Green Credit or Subsidies: Which One Really Cuts Corporate Carbon?

Cutting corporate emissions depends on more than asking companies to become greener, where money flows, who receives financial support, and whether funding systems can distinguish companies that are genuinely reducing emissions from those that are not.

A new study titled "Financial incentives or fiscal support? the differential impacts of green credit and green subsidies on corporate carbon intensity," published in Frontiers in Environmental Science, compares two major tools used to support greener businesses: bank-based green credit and government green subsidies. Researchers Bo Wen, Dayi He and Ping Lei find that both favor lower-carbon companies, but green credit appears to screen them much more strongly.

Two Green Policies That Work in Different Ways

Green subsidies and green credit may share an environmental purpose, yet the money reaches businesses through very different systems. Subsidies are government-led fiscal support, usually provided without a repayment obligation. They can absorb some of the risk involved in green innovation, emerging technologies and costly low-carbon transitions. That flexibility also means subsidies can support high-carbon companies when public authorities want them to upgrade technology or reduce emissions. This flexibility comes with weaknesses as subsidies can face budget constraints, while poorly designed programs may encourage companies to exaggerate environmental achievements or engage in greenwashing to secure public money.

Green credit operates through banks and carries a stronger commercial discipline. Banks assess repayment ability, environmental risks and company performance before lending, then continue monitoring borrowers after loans have been issued. The study's theoretical model shows why this matters? green credit lowers financing costs for emission-abating firms while raising them for non-abating firms, directing relatively more capital toward cleaner businesses.

The model predicts that both policies increase the relative capital and output of low-carbon firms compared with high-carbon firms, while green credit produces the larger shift.

What the Evidence From Chinese Companies Shows

The researchers tested these ideas using 34,400 firm-year observations from Chinese A-share listed companies between 2001 and 2022. Financial companies, specially treated firms and observations with serious missing data were removed. Corporate carbon intensity was measured using carbon dioxide emissions relative to operating revenue.The results were clear that companies with higher carbon intensity were significantly less likely to receive either green credit or green subsidies, meaning both systems generally direct resources toward lower-carbon businesses. The relationship was much stronger for green credit: in the baseline model with controls, the carbon-intensity coefficient was −0.1244 for green credit, compared with −0.0054 for green subsidies.

The predicted probability of obtaining green credit keeps falling as carbon intensity rises. Green subsidies follow a U-shaped pattern that access initially falls but starts rising again among highly carbon-intensive companies. Some high-carbon firms therefore continue receiving subsidies, potentially because governments also use fiscal support to finance technological upgrading and industrial transition.

The researchers tested the findings against several possible weaknesses, including extreme observations, different sample periods, industries facing special credit restrictions, an alternative measure of green credit, another estimation method and potential reverse causality. The central conclusion remained intact.

One Policy Cannot Do Every Green Financing Job

Green credit favored lower-carbon firms among both small and large businesses, while the low-carbon tendency of subsidies was significant mainly among smaller firms. Green credit showed the same orientation among state-owned and non-state-owned enterprises, with a stronger effect among state-owned companies. Subsidies showed a significant low-carbon orientation among non-state-owned enterprises but not state-owned ones.Industry pollution levels mattered too. Green credit favored lower-carbon companies in both heavy-polluting and other industries, with a stronger effect among heavy polluters. The low-carbon orientation of subsidies was mainly visible within heavy-polluting industries.

These differences suggest that policymakers should not treat credit and subsidies as interchangeable green funding tools. Banks could strengthen carbon-based credit assessments while keeping financing available for high-emission companies with credible transition plans. Governments could reserve subsidies for clearly defined green innovation and technological-upgrading projects, tying payments to measurable environmental progress.

The researchers argue that the strongest approach may combine both instruments; subsidies can absorb early-stage risks when green projects remain uncertain, while green credit can provide follow-up financing once projects demonstrate environmental and commercial viability. Sharing carbon-emission, subsidy-use and green-credit information across fiscal, financial and environmental authorities could also reduce duplicated support and close funding gaps.