trillion yuan to RMB 100 trillion yuan between 2020 and 2050 to achieve its carbon neutrality goal, accounting for about 2% of GDP by 2020–2050. This represents about 2% of the total GDP in 2020–2050.¹⁹

Green financial products continue to be enriched

Based on green credit and green bonds, China has been enriched with financial products in the field of green finance and climate finance. The main green financial products in China can be broadly divided into green financing products, green investment and trading products, environmental risk management products and environmental information products. Green financial products are still mainly green credit, green bonds and green indices are developing at a faster pace, while green funds and green insurance are still in the initial stage. Industrial and Commercial Bank of China took the lead in conducting environmental stress tests in the banking sector in China, and in July 2017 released the first environmental, social and governance green rating system and index study established by a financial institution to carry out the application of evaluation and analysis for 180 enterprises in Shanghai Stock Exchange.¹² In the future, it is expected that the green product system will gradually be improved to provide multi-level and all-round services for green development.

High focus of green finance investment

The capital investment of green finance in China is highly concentrated in green transportation, clean energy and pollution prevention. According to the classification basis given in the “Green Bond Support Project Catalogue (2015)”, the funds raised from green bonds in 2019 will be invested in green transportation (26%), clean energy (27%) and pollution prevention and control (13%), accounting for a total of 66%.¹⁹ As of the end of the third quarter of 2020, the balance of green loans in China accounted for 48% and 27% of the balance of loans to infrastructure green upgrading industries and clean energy industries, respectively; by industry, the transportation industry accounted for about 31% and the energy industry accounted for about 29%.¹⁹ The Green Finance Regulations of Shenzhen Special Economic Zone issued by Shenzhen City, China, has made addressing climate change the first ranked area of support. It can be seen that the field of addressing climate change is still the key support direction for green finance in the future.

Increasingly diverse forms of green finance cooperation

The development of green finance is a systematic project involving many subjects, and the cooperation of domestic and foreign parties with financial institutions as the core is becoming more and more frequent and has shown a trend of normalization and diversification. For example, the Sino-British Financial Dialogue, led by the Green and Gold Council and the City of London, has strengthened exchanges and cooperation between the two sides and promoted environmental information disclosure by pilot financial institutions, achieving remarkable results. China Post and Reserve Bank cooperated with the China Public Environment Research Center to integrate the environmental data of Azure Map into the “Golden Eye” credit risk monitoring system to carry out environmental risk management and customer environmental credit repair work. Cooperation between financial institutions and the government and financial technology companies can help smooth the path of access to corporate environmental data information, establish a risk-sharing mechanism, and solve key problems faced by green finance, such as information asymmetry and low market liquidity.

Key points for green finance enhancement in China

Improve the green financial policy system

Firstly, it is urgent for the Chinese government to establish and improve laws and regulations, policy systems and institutional mechanisms. Drawing on the EU Climate Law and the UK Climate Change Act, we will study and formulate laws and regulations related to green development and addressing climate change, promote the construction of institutional mechanisms such as organization, coordination, supervision and evaluation in the field of green finance and climate financing, and support the healthy and orderly development of green finance. It is urgent for the Chinese government to accelerate the study and introduction of policies such as green development plan and special plan to cope with climate change, formulate carbon peak action plan, strengthen policy support and various policy synergies in industry, environment, finance, taxation and finance, and make comprehensive use of increasing tax relief, financial subsidies, differentiated risk weights, providing risk compensation and setting up guarantee funds to stimulate the endogenous momentum of green financial development.

Secondly, there is an urgent need for the Chinese government to accelerate the construction of a green financial standard system that is unified domestically, in line with international standards, and clearly enforceable. At present, China's green finance standards, especially climate investment and financing standards, still have multiple management and are not yet unified. For example, there are different opinions on the green attributes of projects such as passenger railroads, nuclear power and clean use of fossil energy in China's green industry guideline catalog, green credit and green bonds, and green financing statistical system, and the standards still need to be unified.

Thirdly, the Chinese government urgently needs to strengthen the construction of a mandatory disclosure mechanism for environmental and climate information. Environmental and climate information disclosure is still in its infancy, and most of the relevant laws, regulations and departmental rules are principled and guiding opinions or guidelines, lacking mandatory disclosure requirements and standards. Mandatory disclosure requirements should be made through legislation and other forms, and institutional documents for environmental and climate information disclosure should be studied and formulated to unify the content, form, standards and other requirements for disclosure. At the same time, establish a sound public infrastructure, build a platform for climate information tracking, disclosure and supervision; strengthen the assessment, certification and supervision of third-party institutions, and build a market discipline mechanism.

Enhance the supply capacity of green financial services

Firstly, to establish a sound market system for green finance and climate investment and financing. The Chinese government should actively develop various green financial markets such as green credit, green bonds, green funds, green insurance, green finance and carbon finance, guide and support financial institutions to innovate and enrich green investment and financing products and tools, enhance the supply of green financial services and meet the financial needs of green transformation. It is necessary to accelerate the improvement of relevant systems and trading rules, fully launch a unified national carbon market, improve the carbon spot market, and create a carbon futures market.

Second, improve the internal governance mechanisms of financial institutions to create climate-friendly green banks. Commercial banks should attach great importance to and actively respond to the financial risks brought by the environment and climate change, establish the development strategy of climate-friendly green banking, and comprehensively promote the green transformation of business development and asset structure. Consideration can be given to establishing a governance mechanism compatible with the development of green finance in terms of organizational mechanism, credit policy, resource allocation, product pricing and development innovation, credit rating, business process, incentive assessment, environmental, social and governance risk management, audit supervision, etc., enhancing professional service capacity, and increasing support for green finance and climate finance under the premise of risk control and commercial sustainability.

Thirdly, actively explore the development of financial technology-enabled green finance. At present, the digital transformation of financial institutions has been a major trend, and financial technology is widely used in various business areas. It is necessary for commercial banks to explore the use of big data, blockchain, artificial intelligence and other financial technology tools to solve problems such as information asymmetry in the field of green finance and climate finance, so as to empower the development of green finance with financial technology.

Optimize green financial development support environment

Firstly, play the role of third-party service providers. For example, the definition of green financial attributes needs to rely on an open and transparent information disclosure and certification mechanism, and the establishment of an authoritative, professional and independent comprehensive information service platform for green investment and financing as well as the introduction of third-party green assessment and certification institutions. At the same time, it is also necessary to play the service, guidance and supervision role of industry associations in the field of green finance.

Secondly, strengthen international exchanges and multiparty cooperation. The Chinese government should actively participate in international cooperation in the field of green finance and climate investment and financing, introduce international green investment and financing funds such as international transfer loans and green climate funds, strengthen exchanges and sharing and experience learning, and improve international influence. There is a need to strengthen the synergy, communication and cooperation among financial institutions, local governments, industry associations, professional think tanks, academic institutions, non-governmental organizations and other subjects to play their respective roles.

Thirdly, strengthen the theoretical and practical research on green finance. China's green finance and climate investment and financing are still at an early stage of development, and there are still many issues that need to be addressed through theoretical and practical research. Financial institutions need to attach great importance to research and exploration related to environmental and climate risk management, especially environmental and climate risk stress testing research, to quantitatively predict and assess the impact of climate and environmental risks through scenario analysis and stress testing, so as to effectively identify and prevent and control risks.

Important relationships that need to be addressed in China's drive for carbon neutrality

Achieving carbon neutrality is a broad and profound economic and social systemic change. The Chinese government should incorporate carbon neutrality into the overall national strategy of ecological civilization construction in order to achieve the “3060” target on schedule. The Chinese government's promotion of carbon neutrality is a systematic project, with various areas of work and elements intertwined, and with distinctive characteristics of wholeness, chronology, relevance and hierarchy. There are five key relationships that need to be addressed in the process of promoting carbon neutrality.

Relationship between long-term goals and short-term actions

Achieving carbon neutrality is a widespread and profound economic and social systemic change, and it is necessary to complete short-term action tasks through “offensive battles”, and to achieve long-term goals based on “protracted battles”. Therefore, it is necessary to set both visionary goals and long-term plans, as well as milestones and short-term goals, to lead milestones with long-term planning, and to support the achievement of strategic goals with the realization of tactical goals. In the long run, it is necessary to promote systematic economic and social changes through the transformation of economic development, industrial and energy structure transformation; establish a long-term mechanism for low-carbon development of the whole society by improving the institutional system; and shape the low-carbon awareness and low-carbon behavior of the whole society through the popularization of low-carbon environmental education. In the short term, carbon neutrality should be incorporated into the overall layout of ecological civilization construction to achieve effective synergy between carbon reduction and energy conservation and pollution control; the timetable, roadmap and construction plan of carbon neutrality should be clarified by combining the actual situation of each region and industry. At present, the most urgent task for the Chinese government is to anchor the “3060” target, implement the carbon peaking action plan by region and industry, and break down the long-term target into short-term actions. Carbon emissions have obvious characteristics of regional development stages, and carbon emission characteristics and means of carbon emission reduction differ in different development stages, so the Chinese government should implement differentiated emission reduction strategies in a time-series and focused manner.

Relationship between overall and local carbon peak attainment

The Chinese government needs to scientifically prioritize carbon peaks by region and industry to ensure the best path to achieve national peaks and carbon neutrality. At the regional level, the Chinese government needs to fully consider the stage differences of regional development, base on the main function positioning of each region, and formulate a roadmap of carbon peaking in the same direction but not synchronized in each region according to the common but differentiated principle. The Chinese government should support and encourage economically developed regions and ecological functional areas to take the lead in reaching the peak, so as to buy time for the national peak, and to favor these regions in the layout of low-carbon industries and low-carbon energy, and to support the application of low-carbon technologies. The government should allow regions in the beginning or early stage of industrialization to reach the peak later than the national peak, but should reasonably control the total amount of peak carbon emissions, and support and encourage these regions to reduce the pressure of carbon increase brought by economic scale expansion through eliminating backward production capacity, the low-carbon transformation of traditional industries and vigorous development of low-carbon energy. At the same time, in the fields of industrial transfer and low-carbon energy use, the government should strengthen exchanges and cooperation between areas that reach the peak first and those that reach it later, promote the orderly transfer of industries and the rational allocation of energy resources use, and form a win-win situation in which the low-carbon transformation of the whole society and economic growth are synergistically synchronized. At the industry level, the government should clarify the carbon peak targets for key industries, add carbon emission control-related requirements to the industrial structure adjustment catalog, study and develop a list of high-carbon industries, and build low-carbon industrial chains and supply chains; implement green low-carbon transportation action plans and promote green buildings to promote early peak in construction, transportation and other livelihood sectors.

Relationship between administrative mechanisms and market mechanisms

The government should take advantage of different types of policy tools to build a low-carbon policy system that couples administrative and market mechanisms. The government needs to use the administrative mechanism so that it can play a better leading role in low carbon development. At the same time, it needs to innovate the market mechanism so that various market entities can form a joint force in low carbon development. The government should give full play to the advantages of administrative mechanism-based command-and-control policies that are broad, authoritative, predictable in their objectives and supervisable in their processes, and build rules and regulations for low-carbon development through administrative power to cultivate and guide the expectations of the whole society. It is necessary to establish the status of low-carbon development in national laws and regulations and major policy-making deployments and to develop carbon peaking and carbon-neutral action plans and a multi-level low-carbon standard system for all regions and industries. The government promotes the widespread promotion of low-carbon technologies and low-carbon energy through incentive-based policies, pushes high-carbon industries to exit and transform their development in an orderly manner through binding policies, and cultivates low-carbon awareness and low-carbon conscious behavior in the whole society through a low-carbon education system. At the same time, it is more important to focus on the role of market mechanisms in carbon price discovery and transmission, to provide continuous economic incentives for all types of emission reduction subjects, and to form a long-term mechanism for emission reduction. The government should take the lead in promoting the generation and transmission of price signals based on the cost of the whole society through the carbon emission rights and emission rights trading market, forming a perfect carbon price discovery mechanism, and realizing the optimal allocation of resources and energy in various industries through price signals to guide the convergence and optimization of the marginal emission reduction costs of various emission reduction subjects.

Relationship between technology-driven and structure-driven

The government should build a carbon reduction mechanism driven by “technology carbon reduction - industrial structure carbon reduction - energy structure carbon reduction” in turn. The continuous expansion of economic scale has been the main driver of the growth of total carbon emissions in China, and the improvement of technical efficiency brought by the application of green and low-carbon technologies is the main force to slow down the growth of carbon emissions. Structure-driven refers to the reduction of total carbon emissions brought about by the decarbonization of industry and energy mix. Compared with the industrial structure and energy structure adjustment, it is easier to apply green low-carbon technology. Therefore, the government should still pay attention to the role of technology to reduce carbon in the short and medium term and increase the application and promotion of key technologies for carbon reduction. However, the marginal cost of carbon reduction will gradually increase, and the marginal benefit will gradually decrease, so we should plan ahead to change the driving force of carbon reduction from technology-driven to structure-driven. The government should accelerate the release of space for structural carbon reduction, continuously increase the increment of low-carbon industries, firmly increase the elimination of backward production capacity, and promote the low-carbon transformation of traditional industries.

Relationship between emission reduction inputs and output benefits

Under the premise of ensuring the achievement of the “3060” target, the government should take the lead in exploring the best cost carbon peaking methods and peaking paths for the whole society. Achieving higher output with smaller input is the basic requirement for the quality and efficiency of economic development, and is also the principle that should be followed to achieve carbon peaking and carbon neutrality. The government should further improve the environmental value accounting methodology and introduce the standard guidelines for environmental value accounting, including greenhouse gases, to provide a basis for conducting environmental cost-efficiency analysis. It is necessary to focus on the mechanism of the role between economic development and pollution reduction and carbon reduction, carry out the assessment of economic benefits of environmental projects and the assessment of environmental benefits of economic projects, assess the impact of various economic policies on carbon emissions when formulating them, and carry out the assessment of economic benefits when formulating various carbon reduction policies, so as to ensure the best balance between economic goals and emission reduction targets. The government should take the lead in accounting for the average marginal abatement costs of different industries, and use marginal abatement costs to guide the allocation of carbon emission allowances and the setting of various emission reduction targets. The government should carry out a cost-benefit analysis of low-carbon project construction, develop comprehensive and systematic technical guidelines and working procedures for cost-benefit analysis, arrange the application areas and promotion timing of various low-carbon technologies according to their cost-effectiveness, and realize the unification of environmental, economic and social benefits.

Major experiences of the United States in promoting low-carbon development

The U.S. EPA's year-by-year Greenhouse Gas Emissions and Carbon Sinks Inventory shows that carbon dioxide emissions in the U.S. peaked in 2007 with 5.5 billion tons of carbon emissions that year, and have declined significantly since then. The U.S. policy measures to promote low-carbon development, as well as related practical experience, are worthy of a global audience.

Sound carbon emission reduction policy system

Since the 1970s, the U.S. has introduced several energy and emission reduction-related bills, gradually forming a complete carbon reduction policy system. During the Obama administration, the U.S. attached great importance to low-carbon development, promulgated the “National Action Plan to Address Climate Change”, clarified the priority areas of emission reduction, and promoted the continuous completion of the policy system. For example, in 2009, the U.S. passed the U.S. Clean Energy and Security Act to plan for improving energy efficiency, identify ways to reduce greenhouse gas emissions, establish a carbon trading market mechanism, and propose programs to develop renewable energy, clean electric vehicles and smart grids, which became the core policy for carbon reduction in the U.S. for a period of time. In 2014, the U.S. launched the Clean Power Plan, which established a goal to cut carbon dioxide emissions from power plants by at least 30% from 2005 levels by 2030, the first time the U.S. has set limits on carbon emissions from existing and new coal-fired power plants. A series of top-level designs to address climate change has led to a rapid de-peaking process after the U.S. carbon peak.

Accelerate energy system development and change

The U.S. makes full use of market mechanisms to promote the development and technological progress of renewable energy sources such as nuclear power, solar energy, wind energy, biomass and geothermal energy, and to promote the continuous adjustment and optimization of the energy structure. Currently, the U.S. energy consumption is ranked in order of oil, natural gas, coal, nuclear, and renewable energy. The proportion of U.S. coal and oil consumption continued to decline and the proportion of natural gas consumption continued to increase from 2005–2017, playing a central role in the U.S. clean energy transition.¹⁸ The U.S. federal government has introduced a series of fiscal support policies, including production tax credits, and state governments have implemented renewable energy support policies based on a quota system to promote renewable energy development. For example, the U.S. wind power generation increased from 50,000 GWh in 2008 to 250,000 GWh in 2017, increasing its share of overall power generation from 1.5% to 6.9%; nuclear power now accounts for 20% of total U.S. power generation, and the U.S. has become the country with the most installed nuclear power capacity in the world; California implemented the “Million Solar Roofs Program”, solar power accounted for 43% of the country's total solar power growth.¹⁵

Promote industrial structure optimization and energy consumption reduction in key industries

The U.S. mostly relies on fiscal policy, tax policy and credit policy to promote the transfer of physical capital from declining industries to new industries, and finally achieve the purpose of improving the industrial structure. Under the guidance of policies and markets, energy consumption in key industries such as the U.S. steel industry, metallurgical industry, and aluminum industry is on a continuous downward trend. At the same time, the tertiary sector, which consumes less energy, is growing rapidly, further promoting the U.S. to shift its labor-intensive manufacturing to developing countries, significantly reducing energy consumption and carbon emissions. The adjustment and optimization of industrial structure has contributed to the trend of relative decoupling of greenhouse gas emissions and economic development in the U.S.. From 1990 to 2013, U.S. GDP grew 75%, population grew 26%, and energy consumption grew 15%, while carbon emissions grew only 6%.¹⁵

Promote low-carbon technology innovation

Low carbon technologies have long been developed rapidly in the U.S.. In 1972, the U.S. began to study the integrated gasification combined cycle technology, together with pre-combustion carbon capture technology. The U.S. has now largely achieved clean coal power generation. Carbon capture and storage is a priority area under the framework of the U.S. Climate Change Technology Program Strategic Plan. Ten of the world's 51 large-scale carbon capture and storage technology projects with an annual carbon dioxide capture capacity of 400,000 tons or more are in the U.S..¹⁸ Actions taken to build low-carbon cities in the U.S. include energy conservation projects, street tree planting projects, efficient street lighting, landfill gas recycling, new energy vehicles, and solid waste recycling, which have contributed well to carbon reduction.

States take action on low-carbon development areas

The U.S. states have a high degree of policy autonomy and freedom, and carbon reduction relies primarily on endogenous dynamics. Local initiatives, represented by California, are energizing low-carbon development in the United States. In 2006 California passed AB 32, which requires greenhouse gas emissions in 2020 to be reduced to 1990 levels.²³ After that, California implemented a series of environmental programs, including the cap and trade program, low-carbon fuel standards, renewable electricity mandates and low-emission vehicle incentives, which led other states to take measures to gradually form a concerted effort to reduce carbon emissions.

Discussions and highlight implications

Carbon neutrality is a long-term process that needs to be achieved gradually by human society through changes in production methods, such as reducing the use of fossil fuels.³³ Facing the goal of carbon neutrality, the research and development of new energy sources and the use of products undoubtedly contribute to the eventual achievement of global carbon neutrality.³⁴ New energy is facing difficulties such as disorderly industrial competition, insufficient power of independent innovation, insufficient technology industrial demonstration and application promotion, etc. The development of green finance can help promote the cooperation between new energy and manufacturing, electricity and transportation, expand the field of new energy utilization and improve new energy utilization technology.³¹ At present, green finance provides financial services for project investment and financing, project operation and risk management in the fields of environmental protection, energy conservation, clean energy, green transportation and green building by supporting economic activities for environmental improvement, climate change and efficient use of resources, namely.³⁵ Green finance can promote environmental protection and governance, and guide the flow of resources from high pollution and high energy consumption industries to sectors with advanced concepts and technologies.

Currently, China's green finance policy is steadily advancing, and there has been significant development in the fields of credit, bonds and funds. Compared with traditional finance, the most prominent feature of green finance is that it places more emphasis on the interests of human society's survival and environment. It takes the degree of effective use of environmental protection and resources as one of the criteria for measuring the effectiveness of its activities and guides various economic agents to focus on natural ecological balance through their own activities. It seeks the harmonious development of financial activities and environmental protection and ecological balance and ultimately achieves sustainable economic and social development.³² Green finance has something in common with the policy finance in traditional finance, that is, its implementation needs to be promoted by government policies. The traditional finance industry is guided by the current policy and the idea of “economic man”, either with the goal of economic benefits or with the duty of fulfilling policy tasks, the latter being policy-driven finance. Environmental resources are public goods, and financial institutions are unlikely to actively consider whether the production or service of the lender is eco-efficient unless there is a policy requirement.

Financial institutions have played a great role in financing new energy, but due to the late start of new energy and green finance, up to now, there are still more problems with financial institutions’ support for new energy industries. For example, the source of funds for new energy enterprises is only limited to loans from commercial banks, and financial support from other financial institutions, such as securities, funds and insurance companies, for new energy enterprises is still rare. The rapid and sustainable development of the new energy industry relies only on the government and banks is far from enough, the new energy industry is overly dependent on policy rather than capital operation is a major hard wound. Only the accelerated integration of industry and finance will greatly promote the adjustment of economic structure and industrial upgrading.³¹

In conclusion, as an important way to promote carbon neutrality, new energy and green finance have great potential value and role and are of great significance for human society to effectively combat climate change and achieve sustainable development. This paper only analyzes the role of new energy in carbon neutrality and the value of green finance in promoting the development of new energy from a qualitative perspective, but it does not analyze the specific role of new energy in the process of carbon neutrality from a quantitative perspective, nor does it explore the intrinsic mechanism of green finance in promoting the development of new energy based on an econometric modeling approach. However, it is undeniable that the widespread use of new energy can help achieve the goal of carbon neutrality, and the vigorous development of green finance can promote the development of new energy-related technologies and provide financial security for the development of new energy.

Suggestions for countermeasures to promote low-carbon development in China

Firstly, strengthen the top-level system design, and constantly improve the regulatory and policy system. According to China's National 14th Five-Year Plan, it is required to clarify the key areas of greenhouse gas emission reduction, accelerate the study of the overall strategy of low-carbon development, and formulate an overall roadmap for China's carbon peaking and carbon-neutral development. China should promote legislation to control carbon dioxide emissions by 2030 and strictly implement the greenhouse gas emission reduction and control target responsibility system.

Secondly, optimize the energy structure and increase the proportion of clean energy. The Chinese government should vigorously carry out an energy revolution, actively carry out supply-side structural reforms in the energy industry, and strive to build a clean, low-carbon, safe and efficient energy system. China should continue to reduce coal consumption, reasonably develop natural gas, safely develop nuclear power, vigorously develop renewable energy, and actively produce and utilize hydrogen energy. China should improve the electrification of all economic sectors, strengthen the integration of energy systems with information technology, and realize the intelligent and digital transformation of the energy system. China should further establish and improve the corresponding fiscal, financial, industrial and project management policies, improve the energy market, actively build a green “Belt and Road”, and guide projects and investments at home and abroad to enter the green and low-carbon field.

Thirdly, optimize the industrial structure and reduce energy consumption in key industries. China should further optimize the industrial structure, deeply promote strategic new industries, continuously improve the energy use efficiency of each industry, reduce energy consumption in key industries, expand clean energy use, stimulate energy conservation, limit excessive energy use, and eliminate outdated energy use. The industrial sector should accelerate the implementation of natural gas instead of coal and electricity instead of coal, and the transportation and construction sectors should gradually realize low-carbon transformation. In addition, on the one hand, the government should promote the integrated development of manufacturing and service industries, promote the mutual promotion of modern and traditional service industries, and accelerate the innovative development of service industries and the cultivation of new kinetic energy. On the other hand, it should get rid of the industries’ dependence on fossil energy, popularize low-carbon lifestyle and consumption, and pursue the decoupling of economic development from carbon emissions.

Fourthly, build a complete low-carbon technology system and promote low-carbon technology research and development and demonstration applications. There is an urgent need to sort out low-carbon technologies by industry, focusing on the power industry and industry, making full use of electrification, hydrogen energy, biomass energy and other technologies with carbon capture and storage to gradually achieve decarbonization in the power industry and industrial fields such as steel and cement. In terms of energy supply, in-depth studies are needed to promote the development and application of natural gas and a variety of renewable energy sources to meet new energy demand. For largely mature technologies, such as supercritical technologies, there is an urgent need to advance their commercial maturation and application. For the current demonstration is being done, the maturity of the technology has not yet reached the degree of commercial use, such as electric vehicles, hybrid vehicles, high-capacity wind turbines, etc., to further promote the demonstration, and strive for early maturity and commercialization. For technologies such as photovoltaic cells, fourth-generation nuclear power plants, we should strive to breakthrough as soon as possible, research and development maturity, as early as possible to carry out large-scale demonstration applications.

Fifthly, encourage local conditions to explore a low-carbon development path. Local governments should play a greater leading role in the construction of energy-saving institutions, the establishment of energy-saving pressure transmission mechanisms, the formation of a low-carbon orientation in resource allocation, and local government innovation in low-carbon development. Local governments should be encouraged to base on their own reality, take the principles of low-carbon economic development as guidance, take the experience of advanced low-carbon cities as a reference, and promote benign economic and social development as the goal, and comprehensively integrate the work of addressing climate change into the social and economic development planning of the region. At the same time, it is necessary to actively explore low-carbon green development models, vigorously promote the pilot construction of low-carbon provinces and regions and low-carbon cities, break the political incentive system that uses economic performance as the assessment standard, and take the path of sustainable development with local characteristics.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

This research was funded by the National Key Research and Development Program of China (2018YFE0109600), and the Beijing Social Science Foundation Project (19JDGLA008).

Data availability

No data used in this study.

ORCID iD

Feng Kong

Author biography

Dr Feng Kong is a faculty of Associate Professor of College of Humanities and Development Studies, China Agricultural University, mainly engaged in emergency management and disaster risk management research.

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