Market mechanisms for energy transition: Fossil energy price shocks and irrational renewable energy financing

Abstract

China is taking a leading role in the renewable energy industry and is dedicated to promoting the market-based operation mechanism of the energy transition. Nearly all media attribute it to industrial policies; however, this is insufficient to explain the periodic overcapacity risk behind the rapid development − neglecting the market irrationality behind the prosperity and failing to provide further guidance for the proactive government. Based on the micro-level evidence of enterprise business data, this study explores the market feedback mechanism between renewable energy business expansion and financing under the fossil energy price shocks to disclose the market irrationality mechanism triggered by coal, a key inducement. We first establish an empirical framework to explore the relationship, which remains stable under instrumental variable regression and dual-factor moderating effect with extreme weather damage. Furthermore, we compare the mechanisms of China and the United States to furnish more empirical evidence. The results demonstrate that China’s renewable energy financing displays irrationality in signal transmission and market financing feedback, as well as the possible presence of market overreaction by analyzing the financing feedback during the occurrence and disappearance of fossil energy price shocks. The findings offer further policy operability for the theory of active government.