A crucial tool for green growth

Since China announced its dual carbon goals — peaking carbon dioxide emissions before 2030 and achieving carbon neutrality before 2060 — in September 2020, the nation's green and low-carbon transition has moved from being at the periphery of development to becoming a central theme of high-quality development.

The strategy and related environmental regulations reflect a policy system that embodies China's distinctive model of an active, capable government working in tandem with an efficient market. Such a policy system not only reflects top-down governance principles and regulatory requirements but also relies on bottom-up, endogenous innovation by enterprises and autonomous market operations.

The dual carbon strategy has spurred the expansion of China's carbon market, transitioning it from pilot programs to a nationwide market. Over the past four years, the national carbon market has achieved notable results. The cumulative trading volume of carbon emissions allowances reached about 720 million metric tons by Sep 24, and the total transaction value exceeded 49 billion yuan ($6.8 billion). The Ministry of Ecology and Environment's data show that in 2023, China's national thermal power sector's carbon intensity decreased by 2.38 percent from 2018, and the economy-wide electricity consumption carbon intensity fell by 8.78 percent. This validates the emissions reduction effectiveness of the national carbon market, which is mostly composed of power sector enterprises.

At the institutional level, China unveiled a guideline to accelerate the country's green and low-carbon transition and strengthen the construction of the national carbon trading market in August 2025. This guideline, jointly issued by the Communist Party of China Central Committee and the State Council, has clarified the development road map. And this institutional upgrade will help enterprises translate price expectations into concrete capital expenditure plans by enterprises.

China has been advancing its national climate action agenda, and the dual carbon goals have further accelerated the implementation of climate finance pilot initiatives.

In 2022, China designated the first batch of 23 pilot cities and regions for climate investment and financing initiatives. As of the first half of 2024, climate financing pilot cities and regions across the country have cumulatively guided financial institutions to issue loans of over 1.1 trillion yuan to carbon-reduction projects through carbon-reduction support instruments, facilitating annual carbon emissions reductions of nearly 200 million tons.

Currently, pilot cities and regions are tailoring their approaches to local conditions, developing differentiated pathways and models for climate finance, and continuously refining their strategies, standards frameworks and institutional systems.

However, China's carbon market currently suffers from notably insufficient liquidity, with carbon prices significantly lower than those in major global carbon markets, as well as below the carbon price range recommended to achieve the Paris Agreement's primary goal of limiting global warming to well below 2 C. Excessively low carbon prices not only fail to accurately reflect the social cost of emissions reductions and hinder the carbon market's ability to effectively drive decarbonization, but also impede Chinese investors from participating competitively in international carbon trading markets.

At the government level, it is essential to develop indicators of green development quality and incorporate them into the evaluation system for medium- and long-term development plans. Meanwhile, in designing green finance policy instruments, priority should be explicitly given to sectors capable of driving emissions reduction and greening across entire industry chains.

In policy formulation, three questions on policy effectiveness should be incorporated into assessment and feedback mechanisms, namely: whether cash flows and marginal costs have been optimized, whether technological innovation and organizational management capabilities have improved, and whether the stability and effectiveness of price signals have been enhanced. Simultaneously, a unified, credible and auditable monitoring, reporting and verification system should be established alongside these measures, to enhance market credibility and the stability of expectations with legal safeguards.

At the corporate implementation level, carbon price signals, carbon constraints and carbon-related disclosure requirements can be integrated into corporate financial decision-making and investment appraisal processes. Then, green development, efficiency improvement and profit growth can be achieved simultaneously through advances in green technologies and the development of green productivity. Real economy industries can tap their potential to optimize production processes and catalyze technological breakthroughs in green sectors. They can also harness digital and intelligent technologies to enhance the efficiency of factor allocation and reduce transaction costs and moral hazard.

At the international level, the deficit in global climate governance is becoming increasingly pronounced; international climate negotiations are exceptionally difficult; and progress in global climate cooperation remains slow.

Despite the headwinds, China has consistently played an active role in global climate action — from active participation in the Clean Development Mechanism under the Kyoto Protocol to its commitment in the Copenhagen Accord to specific carbon intensity reduction targets, and subsequently to its accession to the Paris Agreement.

The withdrawal of the US from the Paris Agreement, coupled with the European Union's proposal of the Carbon Border Adjustment Mechanism, may impact global climate efforts and hinder the development prospects of some developing countries. The introduction of China's dual carbon goals has not only powerfully advanced its own green and low-carbon transition, but also significantly propelled China from being an important participant in international climate cooperation to becoming a global leader in this field.

China's comparative advantage in global green development lies in its scale, but, more importantly, in its implementable institutional capacity and replicable, engineering-oriented solutions. And the key to transforming China's climate response experience into a global public good lies in creating replicable project packages and transferable governance processes.

Building on its domestic unified carbon market, China should focus on the market mechanisms, transparency requirements and just transition provisions of the Paris Agreement, to formulate methodologies and accounting procedures that are measurable and verifiable. These tools will empower developing countries to establish green governance systems that are institutionally grounded, operationally feasible and evaluable — thereby cultivating China's capacity to supply tangible international public goods and securing greater influence in the global carbon market through practical, implementation-oriented strengths.

The author is a professor at the School of Economics at Fudan University. The author contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.