China's green transformation has come about more from "financing green" than "greening finance", write Calvin Quek and Mathias Larsen
Have pity for the climate change scientist. Despite decades of warnings that carbon emissions must fall to limit global warming, year after year, emissions continue to rise.
That's why recent news that emissions from the world's largest emitter – China – actually fell may give climate scientists something to cheer about.
While China's emissions have declined during past economic slowdowns, this time emissions fell 1.6% year-on-year in the first quarter of 2025, even as its economy grew by 5.4% over the same period.
Driving this shift has been an unprecedented expansion of clean energy capacity: solar and wind capacity in China increased respectively by 28% and 5% year-on-year in 2024, with 277GW of new solar and 79GW of new wind connected to the grid.
China's clean energy installation accounted for an eye-watering 64% of the world's newly installed renewable energy capacity. As a result, 39% of China's electricity generation came from clean energy sources, up 5% year on year.
China has also become a major force in "green finance" – a suite of policy tools like green bonds, loans, taxonomies, and disclosure rules aimed at making the financial system more sustainable.
In 2023, China issued a world-leading $131.3 billion in green bonds, and by 2024, green loans reached $4.9 trillion.
"China's clean energy installation accounted for an eye-watering 64% of the world's newly installed renewable energy capacity. As a result, 39% of China's electricity generation came from clean energy sources, up 5% year on year"
At the global level, momentum in green finance continues: Since 2018, the cumulative green bond market has grown nearly six-fold, reaching approximately $3.4 trillion by 2024. Over the same period, over 40 countries have adopted national green finance or sustainable finance strategies, up from 17, while green taxonomies have increased from three to 47.
Additionally, the landscape of sustainability disclosure frameworks has become more complex, with over 600 different ESG reporting provisions identified globally.
Yet the relationship between green finance and China's renewable energy expansion remains complex.
Many green finance tools in China, such as bonds and disclosure, are market-based and may have limited measurable impact on directing new capital flows.
Most green bonds and green loans are issued by state-owned banks, but transparency about around how proceeds are used remains limited.
In addition, green bonds may play only a modest role in financing actual renewable energy projects, in a country where project finance remains overwhelmingly bank-led, casting doubt on their additionality, i.e. how much new money is raised through bonds.
Moreover, disclosure requirements vary across at least four overlapping standards, and although a mandate for environmental reporting was announced in 2016, analysts estimate that only around 10% of listed companies are currently subject to comprehensive rules.
Also, China still lacks a unified green taxonomy, and some versions still allow for "clean coal".
Indeed, China's renewable energy surge may have more to do with industrial policy than with green finance.
A seminal 2024 report from the Oxford Institute for Energy Studies argues that four main synergistic industrial pillars underpin China's clean energy success:
- First, long-term policy support in the form of generous feed-in tariffs, sustained R&D subsidies and clear industrial targets have provided certainty and reduced investor risk.
- Second, vertically integrated Industrial clusters in the Yangtze and Pearl River Deltas, optimize supply chains and manufacturing, enabling rapid product development and cost reductions.
- Third, strategic technology engagement, once reliant on licensing and joint ventures, has evolved into collaborative innovation with global players.
- And fourth, China's booming science, technology, engineering & mathematics (STEM) talent and its private sector entrepreneurs have driven commercialization with remarkable speed.
The results speak for themselves. In 2024, China installed more than half the world's new clean energy, produced 71% of the world's batteries, exported over 235GW of solar panels (80% of global demand), and shipped 1.28 million electric vehicles (making it the world's largest exporter).
All told, cleantech industries contributed 10% to China's GDP, surpassing real estate.
That is not to say that green finance tools are not important. The PBOC's green lending scheme, which cuts banks' borrowing costs if they lend to green companies and projects, led to $123 billion in new financing in less than two years.
But these green finance tools form part of a larger suite of catalysts that underpin state-driven industrial policy. For example, China's state-capitalized equity funds have invested over half a trillion dollars into strategically important industries, of which the clean energy sector is one of its largest beneficiaries.
"Most green bonds and green loans are issued by state-owned banks, but transparency about around how proceeds are used remains limited"
Fiscal policy complements this with direct subsidies, tax incentives, public procurement, and R&D support.
If countries want to learn from China's success, it is crucial to focus on what actually delivers results. While green finance tools such as taxonomies, disclosure standards, and bonds have a role to play, particularly in building market integrity and investor confidence, they are most effective when embedded within a coherent industrial strategy.
Indeed, China's experience shows that its green transformation, has come about more from "financing green", i.e. directing capital to green sectors as part of a larger industry strategy, as opposed to solely "greening finance", i.e. making the financial system itself more sustainable from within.
As industrial policy regains prominence globally as a topic, this distinction matters.
Policymakers, researchers, and companies must focus on what actually works. That means moving beyond symbolic market measures and embracing the transformative potential of a holistic green industrial strategy.
Calvin Quek, University of Oxford
Mathias Larsen, Brown University
