China’s climate transformation and the role of green finance – what is going on and what can we expect?

“Both the reduction of high-carbon investments and the massive increase in low-carbon and zero-carbon investments are tasks of the green financial system”. Dr. MA Jun, member of the Monetary Policy Committee of the People's Bank of China...

“Both the reduction of high-carbon investments and the massive increase in low-carbon and zero-carbon investments are tasks of the green financial system”.

Dr. MA Jun, member of the Monetary Policy Committee of the People’s Bank of China and chairman of Green Finance Committee of China Society for Finance and Banking

China’s new climate pledges to peak its carbon emissions by 2030 and reach carbon-neutrality by 2060 (30-60-carbon targets) as well as the launch of its national emission trading system (ETS) (hopefully this summer) have caused a lot attention internationally. However, a less discussed issue is how such a tremendous transformation, in terms of both scale and speed, can be financed? And by who? At the same time, while we focus a lot on emissions reduction per se, the incentives behind and the risks, both technically and financially involved in emissions reduction are less addressed dimensions. To make things even more complicated, if these questions are put into different time horizons, i.e. short-term respective long-term, both solutions and costs for emissions reduction may also vary significantly. When it comes to policy frameworks to support and incentivise emissions reduction, the international policy discussions and debates are often (heavily) focused on carbon pricing, including carbon taxes and carbon trading systems. A rather new policy domain, which is taking off now, is how to mainstream and speed up climate actions through mainstreaming climate finance and investments by engaging and transforming financial institutions and financial markets.

Having carefully watched and reflected over both achievements and limitations of international climate actions, i.e. in terms of both policy frameworks and actions on the ground, particularly in the European context, very interesting and important policy considerations and debate are ongoing in China. To a large extent, the  debate reflects two of China’s advantages when facing daunting challenges in its future climate transformation, namely 1) to be able to learn from the European experience, both successful and less successful ones and 2) to be able to mobilise an integrated and long-term approach to addressing the financing and investment-related policy issues. Here are a few of our observations and reflections that we would like to share and discuss with our colleagues and interested readers.

Huge investment needs, huge financing gaps – and huge transition risks and opportunities…

There are no single and straightforward estimates of the investment need or financing gaps. But here are a few numbers that can be informative, for instance:

  • Already in 2015, Dr. MA Jun, China’s foremost leading expert on green finance, put forward the first estimate that China would need 4 trillion RMB annually (approx. 5 trillion SEK)  in green investment to be able to achieve its national environmental protection goals (covering air-, water- and soil pollution). However, only 10%-15% of this huge investment need could be met by public finance.[1]    
  • More recently, at the research report launch of “China’s Long-term Low-carbon Development Strategy and Pathway, Professor HE Jiankun, the Vice Chairperson of the National Expert Committee on Climate Change highlighted the estimates as below:[2] 
    • To achieve the transformation of China’s energy system, in line with the 2-degree goal of the Paris Agreement, it will require new investment around 100 trillion RMB, or 1,5 -2.0% of China’s annual GDP during 2020 – 2050.
    • In line with 1,5-degree goal, the investment need will be even higher, i.e. 138 trillion RMB, or over 2,5 % of annual GDP.

The message from the above figures is clear: both the investment need and the public financing gap for green and climate-neutral transformation are huge. China will need serval simultaneous and mutually supportive transformation pathways, including a technology- and innovation transformation to deal with technical uncertainties and to reduce costs as well as a transformation towards a green and carbon-neutral financial system to mobilise financial resources and create new and sustainable growth opportunities. Given the fact that China’s carbon-neutrality transformation needs to accelerate from a high carbon-dependent starting point, the transition risks are also high from the perspective of the financial system, which is closely associated with the health and stability of the financial system. China’s financial system will thus need to address the climate risks and associated transition risks – as efficiently and quickly as possible.  

Carbon market and green finance – two seemingly disconnected dots need to be connected… 

The announcement of the “30-60- carbon targets” and the start of trading in China’s national ETS later this year have brought strong momentum when China is embarking on a broader and deeper transformation pathway. When it comes to financing, we hear different voices from the ongoing policy debate, namely:

  • We need to be careful to “financialising” or “over-financialising” carbon trading to avoid speculation risks and to not lose the focus on real emissions reduction.    
  • Carbon trading is, fundamentally “financial” in nature, i.e. without a proper level of market  liquidity from both the demand- and supply-sides and possible means of managing various market- and transition risks, the “trading” will be both limited and “superficial”.  In other words, carbon trading needs to go beyond spot trading and participation of financial institutions should be encouraged.   

Given the early stage of China’s national ETS, i.e. the formal trading has not yet started, it is neither reasonable nor possible to give a definitive answer on how the future policy debate will end. But one very important aspect needs to be taken into account, namely that China’s ETS is launched in a rather different time than the launch of EU ETS in 2005. China has already made significant progress in developing a green financial system – which will be an important steppingstone to link with and support China’s climate transformation (See Figure 1 – Figure 2 below for an overview). According to some domestic and international observers and experts, there are already existing legal basis and good practices in China’s green finance system to support an accelerated and market-driven climate transformation in the future development.[3]  

In the past few years, China’s green finance has developed rapidly. By the end of 2020 China became the largest green credit market in the world with a total lending of 12 trillion RMB and the second largest green bond market in the world, with a total volume of issuance of 813.2 billion RMB. An assessment from People’s Bank of China (PBoC) (China’s Central Bank) shows that the default rate of green credits is clearly lower than the average default rate of commercial bank lending in China.[4]

By looking at the types of projects that are eligible for green finance, there are already clear links to climate mitigation and adaptation actions (See Figure 3 below). Also, in the “Green Industry Catalogue”, jointly launched by 7 Ministries in 2019, the following 6 industries, 30 sub-industries and 211 green industry specifications were included. In May 2020, the PBoC further tightened the green criteria and removed clean coal as eligible projects for green bond financing.

  • Energy-saving and environment protection
  • Clean production
  • Clean energy
  • Ecological environment protection
  • Green upgrading of basic infrastructure/facilities
  • Green services  
Figure 3: Green bond project categories (2020 edition)
Source: Green Finance supports green recovery and carbon neutrality target. Presentation by Prof. WANG Yao, International Institute of Green Finance, CUFE

At the same time, there is a strong voice from the Chinese policy experts that further clarification and tightening of taxonomies and information disclosure towards greenness and carbon-neutrality are both urgent and necessary. For instance, as Dr. Ma Jun pointed out, “the current green finance standards, environmental information disclosure requirement and the incentives are not yet fully aligned with the goal of carbon neutrality, although they served the goal of reducing pollutions quite effectively in the past years. Many financial institutions have not fully recognized the risks posed by climate change and have not taken adequate measures to manage these risks”.[5] In this context, the green finance taxonomies for green credits and green industries will also need to be refined and tightened.  

China’s green finance development in the light of the “30-60-carbon targets” – the way forward…

The “30-60- carbon targets” are not only sending a strong policy signal to the Chinese energy and industrial sectors, but also to China’s financial system and market actors. The question, or the expectation, is therefore, if a coordinated and mutually supportive acceleration can really take place through a carbon-neutrality transformation where the industrial side and the financial side are aligned with each other. Yes, it can happen – given that the policy push continues and the microeconomic foundation to incentivise innovation and investment will be in place. On the policy side, we do see some very encouraging signs. For instance, PBoC has put improvement of green finance policy framework and incentive structure to align with the “30-60-carbon targets” as one of its key priorities in 2021, with the following specific directions:[6]

  • Enhance the capacity of climate risks assessment and management in China’s financial system.
  • Support the development of China’s national ETS and foster proper carbon price-setting.
  • Improve standards for financial products and policy incentives for low-carbon and zero-carbon investments.
  • Clarify the supervision and information disclosure requirements and regulations related to green finance and climate finance development, incl. climate risks.  

However, there is still uncertainty or unclarity about the microeconomic foundation – faced by both Chinese companies and Chinese financial institutions. As discussed and highlighted by Mr. ZHOU Xiaochuan, the former Governor of PBoC, setting up a clear and transparent cap on carbon emissions is a necessary condition for achieving carbon-neutrality. The logic and rationale are simple and straightforward, namely, to be able to attract investments for carbon-neutrality, investors need to be able to calculate the possible return-to-investment. This implies that the microeconomic foundations for investment and business cases need to depart from a measurable verifiable and reportable emissions reduction level as well as a transparent and market-based pricing mechanism for carbon. In this context, China’s national carbon-trading system will need to play a critical role in putting the microeconomic foundation in place with a well-functioning pricing mechanism. In a longer run and in an international perspective, the green finance market will play a key role in a continuous and deepened opening of China’s financial system. International investors will pay great attention to the future development of green finance standards, environment- and climate information disclosure as well as the microeconomic foundation of China’s carbon market.   

Looking ahead, particularly in this new 14th Five-Year-Plan Period (2021 – 2025), China’s economic and climate transformation will enter a critical stage. We will see rapid and dynamic development in China’s national emission trading system as well as China’s green finance – through both national efforts, proactive actions at the regional and local level as well as international cooperation. For instance, China first green finance regulation/law at the local level was already put in force in Shenzhen on 1 March.[7] The “30-60- carbon targets” are already integrated in the regional and local 14th FYP plans across China and a race for earlier peak and earlier neutrality (instead of GDP-race) has just started.  Also, we know that China and the US will co-chair the new Sustainable Finance Study Group (SFSG) under G20.[8] From a Swedish perspective, given Sweden’s track record in green finance as well as strong global engagement in climate transformation, could green finance and its interaction with China’s carbon market development also be a new and promising departing point for a deepened dialogue and cooperation between Sweden and China in the near future? Given the rapid policy- and market development in China as well as the clear potential of a broadened and strengthened EU-China cooperation on innovation-driven climate transformation, supported by green and climate finance cooperation, I am sure that brainstorming, exchange and exploration on this topics will continue and progress in the near future…

Nannan Lundin and Linnea Yang

PS: To better inform on China’s development in Science, Innovation and Sustainability, SIO-Beijing will provide a monthly newsletter together with our blog. Here is the first issue for Jan- March 2021, put together by Jessica Zhang, Linnea Yang and Matilde Eng! 

[1] China’s Pioneering Green Finance (2015),MA Jun, Research Report from Research Centre for Green Finance Development, Tsinghua University. d566b30adccb62eab7a0e67cc656fa3f.pdf (

[2] Research on China’s Long-term Low-carbon Development Strategy and Pathway, Presentation by Prof. HE Jiankun, (ICCSD), Tsinghua University, October 12, 2020.

[3] See e.g. and

[4] 绿色金融五大支柱初步形成 国新办绿色金融有关情况吹风会文字实录 (

[5] Financing carbon neutrality in China –

[6] 2021年央行工作展望:完善绿色金融政策框架和激励机制 (


[8] China and U.S. to Lead G-20’s Sustainable Finance Study Group – Caixin Global

Theme image:nattanan23/Pixabay / 16 Jul 2019