Establishing China's Green Finance

Theoretical Framework of Green Finance:

To build a green financial system, private capital investments must be drawn into green industry with a serious of policy and institutional arrangements. State laws and financial services can protect and support green projects against polluting ones. Private capital must be steered into green projects whereas polluting projects are becoming less important and financial risks must be controlled to protect green projects. There are still many companies investing into polluting projects. To reverse this situation, the profitability of green investment project must be increased by increasing product prices and decreasing the cost of those projects and the opposite must be done for polluting projects: decreasing the profitability of polluting investment projects and increasing the costs of these projects. For example, green investment projects can enjoy from discounted interest rate of lending, tax exemptions on green bonds, green rating, increasing fund availability and so on. And also raising the tax and fees for polluting investment projects can be beneficial for green investments. However, it is still challenging to attract private capital into green industry because of insufficient incentives for green investment projects, miscalculated positive externalities of different green industry which ends up with inefficient emission abatement and a waste of financial resources and underestimated risks which can result into a failure of green projects. To eliminate these negative outcomes and improve green finance, there are several policy recommendations:

- Green banks can increase the profitability of green investment, reduce the risks and costs to attract private capital into green projects

- Green funds can reduce the cost of green projects.

- Greening the development banks can give a message to investors about the image of China environmentally.

- Green bonds reduce the cost of financing green projects.

- Green rating can also reduce the cost of green projects and also decrease the investments in polluting projects as well by revealing positive externalities of green projects.

- Green stock indices help more funds to be drawn into green projects, thus; it decreases the cost of these projects.

- Environmental cost database helps environmental information to spread out.

- Green investor network can attract investors to green projects by increasing their preferences and reduces the costs.

- Green insurance increases the cost of polluting investments so that discourages these kinds of projects.

- Lender liabilities increase