Green Finance Policy Evolution in China and the Impact of Pilot Zones

The rise in global temperature must be held to no more than 1.5°C above preindustrial levels to prevent the worst effects of climate change. Achieving this goal requires reducing greenhouse gas (GHG) emissions to “net zero,” where emissions are balanced by their removal from the atmosphere. This transition will require significant investments, and many governments are starting to implement policies to support this shift. According to “Green Finance Policy Evolution in China and the Impact of Pilot Zones: Huzhou Case Study,” approaches to green finance — financing that supports environmental sustainability — should vary by region.

The report focuses on China’s development of green finance, particularly through its use of pilot zones. Pilot zones allow local governments to test green finance policies and products before applying them nationwide. It presents Huzhou, a city in China, as a successful example of this approach and offers valuable lessons for other emerging markets.

Huzhou’s Green Finance Journey

Huzhou’s green finance journey has been driven by strong local government leadership and cooperation between the government, businesses, and financial institutions. The city developed a green finance taxonomy, focused on such industries as textiles and batteries, and created financial products to help small and medium-sized enterprises (SMEs) adopt more sustainable practices. Huzhou’s investment in capacity building has been a key factor in its success. The city worked to educate local officials and businesses on green finance and environmental standards, creating a strong foundation for its green finance system.

Huzhou also used policy incentives to encourage green finance adoption. These included interest subsidies for green loans and rewards for financial innovation, as well as penalties for greenwashing. The city also developed a digital platform to streamline access to green financing, particularly for SMEs, reducing the time and cost associated with securing funds for sustainable projects.

Lessons for Other Emerging Markets

Although the impacts of climate change will be felt globally, they are known to be regressive, which means that emerging economies will be disproportionately affected. Huzhou demonstrates how emerging markets can integrate green finance into their economies and that even in economies with less developed financial markets, green finance can thrive with strong government leadership and collaboration between sectors.

This is particularly relevant for countries in Southeast Asia, Africa, and Latin America, which, the report notes, are expected to be disproportionately affected by climate change. By adopting practices like those used in Huzhou, these countries could balance environmental goals with economic growth, creating a sustainable path forward.

The Global Climate Context

The need for a global transition to a green economy is urgent. Current climate projections suggest a 2.9°C temperature rise by the end of the century, far above the 1.5°C target set by the Paris Agreement. This would result in devastating effects on ecosystems and economies, particularly in developing countries. To avoid these outcomes, countries must reduce GHG emissions to net zero. The report suggests that while costly, the long-term benefits of this transition far outweigh the costs, with potential economic gains far surpassing the damage caused by climate change.

Six Key Takeaways

1. The importance of limiting temperature rise: To avoid the worst impacts of climate change, global temperatures must be limited to 1.5°C above preindustrial levels.
2. Green finance as a key solution: Green finance, which supports sustainable economic practices, is essential for financing the transition to a green economy.
3. Huzhou’s success in green finance: Huzhou is a successful example of integrating green finance. It developed its own green finance taxonomy, focused on key industries such as textiles and batteries, and created financial products that support SMEs in adopting sustainable practices.
4. Capacity building is critical: Huzhou's success was largely due to its emphasis on capacity building — educating local officials, businesses, and financial institutions on green finance and environmental standards.
5. Policy incentives and innovation: Huzhou used various policy tools, such as interest subsidies for green loans, rewards for green financial innovation, and penalties for greenwashing, to encourage the adoption of green finance.
6. Lessons for other emerging economies: With strong government leadership, tailored policies, and collaboration between sectors, other countries can develop green finance systems that support both economic growth and environmental sustainability.