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Innovate Fiscal Policy to Support Green and Low-carbon Development

2021-11-12

Jiao Xiaoping 

(Director General, China CDM Fund Management Center)

Green and low-carbon development is a long-term systematic project that requires coordinated advancement. The comprehensive green and low-carbon governance policies of various countries mainly include six areas such as the rule of law, administration, economy, market, society and international cooperation.

The first is the rule of law — governing in accordance with the law and establishing a modern governance framework. Adopting rule of law to promote green and low-carbon development is the main governance model of developed countries. Countries and regions such as the EU, Japan, New Zealand, the US State of California, and others have passed legislation to establish a long-term governance mechanism to provide a fundamental guarantee for encouraging and protecting the development interests. At present, China is actively promoting legislation to address climate change as the "1+N" policy system is accelerating.

The second is administrative means — establishing rules and good governance, and stabilizing development expectations. Administrative measures are auxiliary tools of the rule of law, which are mandatory, direct, and quick to take effect. However, excessive administrative and simplistic behaviors must be prevented. In terms of administration, the main tasks are to do the following three works: first, to establish a basic framework which includes planning, policies, and standards to clarify the development direction, development path and operating rules. For example, establishing National Determined Contributions targets, and establishing industrial carbon emission reduction measurement, certification, and reporting (MRV) system. MRV is the most important and basic work for low-carbon development. The MRV standard could be compared to the financial accounting system for economic management. The second is to supervise law enforcement, maintain market order, play the active restraint and incentive role of institutional mechanisms, and stabilize long-term development expectations. The last is to optimize public services and create a legal and market-oriented business environment that is conducive to public participation, social supervision, and openness and transparency.

The third is economic means — acting according to the law, and play the basic regulatory role of economic means. The problem of environmental externalities can only be solved fundamentally through cost internalization. According to the principle of whoever pollutes pays and whoever reducing emissions benefits, making full use of the role of fiscal, financial, industrial, land and other policies in readjustment, complete the cost composition of green and low-carbon products and services, promote fair competition, and guide the allocation of resources to green and low-carbon industries. At present, 27 countries around the world have implemented carbon tax policies. Although China does not have a separate carbon tax, there are related functional taxes, such as refined oil consumption tax. Carbon tax is a fundamental economic adjustment tool and an important carbon pricing mechanism. It is necessary to accelerate the research and development of carbon pricing mechanisms include carbon market, carbon tax, and etc. to facilitate green and low-carbon development.

The fourth is the market approach — developing carbon market to reduce the overall cost of emission reduction of the society. The carbon market is an effective and efficient emission reduction tool that can not only achieve the goal of controlling the total emission reduction, but also promote competition, encourage technological innovation, and achieve the goal of reducing the overall emission reduction cost of the society. Currently, about 24 countries and regions in the world have established carbon markets, covering about 16% of global carbon emissions. This year, the launch of China’s national carbon emissions trading market, with the first batch of trading among the power companies, is a major event in China’s carbon market development process. It is gratifying but there is still a long way to go. China is a major manufacturing country in the world, with a high proportion of emissions generated from industries. In this regard, there is a great potential for carbon market development. The emission sources from steel, cement, construction, aviation and other industries are relatively concentrated, which facilitate the application of the MRV system and are suitable for carbon trading. In addition, apart from the mandatory emission reduction market, the voluntary emission reduction market is also a useful supplement. Currently, establishing a national MRV standard system is crucial to the development of the carbon market.

Fifth, social means — increase environmental awareness education and encourage all citizens to participate in emission reduction. According to the common understanding nowadays, climate change issue mainly stems from the excessive greenhouse gases emissions from human activities. To this end, it is necessary to completely, accurately, and comprehensively implement the new development philosophy, to raise the people’s green and low-carbon awareness, to promote the concept of carbon footprint and carbon labeling, to promote low-carbon life, to refine ecological and environmental protection measures into all aspects of economic development and social life, and to accelerate the construction of the new pattern of ecological civilization, with participation from all people and the whole society to reduce emissions. The CDM Fund is preparing to launch a carbon footprint activity among young people, encouraging young people with a sense of social responsibility to reduce their carbon footprint by purchasing negative carbon assets such as forest carbon sinks, and raise the public's awareness of addressing climate change.

Sixth is international cooperation — global consultation, joint construction and common governance. Climate change is a common challenge for all mankind in the 21st century, which will lead to a loss for all and a glorious prosperity for all. China has committed to move from carbon peak to carbon neutrality in a much shorter time span than what might take many developed countries, which fully demonstrates China’s sense of responsibility to build a community with a shared future for mankind and its firm determination to actively respond to climate change. We must be committed to the principle of common but differentiated responsibilities, promote the full and effective implementation of the Paris Agreement, strengthen cooperation in capital, technology and capacity building, and accelerate the global green and low-carbon transformation.

In the initial stage, the publicity and marketability of green and low-carbon development coexist, but the role of the market in allocating resources is decisive. It is also necessary to make full use of the role of finance as the foundation and important pillar of national governance, and coordinate, optimize and guide the allocation of resources to efficiently promote green and low-carbon transformation with high quality. For the six major policy tools I just mentioned, each has a fiscal role, while some play a basic guarantee role, some play a role in resource allocation, and some play a direct guiding role.

First, we must innovate systems and mechanisms and play the basic regulatory role of fiscal policies. Comprehensively use taxation, financial subsidies, special funds, green procurement and other methods to support the country's major green development strategy, strengthen the role of financial support, increase investment in environmental governance, establish an ecological protection compensation mechanism, support green and low-carbon technological innovation and industrial development, promote the coordinated governance of pollution reduction and carbon reduction, and deepen and refine the environmental effect evaluation mechanism of fiscal funds. Fiscal policies have contributed to the major progress made in photovoltaics, wind power, new energy vehicles, and other areas in China. In the early development stages of the green and low-carbon technologies, which is before the "valley of death" of industrial development, the role of financial support is very important.

Second, we must coordinate the two resources of government and market, and play the role of fiscal policy. At present, there is huge funding demand for China’s green transition, and the statistics from various organizations show this funding amount is roughly 150 to 300 trillion yuan, while China's fiscal expenditure now is about 20 trillion yuan per year. Therefore, it needs to actively play the well-leveraged role of fiscal funding, give play to the decisive role of the market in resource allocation, actively support the development of the carbon market, and expand market coverage. Meanwhile, it needs to standardize and promote the public and private partnership (PPP) model. Since 2014, the amount of investment in green and low-carbon PPP projects that have been signed and implemented in China is 4.3 trillion yuan, with a market share of 35%. From 2016 to 2020, China’s fiscal expenditure in ecological and environmental protection is 4.4 trillion yuan. Faced with the huge resource gap for green transition, the role of finance in guiding resource allocation and leveraging the market to make up for the development gap is crucial.

Third, we must actively participate in global climate governance and form a new “dual circulation” development pattern in which “internal circulation” and “international circulation” promote each other. Support the UN climate change negotiations and implement the “United Nations Framework Convention on Climate Change” and “Paris Agreement”. Make full use of the role of global and regional cooperation mechanisms such as the G20, BRICS, and APEC, and accelerate the establishment of global climate funding mechanisms. Strengthen multilateral and bilateral financial cooperation, and use international resources to support domestic green and low-carbon development. Strengthen cooperation in building a green “Belt and Road”, develop high-standard green demonstration projects, and demonstrate China’s image as a responsible major country.

 


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