The Impact of Cap-and-Trade Mechanisms and Bank Credit on Renewable Energy Investment

Abstract

In this work, the bank credit enriches renewable energy investment channels, and the optimal equilibrium solutions under no cap-and-trade mechanism (NM), the grandfathering mechanism (GM), and the benchmarking mechanism (BM) are derived and compared. The main results are as follows: First, from the perspective of environmental performance, both GM and BM are more conducive to promoting the electricity generator's renewable energy investment than NM, in which the BM perform far better than the GM. Second, from the perspective of economic performance, BM and NM may be the unique equilibrium mechanisms, depending on the unit and total carbon quotas. Third, to tradeoff the environment and economic performance, BM is the optimal mechanism in the long term to obtain a win-win-win outcome for the renewable energy investment, the electricity generator and retailer, and consumer surplus. Although GM always hurts the electricity retailer and consumer surplus under any situation, the electricity generator may be beneficial, and the total carbon emission is also the least. Therefore, some mechanisms, like profit distribution, can lead GM to become the optimal mechanism. Finally, raising bank credit rates is neither conducive to renewable energy investment and economic performance nor to carbon emission reduction.