Abstract
Unlike traditional finance, green finance (e.g. green loans or green bonds) aims to address the current inadequate levels of investment and financing available for green development as a result of “market failure”. Finance usually follows and serves the real economy in an effective market. However, when the market is ineffective in allocating resources to green development, green finance should enhance its guiding role in the real economy in order to reduce the cost of green investment and financing, improve the accessibility of green funds and even meet the demand for green investment and financing by establishing new trading markets. China has made considerable progress in green finance with a decent market for financial products such as green credits and bonds. However, several obstacles need to be overcome to realize carbon neutrality, such as inadequate green investment and financing, lack of unified standards for green finance and the absence of mandatory requirements on information disclosure. To realize carbon neutrality, we estimate China needs to invest Rmb139trn before 2060 and Rmb22trn before 2030. It will be a significant challenge for China’s green finance system to meet such enormous demand for green investment and financing. To better promote green development, China should establish a unified standard for green finance, improve mechanisms for green information disclosure, strengthen policy incentives for internalizing externalities, develop a more diversified green financial market, enhance education and awareness about green investment and include environmental risks into regulatory policy considerations. These actions should help turn the challenges of the next 4 decades into unprecedented opportunities for green development.
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