Hurdles remain on country's path to a green economy

China stands at a pivotal moment in its modern development. As it seeks to balance rapid economic growth with environmental sustainability, the country's choices in policy design, financial structuring and community engagement are increasingly consequential — not only for its own future but for global pathways toward a green economy.

While many nations wrestle with similar dilemmas, China's scale and weight make its trajectory uniquely influential.

The country recently unveiled a set of guidelines to ramp up green transition in all areas of economic and social development. However, the country's policies on fostering a sustainable economy began more than a decade ago.

The green credit policy is perhaps the clearest example of how China has attempted to shift environmental protection from the realm of regulation to the domain of finance.

Introduced in 2007 and formalized through the Green Credit Guidelines of 2012, the policy requires commercial banks to integrate environmental and social responsibility into their lending decisions.

This was not just a symbolic gesture; it fundamentally altered the calculus for polluting companies, which had long relied on low-cost credit to prop up unsustainable production models.

The results, as studies have shown, are significant. Before 2012, polluting companies suffered from serious "maturity mismatches"?— using short-term borrowing to finance long-term projects, leaving them vulnerable to liquidity crises.

After the green credit rules took effect, this mismatch narrowed, with polluting companies increasingly aligning their financing strategies with nonpolluting ones. By pushing banks to assess environmental risk alongside financial risk, China created a mechanism that indirectly but effectively pressured companies to pursue green transformation.

Yet challenges remain. Implementation is uneven, and banks, especially non-State lenders, still grapple with balancing profitability and sustainability. Policymakers must therefore continue refining the financial system: expanding long-term green loans, improving cooperation between banks and environmental regulators, and incentivizing innovation in financial products that support decarbonization.

At the same time, companies themselves cannot rely solely on bank financing. They must enhance their own innovation capabilities, diversify funding sources, and treat green transformation as a driver of competitiveness, not a compliance burden.

If green credit works through incentives, the Environmental Protection Tax Law, which was adopted in 2016 and implemented in 2018, works through disincentives. By taxing pollution directly, the law signals that environmental degradation carries a financial cost.

Companies that disclose environmental performance without corresponding improvement strategies often face negative market reactions, underscoring investors' growing awareness of regulatory risks.

The tax has also highlighted a key reality of sustainable development: Regulation and market perception are intertwined. Investors increasingly reward companies that not only comply with environmental rules but also proactively pursue greener practices. This dynamic pushes companies to disclose more detailed environmental information, while also pressuring local governments to improve the quality of their legal institutions.

Social acceptance

Looking ahead, the success of the tax will depend less on its formal design than on its credibility in enforcement. Only when companies see environmental damage consistently penalized will they fully internalize the costs of pollution. For investors, this law is also a signal: The safest long-term bet lies in industries and enterprises that embrace sustainability, rather than resist it.

Policies and taxes are powerful, but the social acceptance of climate strategies is equally vital. A nationwide survey in China in 2020 examined public attitudes toward solar climate engineering — technologies such as stratospheric aerosol injection, or space reflectors designed to artificially cool the planet. While such proposals remain controversial, the survey offered important insights into how the Chinese public perceive climate risks and technological interventions.

The results were striking. Nearly 95 percent of respondents acknowledged climate change, with majorities linking it to human activity and expressing concern about its consequences, particularly extreme heat, glacier retreat and drought. Support for government action was strong, and about half of participants were even willing to accept personal taxes to fund climate measures.

Yet when it came to solar climate engineering, enthusiasm was muted. Compared with mainstream solutions like renewable energy and energy efficiency, geoengineering ranked lowest in priority. This suggests that while the public wants action, it favors familiar, tangible solutions over large-scale technological experiments. The implication is clear: China must expand climate education and foster discussions about emerging technologies.

China's path toward a green economy is neither linear nor assured. Green credit and environmental taxes provide powerful frameworks, but their effectiveness depends on enforcement, institutional capacity and corporate adaptation. Public perceptions reveal both an appetite for climate action and a caution toward untested technologies, suggesting the need for broader engagement and education.

The lesson is that no single lever, financial, legal, technological or social, can on its own guarantee sustainability. The transformation requires coordination among government, banks, companies, citizens and communities. In this sense, China's green transition is a microcosm of the global struggle: moving from policy design to practical action, from ambition to accountability.

China's experience thus far offers cautious optimism. It demonstrates that aligning finance with sustainability can reshape corporate behavior, that taxes can internalize environmental costs, that public opinion is engaged, and that civil society can act as both a watchdog and a partner. The challenge now is to scale these successes, confront deficiencies in enforcement, and ensure that policies are not only written, but lived.

In the end, China's green economy journey will serve as both a test and a template. If it succeeds in marrying rapid development with ecological resilience, it could inspire a model for other nations. If it falters, the consequences will reverberate far beyond its borders. Either way, the world will be watching.

The author is a supernumerary fellow of Wolfson College, University of Oxford, the United Kingdom.

The views do not necessarily reflect those of China Daily.