Key Factors In Building China’s Climate Investment And Finance Policy System

Climate change is the common challenge of human being.A majority of countries in the world have signed the Paris Agreement which agrees with the target to control global warming to under 2℃ compared with the pre-industrialisation level.The United National Framework Convention for Climate Change(UNFCCC)predicts a significant funding gap exists in addressing climate change.The climate funding shortage is particularly significant in developing countries,as these countries have substantial demand for new infrastructure.Climate investment and finance is the key pathway to address the funding issue,but the topic is still at the exploratory stage,and the climate investment and finance policy system is not yet established.Therefore,the thesis aims to research factors related to climate investment and finance policy,to provide a reference for policymaking department,regulatory departments,industry,fi nancial institutes and scholars in pursuing climate investment and finance works.The thesis through literature review and survey proposes eight key factors to be considered for building the climate investment and finance policy system,including(1)definition and scope;(2)policy target and demand;(3)institutional framework,(4)policy assessment system,(5)climate investment and finance standard;(6)climate finance instrument;(7)climate risk management system;and(8)incentive system.The coverage includes two aspects:one is the regional coverage(e.g.global,multilateral,bilateral,multilateral,national,regional,provincial,municipal)and user coverage(government,corporate and financial institutions in defining the policy system);the other aspect is the industry and project types of carbon emission and climate adaptation.Policy objectives are emission reduction or adaptation targets based on defined coverage areas,and they are influenced by national medium-and long-term climate change targets(e.g.,China’s National Determined Contribution).The policy framework covers different types of policy instruments that internalize the external benefit of greenhouse gas emission reduction and climate adaptation(e.g.,financial subsidies and the establishment of markets for environmental equity trading),as well as regulatory policies for financial instruments related to climate investment and finance and binding or incentive policies for investment approval and authorisation.The institutional framework includes relevant government departments directly involved in climate investment and financing policies.Climate investment and finance standards include criteria or guidance documents for climate investment and finance,including statistical standards,screening criteria for financial instruments,climate benefit assessment criteria and other factors.Climate investment and finance instruments include tools related to equity,debt and risk management.Incentives include sound statistical systems and guidance for climate-friendly investors,as well as incentives for policy support for climate-friendly projects to screen and avoid investments that have a negative impact on climate change.In terms of definition,the paper considers that the concept of climate finance should be expanded to include "climate investment and financing",both public and private sector investments,as well as project finance;"Climate finance" conceptually includes financing activities related to financial institutions and is widely used internationally.Although,in theory,broad "climate finance" could cover corporate climate investment and risk management,climate finance at the policy level often involves only financial management.It is not conducive to policy formulation by investment-related authorities(e.g.the relevant departments of the Ministry of Finance,the National Development and Reform Commission and State-owned Assets Supervision and Administration Commission).As a result,climate investment and finance can integrate and embody both climate investment and climate finance concepts more intuitively,as well as better facilitate cross departments policy support established by the relevant government departments in investment and finance.The categories of projects for climate investment and finance should include all low-carbon and climate adaptation projects with social benefits.These projects include low-carbon technologies,such as renewable energy,nuclear energy,carbon capture and storage,energy conservation and end-fuel conversion.These also include adaptation technologies,such as efficient use of water resources,development against extreme weather,flood control works,crop improvements,forestry management models that are resistant to storms and fires,and land corridors that facilitate species migration.Some low-carbon technologies can achieve commercial investment without policy support,such as energy conservation for some residents,industrial energy-saving technologies and some hydropower projects.All low-carbon projects can achieve business returns under specific policy scenarios.Still,most adaptation projects tend to reflect only social benefits and do not have a sound business model,and the adaptation investments mainly rely on policy support.The climate investment and finance policy system needs to distinguish between commercial scenarios for different types of projects,avoid policy deficiencies,and prevent excessive policy support to generate windfall return for projects already commercially viable.Governments should establish an integrated assessment system for climate investment and finance policy assessments.Governments shall guide third parties to carry out pre-policy,in-policy and post-policy assessment by market-oriented mechanisms governed by rule and regulation.The paper establishes a low-carbon project cash flow analysis model and analyzes the cases of offshore wind power and seawall projects.Most low-carbon and adaptation projects have very long life cycles,and the use of commercial discount rate assessments is not conducive to the present value of projects and is often a major obstacle to climate investment decisions.The paper reviews and studies the composition of commercial and social discount rates,and proposes to use the value generated by the difference between commercial and social discount rates as a basis for setting public sector support levels.The financial value of some low-carbon projects depends on future uncertainties,such as the price of carbon emissions.This thesis proposes to use the real option model to dynamically analyze the economic feasibility of the project,to study the oxyfuel combustion carbon capture retrofit of coal-fired power projects,and to evaluate the option value of carbon capture retrofit in the steel industry(Ding et al.,201 9).In terms of key elements of climate investment and financing standards(CIFS),this paper suggests that climate investment and finance standards should draw lessons from the experience of the green finance system and the CIFS shall be fully integrated into the green financial system.At the same time,CIFS requires a clear road map for development and clear policy direction,such as how developing countries,such as China,can mobilize limited policy resources more efficiently.In this paper,the climate investment and finance policy system suggests distinguishing between "climate investment and finance statistics" and "climate investment and finance incentives".The former consider all investment and finance projects with climate-friendly effects while focusing on guiding investors to support projects already commercially viable.For the best use of climate investment and finance incentives,the paper suggests that limited resources need to be invested in the highest priority projects to produce additional emission reductions benefits or additional adaptation benefits,i.e.to achieve real additionality.Supporting high-quality projects is recommended in the construction of climate investment and finance instrument standards,with a focus on the demonstration value of projects,innovation attributes and social significance.In terms of risk management,this paper reviews the policy system of foreign enterprises and financial regulators in managing corporate and systemic climate risks.Corporate social responsibility and information disclosure are important development drivers of climate investment and finance.The paper recommends policies to guide corporates to forecast and set medium-and long-term internal carbon prices according to market conditions,which is conducive to reducing the climate risk of investment,and to study how to disclose to regulators and investorsBased on literature review and data analysis,this paper focuses on key elements of the climate investment and finance policy system,including definition and scope,policy assessment system,climate investment and finance standards and climate risk management system.Due to the limitations of research time,many key elements still need further study and analysis by policymakers and scholars.Some innovative recommendations,such as the combination of additionality assessment for policy incentives and the realization of the strategic value of options still need to be studied in-depth and demonstrated through practice.