China has updated its green taxonomy as part of the country’s efforts to strengthen its net-zero transition ambitions

In an article on the Green Central Banking website, Moriah Costa writes about latest developments in China to update its green taxonomy, which comes into effect in October. The catalogue defines which economic activities and investments qualify as green or environmentally sustainable across a wide variety of industries.

China updates green taxonomy to increase energy transition finance

China has updated its green taxonomy as part of the country’s efforts to strengthen its net-zero transition ambitions and reduce fragmentation which had often been a source of confusion and increased costs for financial institutions and regulators.

The catalogue of green finance endorsed projects comes into effect in October and will replace two separate green lists that have been used for bond and loan markets, but it will not cover Chinese equities.

Issued by the People’s Bank of China (PBoC), the National Financial Regulatory Administration and the China Securities Regulatory Commission, the catalogue defines which economic activities and investments qualify as green or environmentally sustainable across a wide variety of industries.

The consolidation will reduce reporting costs for financial institutions and provide more support for decarbonisation in China, said Xie Wenhong, head of the China programme at the Climate Bonds Initiative’ (CBI).

“A longstanding issue, both in China and globally, is that the financial sector often leads the real economy in its ambition to go green but can struggle to effectively support the transition of the real economy,” he said.

China has set clear goals for curbing emissions in a bid to become a global leader on the energy transitionand exert its influence in the region. In 2024, China joined a joint green taxonomy with Singapore and the EU to facilitate cross-border green loans and bonds.

Ting Su, Chinese sustainable research associate at the World Resources Institute, said the consolidation will help improve efficiency and is expected to ramp up funding either through the credit or bond market.

“The updated and more consolidated catalogue is a big milestone to improving market efficiency and securing market integrity,” she said.

Xie is positive about the updated version as it expands on green economic activities, such as those related to climate resilience and methane abatement and includes passenger rail for the first time. CBI has long advocated for including passenger rail as a green activity due to its low-carbon impact.

In addition, the taxonomy also has a greater emphasis on green and low-carbon industries which “is expected to provide much-needed momentum for industries to adopt greener practices”, Xie said.

The catalogue also expands the scope of green finance to include green trade and consumption. Trade was added to support the import and export of energy-efficiency equipment and green technologies, while green consumption targets consumer behaviour and shifts focus from production to demand, Xie explained.

This could lead to the creation of green consumer loans and mortgages and “while its effectiveness remains to be seen, this inclusion could reduce consumer costs, incentivise manufacturers and drive innovation, providing a further boost to the green industry sector”.

But there is still some overlap with other transition finance standards as China continues to pilot its standards, and “there needs to be more clarity to market participants on how to deal with the ambiguity to avoid double counting”, said Ting.

While the updated standards are a huge milestone, incentives are still needed to ensure green finance is developed in China, she said.

“As green premium in China is lower than other developed markets, [the] creation of policy incentives based on the catalogue will play [an] important role to impetus the market.”

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