Carbon neutrality and renewable energy sectors

Abstract

 President Xi Jinping announced China's promise of carbon neutrality on September 22, 2020, during the 75th Session of the General Assembly at the United Nations. According to this plan, China aims to reach its carbon emission peak by 2030 and achieve carbon neutrality by 2060. This commitment, known as the "30/60 carbon" goals, is based on the two crucial time points mentioned. Such a political promise is primarily top-down rather than bottom-up-driven. In other words, the central government creates and publicly announces the plan, then delegates tasks to various departments for implementation. The actual impact of this political promise on environmental campaigns and whether there are any unexpected outcomes are yet to be determined. This research aims to evaluate the effects of such a political promise on environmental initiatives. As part of this research, I have identified three key sectors that are poised for significant growth and innovation in the wake of China's carbon neutrality promise: power battery (and electric vehicles), wind power, and solar power. I compare companies' market performance, financial performance, innovation, and corporate governance in these three key sectors ('treated firms') with other manufacturers. Firms related to these key sectors, including suppliers and customers, are treated as treated firms. The potential for innovation and growth in these sectors is a key focus of this research. The short-term return for treated firms is 10%-20% higher than other manufacturers. The P/E ratio of treated firms is 13.59 (t=2.26) higher. The capital market gives a higher valuation to the treated firms, which shows that market participants perceived the "30/60 carbon" goals as a value-added signal to the affected industries. Due to the promising valuation, treated firms increase equity financing by 30% (t=2.01) and reduce debt financing by 2.58 percentage points (t=-4.06). This leads to a 1.16 percentage point (t=1.74) lower leverage ratio than non-treated manufacturers. Regarding financial performance, I first evaluate the changes in resource input. I find that treated firms increase physical capital (proxied by capital expenditure) and human capital (proxied by the number of employees). The capital expenditure increases by 30% (t=3.90), and the number of employees increases by 17% (t=2.50). I also find an increase in research and development expenses and a sharp increase in selling expenses. R&D expenses of treated firms increase by 3% (t=2.48) while selling expenses increase by 5% (t=2.23). This evidence shows that the top-down political promise may trigger advancement in productivity less strongly and have a stronger effect on product market competition. Evidence from return on assets (ROA) supports this view. ROA, on average, increases by 0.63 (t=6.28) percentage points, but the increase comes from an increase in asset turnover rather than profitability. The top-down political promise expands market demand and thus increases sales of treated firms but does not improve their profit margin. Analysis of innovation output also supports such a view. I do not find any increase in patent filing compared with non-treated manufacturers. I further disentangle the effects based on the sectors, supply chain position, and ownership type. Innovation output and profitability increase in upstream firms in these sectors. This evidence reveals a heterogeneous effect of political promise-driven demand expansion. This research contributes to understanding an environmental campaign's top-down political promise. President Xi Jinping's "30/60 carbon" goals, as a high-level promise, generate substantial effects on affected industries. Overall, valuation and sales increased for these sectors, and innovation output increased upstream of affected sectors. It is important to assess whether the current realization is as the policy originally planned. It also provides a comprehensive reference for other jurisdictions considering similar approaches to achieve carbon neutrality.