By Prof. Oliver Rui, Professor of Finance and Accounting and Parkland Chair in Finance, CEIBS

Green finance refers to financing and investment activities that benefit the environment and further sustainable development. These benefits include the reduction of air, water and soil pollution, reduction of greenhouse gas emissions, more efficient use of resources and mitigation of climate changes.

Green finance facilitates a shifts towards a greener economy through market-based financial incentives. Financial institutions such as banks, for example, can increase their financing capacities for green industries, and government authorities can incorporate more financial facilities for these industries into their policy-making. Green finance can be realised in the form of various products such as green credit, green bonds, green investment funds, green insurance, green securities funds, as well as carbon trading, carbon assets and carbon derivatives.

Green Finance Products

China's green finance market uses several forms of capital to support environmentally beneficial projects, with green credit, green bonds, green equity financing, and green development funds among the main instruments.

Green credit

In China, green credit includes loans issued to environmentally beneficial projects at more favourable interest rates or on more favourable terms compared to those with negative environmental fallouts. It accounts for over 95% of all green financial products. These include loans issued to environmentally beneficial projects at more favourable interest rates or on more favourable terms compared to those with negative environmental fallouts.

At the end of 2025, green loans amounted to RMB 44.8 trillion, up 20.2% year on year. Following revisions to the statistical coverage and standards for classifying green loans at the start of 2025, this total should not be compared directly with figures from previous years. These loans include major areas such as transportation, warehousing and postal services, and electricity, heat, gas and water production and supply.

Green bonds

The funds collected as green bonds are mainly used to finance improvements in energy conservation and emissions reductions, green urbanisation, clean energy, the circular economy, water conservation, ecological farming and forestry, low-carbon industries and more. China's onshore green bond issuance fell by 31.62% year on year in 2024 before rebounding by 56.5% in 2025 to RMB 1.09 trillion. During the 2021–2025 period, cumulative green bond issuance reached RMB 5.2 trillion.

Green equity financing

There are also dedicated private equity and venture capital funds for green industries and companies in the area of equity financing. These funds differ in that they offer not only funding for listed companies in green and environment-friendly industries, but also services in operations management. They generally have longer maturities and focus more on long-term yields. They also offer an effective alternative for SMEs and start-ups which struggle to obtain loans from banks.

Green development funds

In July 2020, China established the National Green Development Fund. In May 2026, the Ministry of Finance continued to report its total scale at RMB 88.5 billion. The fund was jointly initiated by the Ministry of Finance, the Ministry of Ecology and Environment, and Shanghai, with participation from provincial and municipal governments along the Yangtze River and financial institutions including the Bank of China and China Construction Bank. It is dedicated to environmental protection, pollution control, ecological rehabilitation, green transportation, and green energy.

Carbon Markets and Carbon Finance

Alongside green credit, bonds, and funds, green finance also extends to carbon itself as an asset through carbon trading, carbon assets, and carbon derivatives.

Carbon Trading

Carbon trading is a market-based policy tool used to reduce greenhouse gas emissions. Quotas are stipulated for various industries and enterprises that are incorporated into the trading system. These quotas can be granted by governments or purchased through auctions or through trading with other companies. Carbon trading allows enterprises to offset part of their emissions with the amount of reduction they have realised.

Carbon trading serves as an incentive for new energy or non-fossil fuel sectors and a constraint on industries relying on fossil fuels. The combination of these two forces helps to enable the improvement of energy use efficiency and to curb environmental pollution in a cost-effective manner.

China's national carbon market has grown substantially since trading began in 2021. In 2024, 189 million tonnes of carbon allowances were traded, with a transaction value of RMB 18.11 billion. In 2025, trading volume increased to 235 million tonnes, with transactions worth RMB 14.63 billion. By the end of August 2025, cumulative trading since the market's launch had reached 696 million tonnes and RMB 47.83 billion, rising to 865 million tonnes and RMB 57.66 billion by the end of 2025.

In 2021, I forecast that accumulated carbon trading value could reach as high as RMB 100 billion by 2030, when China is expected to reach its carbon peak. The direction of that forecast has largely been borne out: by the end of 2025, cumulative transaction value had already reached more than half of that level.

The market has also expanded well beyond the energy industry. Steel, cement and aluminium smelting joined the national carbon market in 2025, taking the number of key emitting entities covered to 3,378 in 2025. The Ministry of Ecology and Environment is now preparing to extend coverage to the chemical, petrochemical, civil aviation and papermaking industries, with the national market expected to cover the main emissions-intensive industrial sectors by 2027.

Carbon Financing Products 

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Oliver Rui is Professor of Finance and Accounting and Parkland Chair in Finance at CEIBS. His research interests include corporate governance, stock markets in China, corporate finance, and mergers and acquisitions. He has also focused in recent years on ESG, green finance, and family wealth management.

Frequently Asked Questions

What is green finance?

Green finance refers to financial services provided for economic activities that support environmental improvement, climate change mitigation, and the efficient use of resources. In China, it directs capital towards environmentally beneficial projects through instruments such as green credit, green bonds, equity financing, development funds, and carbon-related financial products.

What are the main green finance products?

The main products covered here are green credit, green bonds, green equity financing, and green development funds, alongside carbon trading and carbon financing products. Carbon finance can include carbon asset lending, carbon bonds, carbon-based asset-backed securities, and sale and repurchase arrangements using carbon assets as the underlying asset.

How does carbon trading work?

Carbon trading sets emissions quotas for participating industries and enterprises. These quotas may be allocated by governments, purchased through auctions, or traded between companies. Enterprises can also use eligible emissions reductions to offset part of their obligations. This creates financial incentives to reduce emissions while placing constraints on more carbon-intensive activities.

What is carbon finance?

Carbon finance uses carbon assets as the basis for financial products and financing arrangements. These include lending carbon assets, issuing carbon bonds or carbon-based asset-backed securities, and selling and later repurchasing carbon quotas. Such products can help companies manage price volatility, earn returns on carbon assets, access subsidies, and broaden their financing options.