Carbon neutral is defined as the net zero emission of carbon dioxide. Specifically, the amount of carbon dioxide emitted and the amount of carbon dioxide absorbed offset each other. This target requires not only the reduction of carbon emission in various sectors, but also the adoption of afforestation, negative carbon technologies and carbon compensation measures. As a new form of environmental protection, carbon neutral has been adopted by an increasing number of large-scale events and conferences, since it would accelerate the transformation of eco-friendly way of life and production.

After analyzing the changes of social development and energy consumption in typical countries in the process of achieving carbon neutrality, scholars conclude the following points. First of all, the peak of carbon emission usually occurs in a plateau period for a certain period of time. Generally speaking, countries with large economic volume and higher emissions have a longer duration of plateau period when the carbon discharges peak value. Next, the population growth rate is low when carbon emission in the country reaches its peak, and the urbanization rate reaches a high level (above 70%). Also, industrialization is basically completed, and the service sector accounts for more than 50 percent of the economy. GDP growth rate decreases compared with the previous period, and the countries that reach carbon peak later have higher per capita GDP at peak time. Then, the peak of per capita carbon emission usually occurs slightly earlier than that of total carbon emission; in most countries, energy consumption also peaks at different periods after the carbon peak. A common feature is the sustained and significant reduction of energy consumption per unit of GDP after the carbon peak, which contributes to the decline of carbon emission.

Experts in green finance and sustainable development study the macroeconomic impact of carbon neutral from at least four aspects. First, additional investments. In the next three decades, the target of carbon neutral requires trillions of additional investments that could boost demand and economic activity. Second, advances in technology. Technological progress can reduce the risk of inflation. For example, technological advances in photovoltaic and wind power equipment have cut production costs by four-fifths in the past decade; if other new energy sources such as hydrogen make major technological breakthroughs, the overall energy cost would be significantly and continuously reduced. Third, policy factors. In order to achieve the goal of carbon neutral, the government must introduce some supporting policies, including energy policies, environmental regulation policies, eco-friendly finance policies, fiscal policies and so on. These policies affect the behavior of different industries and consumers in the economy. Fourth, the country’s import and export potential and trade environment will have corresponding influence. For countries that need to import a large amount of oil, they would use locally produced renewable energy instead of relying on imported oil, which is an advantage brought by carbon neutral. Therefore, whether a country exports a plenty of carbon-neutral technologies and products in the future will also affect the trade surplus or deficit and product competitiveness in the global market.

Carbon neutral will influence on the macro economy and economic structure greatly, especially in the field of investment and financial risks, and the predicted investment quota ranges from 100 trillion to 300 trillion yuan in the next three decades. At the same time, if financial institutions remain focusing on high-carbon industries and enterprises, they will face the risks of higher default rates and sharply lower investment returns. Therefore, the restructuring of the energy structure is important.

Researchers analyzed carbon emission and carbon sequestration at the industry level by breaking down the process from energy production to energy consumption. Specifically, the energy industry includes traditional energy (coal, oil, etc.) and clean energy (solar, hydrogen power, nuclear power, etc.). In fact, energy activities (fossil fuel combustion), industrial production (chemicals, metal products, non-metal products, etc.) and waste disposal (incineration, recycling) all contribute to carbon emission. Carbon sequestration includes the technologies and projects of carbon capture, utilization and storage, while forest carbon sequestration mainly refers to afforestation.

In order to realize the goal of carbon neutral, China will gradually reduce the proportion of fossil energy, and increase the development of new energy. Thus, these industries as well as upstream and downstream sectors could seize opportunities and start energy technology revolution. In 2020, costs of photovoltaic power in China were 82% lower than the figure in 2010, while onshore wind costs were 39% lower. All these cost reductions can improve productivity.

According to estimation, the carbon emission is large in the field of energy industry, manufacturing, transportation. The energy industry and manufacturing sector require industrial upgrading, and technologies that help to alleviate carbon emission should be developed to replace traditional industrial processes. Meanwhile, the manufacturing of new materials or equipment in the field of energy conservation and emission reduction will usher in a period of rapid growth. The sales penetration rate of new energy vehicles increased from 0.03% in 2010 to 5.4% in 2020. Household energy usage mainly includes water and electricity, and emission reduction depends directly on the popularization rate of clean energy as well as the promotion of energy-saving and emission reduction technologies.

As mentioned above, technologies and projects such as Carbon Capture, Utilization and Storage (CCUS) and Bioenergy with Carbon Capture and Storage (BECCS) are expected to be benefited, which alleviate Carbon Dioxide from the atmosphere. According to research institutions, carbon capture and storage (CCS) theoretically has the potential to solve 62% of global Carbon Dioxide emission, which is on a par with carbon reduction technologies such as hydrogen fuel and battery storage.

Carbon neutral and other enhanced actions on climate change are not only an environmental issue, but also an issue of international trade and macroeconomic development, policies setting and international relations. Therefore, the country should come up with a progressive analysis framework from the perspective of macroeconomic to study the impact of carbon neutrality on economy. This framework should be a dynamic, cross-cycle model, integrating climate and energy models into macroeconomic models.

What’s more, the government should thoroughly research on the investment opportunities and challenges brought by carbon neutrality. The main challenge is the impact of high-carbon industries on financial stability, and professionals that work at both financial institutions and the Central Bank need to do more quantitative analysis.

Finally, carbon neutralization would lead to the unbalanced distribution of benefits and costs in different regions and industries. In some cases, it possibly causes the significant shrinkage of some economies and industries or even unemployment, therefore the country needs to focus on how to ensure a more equitable and stable social transition.

By Xin Wang