ADB Warns China Must Reform Climate Finance as Net Zero Could Cost Up to CNY487 Trillion

China's transition to carbon neutrality could require up to CNY487 trillion in investment, with the ADB warning that China must move beyond subsidy-led financing toward carbon pricing and tax reforms to protect fiscal sustainability. The report says stronger public-private partnerships, expanded green finance, and market-based climate policies will be essential to help governments, investors, and development partners achieve long-term climate and economic goals.

China's pledge to peak carbon emissions before 2030 and achieve carbon neutrality before 2060 has become much more than an environmental commitment. According to a new Asian Development Bank (ADB) report prepared by Yongzheng Liu of Renmin University of China for the Ministry of Finance of the People's Republic of China, the country now faces one of the world's biggest economic and fiscal transformation challenges. While China has built an ambitious policy framework to reduce emissions, the report warns that achieving these goals will require massive investment, smarter public finance, and stronger participation from the private sector. Without reforms, climate ambitions could put increasing pressure on government finances even as they create new economic opportunities.

A Climate Goal That Comes With a Massive Price Tag

The report estimates that China will need between CNY100 trillion and CNY200 trillion in green investment under a narrow estimate, and more than CNY487 trillion under a broader estimate by 2050-2060. If governments finance around 15% of that investment, annual public spending would need to reach CNY500 billion to CNY2.4 trillion.

That compares with current annual spending on energy conservation and environmental protection of only about CNY570 billion, leaving an estimated funding gap equal to nearly 1.4% of GDP every year.

The study says China has already developed one of the world's most comprehensive climate governance systems through its "1+N" framework, combining national strategies with sector-specific and provincial implementation plans. The country aims to reduce energy consumption per unit of GDP by 13.5% by 2025, increase the share of non-fossil energy to 20%, and cut carbon emissions intensity by 18% compared with 2020 levels. By 2030, non-fossil energy should account for around 25% of total energy consumption while installed wind and solar capacity exceeds 1.2 billion kilowatts. By 2060, more than 80% of energy consumption is expected to come from non-fossil sources.

Industries Face Big Changes and Big Opportunities

China's energy sector remains the biggest source of emissions, accounting for more than 80% of national carbon emissions. The report says the transition will depend on expanding renewable energy, strengthening electricity grids, improving energy storage, and gradually transforming coal-fired power plants using carbon capture technologies, biomass and cleaner fuels.

Manufacturing will also undergo significant restructuring. China's industries consumed 3.64 billion tonnes of standard coal equivalent in 2022, representing 67% of the country's total energy consumption of 5.41 billion tonnes. The report outlines major reforms across steel, cement, petrochemicals, electronics and equipment manufacturing through cleaner technologies, greater electrification, recycling and hydrogen-based production.

Transport and urban development are expected to play equally important roles. China plans to increase rail-water freight transport by more than 15% annually, raise the share of newly added clean-energy vehicles to about 40% by 2030, expand charging infrastructure, electrify airport operations and promote greener public transport. New urban buildings are expected to meet strict green standards while renewable energy, rooftop solar and energy-efficient construction become standard practice.

For businesses, these policies present enormous investment opportunities. Renewable energy developers, electric vehicle manufacturers, battery producers, hydrogen companies, green construction firms, digital technology providers, carbon market participants and financial institutions are all expected to benefit from one of the world's largest green investment programmes.

Fiscal Pressure Raises New Questions for Policymakers

Despite these opportunities, the report argues that China's current climate financing model relies too heavily on government spending. Dedicated public funds, subsidies, tax incentives and green procurement programmes have successfully accelerated renewable energy deployment and industrial upgrades, but they are also placing increasing pressure on public finances.

Using economic modelling, the study projects that under the current expenditure-heavy approach, China's fiscal revenue-expenditure gap could widen from around 5% of GDP to 11% of GDP by 2030. Coal-dependent provinces such as Inner Mongolia, Gansu and Liaoning face particularly high fiscal risks, while funding gaps could exceed 8% of provincial GDP in regions including Ningxia and Inner Mongolia.

The report also finds that China's current tax system lacks strong revenue-generating climate instruments. While tax incentives have encouraged green investment, environmental taxes and resource taxes remain relatively limited in scope and do not generate enough revenue to finance the long-term transition.

Carbon Pricing Could Strengthen Public Finances

The report recommends shifting gradually from subsidy-driven financing to market-based climate finance. International experience shows that carbon pricing generated more than $100 billion globally in 2024, making it one of the most effective tools for both reducing emissions and raising public revenue.

For China, the report recommends expanding the national emissions trading system, replacing free carbon allowances with auction-based allocation, increasing carbon prices over time, reducing fossil-fuel subsidies and strengthening environmental and resource taxation. Over the longer term, it suggests introducing a dedicated carbon tax alongside emissions trading, while also exploring carbon border adjustment measures, aviation-related environmental taxes and other innovative fiscal instruments.

For governments, the findings highlight the importance of balancing climate ambition with fiscal sustainability. Development partners such as multilateral development banks can help by supporting green finance, blended investment, technology transfer and local government capacity building. Meanwhile, private investors have an opportunity to participate in one of the world's largest green transitions, provided they adapt quickly to tightening environmental regulations and changing market conditions.

The report concludes that China has already built a strong policy foundation for achieving its dual carbon goals. However, reaching net zero without creating long-term fiscal stress will require a broader financing strategy that combines public investment, carbon pricing, stronger tax reforms and greater private-sector participation. Such an approach, it says, could not only secure China's climate objectives but also provide a valuable roadmap for other emerging economies pursuing sustainable growth.