Financial Policy and Low-Carbon Transition of the Economy: A Growth Perspective
PAN Dongyang, CHEN Chuanqi, GRUBB Michael
School of Applied Economics, Renmin University of China; School of Finance, Central University of Finance and Economics; Institute for Sustainable Resources, University College London
Summary:
Given the global net-zero target for carbon emissions and awareness of the role of investment and finance in a low-carbon economic transition, financial regulators in many countries have started to promote green investment by developing so-called green financial policy to alleviate the barriers to and increase the incentives for green investment. For example, central banks provide refinancing for banks that conduct green lending. Discussion and development of green financial policy have increased in recent years as climate change and environmental degradation have intensified. In 2016,China promulgated the Guidelines for Establishing the Green Financial System, in which several green financial policy tools were first proposed. Financial regulators worldwide have started to take action, particularly since the founding of the Network of Central Banks and Supervisors for Greening the Financial System in 2017. The growth of green financial policy is expected to continue; however, many questions remain about the theoretical relationship between green financial policy and the low-carbon transition of the physical economy, which is the ultimate purpose of this policy. Do financial factors affect the low-carbon transition? If so, how? What can financial policy do for the transition?Compared with other policies, what are the advantages and disadvantages of green financial policy? Moreover, given the current COVID-19 pandemic, what can green financial policy do for the “green recovery” that is being called for by many? This study aims to answer these questions. We build a macroeconomic growth model of directed technical change. In this model, the production sector is divided into two parts—clean and non-clean—to analyze the transition of industrial structure and its environmental impact. We introduce financial constraints and financing costs to analyze the role of financial policy. The model is also extended with the shock of the COVID-19 pandemic to analyze the green recovery. Using the model, we first show the specific roles of financial policy in supporting the low-carbon transition by giving and proving four formal propositions. This clarifies the mechanisms through which financial factors can play a role in the low-carbon transition. Second, we numerically analyze the effect of green financial policy and compare it with the effects of other green economic policies. This reveals the advantages and disadvantages of green financial policy and can help policymakers choose appropriate policies. Third, we simulate the dynamics of the economy under different policy scenarios with and without the COVID-19 shock. This shows what the pandemic and different policy mixes could bring to the green transition and economic recovery. This study finds that (1) stronger financial constraints in the clean sector relative to the non-clean sector delay the low-carbon economic transition and cause environmental degradation, and green financial policy can alleviate these financial constraints. (2) Green financial policy can increase the output of the clean sector and, under certain conditions, facilitate the low-carbon transition of the economy and prevent environmental degradation. (3) Financial policy is cost-effective compared with some fiscal policies that promote the low-carbon transition; there is space for mixing policies. (4) Increasing the intensity of green financial policy in the aftermath of the pandemic would be beneficial for achieving a green recovery and may accelerate the low-carbon economic transition at a cost lower than expected. Our work has significance for both research and policy. In terms of research, this study discusses the role of financial policy in the low-carbon transition from the economic growth perspective using a theoretical model. It extends the horizon of financial development theory from the sustainability perspective and provides a theoretical basis for future empirical research on the effects of green financial policy. Our growth model, which includes factors related to green finance, could also be a useful tool for future research. In terms of policy, this paper provides a theoretical basis for analysing green financial policy and provides policymakers with the following practical information: the mechanisms by which green financial policy works, the advantages and disadvantages of such policy,the way to effectively mix different policies and policy recommendations for the post-pandemic era.
潘冬阳, 陈川祺, Michael Grubb. 金融政策与经济低碳转型——基于增长视角的研究[J]. 金融研究, 2021, 498(12): 1-19.
PAN Dongyang, CHEN Chuanqi, GRUBB Michael. Financial Policy and Low-Carbon Transition of the Economy: A Growth Perspective. Journal of Financial Research, 2021, 498(12): 1-19.
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