Carbon taxes and a guidance-oriented green finance approach in China: Path to carbon peak

Abstract

The goals of carbon peak and carbon neutrality pose new challenges to China's economic growth and carbon reduction efforts. Regarding synergy of policies, a dynamic general equilibrium model is constructed to analyze the feasibility of achieving carbon peak. We find that, compared to other greenhouse gas (GHG) mitigation regulations, carbon taxes are more effective in curbing pollution emissions; hence, it is critical to implement carbon taxes in China. However, complete reliance on carbon taxes means formulating a tax rate that is four times higher than the constraints of the 2019 GHG mitigation regulations, which translates to a tax burden of 0.28%. Although current market-guided policies based on a service-oriented green finance approach can partially supplement the policy effects of carbon taxes, a guidance-oriented green finance approach is more effective because of its dual functions of guiding green investments and serving green industries. Such an approach leads to a comparatively lower carbon tax rate that is roughly two times higher than the constraints of the 2019 GHG mitigation regulations and a tax burden of 0.2%. We further show that in transitioning to carbon neutrality, a guidance-oriented green finance approach can generate optimal allocation effects of capital and environmental resources, thus promoting carbon reduction and green transformation. This study provides theoretical and quantitative reference for implementing carbon taxes and transforming green finance in China.