While central banks around the world now acknowledge climate risk, only one major central bank has translated this concern into systematic, large-scale monetary intervention in support of decarbonisation: the People’s Bank of China (PBoC).
Unlike western central banks, whose climate engagement focuses largely on guidelines, disclosure, stress testing, and risk analysis, the PBoC has embedded climate objectives directly into its core monetary policy tools. These divergent approaches result from very different political environments, but examining China’s approach shows the stance taken by many other countries is a choice rather than a necessity.
Formally, the PBoC is not independent. It operates under the authority of the State Council and the Chinese Communist Party (CCP). Strategic objectives, such as China’s goals of emissions peaking before 2030 and achieving carbon neutrality by 2060, are set at the highest political level. Once these goals are established, the PBoC is instructed to align its monetary tools accordingly.
The carbon emissions reduction facility (CERF), for example, was launched directly following the State Council’s decision to commit to carbon neutrality. The political leadership of the CPP defines what must be achieved; the central bank is then tasked with making it happen. This institutional structure differs sharply from western central banking, where independence is interpreted as insulation from government priorities and thus political influence. In China, the PBoC is explicitly embedded within the state’s economic, development and climate strategies.
Operational independence in practice
Non-independence at the strategic level does not mean micromanagement. The PBoC enjoys substantial operational independence in how it implements political directives. While the government sets climate and industrial priorities, the PBoC retains discretion over the design of green facilities, interest rate and risk-sharing structures, eligibility criteria for green collateral and calibration of macroprudential incentives.
This reflects a characteristic feature of China’s political economy: political authorities set goals and technocrats design instruments. Within its mandate, the PBoC exercises considerable technical autonomy, supported by strong internal research and monetary policy departments. Operational independence also acts as a brake on financial excess. The PBoC filters political ambitions through prudential criteria, ensuring that green policies do not create systemic risks.
The PBoC’s climate role is inseparable from China’s broader system of state-led financial coordination. Under the principle of “market-driven, government-guided” development, finance is deliberately channelled toward strategic sectors. Green industries now sit at the centre of this system.
State-owned commercial banks, policy banks and government guidance funds provide large-scale capital to renewables, batteries, electric vehicles, hydrogen and grid infrastructure. The PBoC acts as the liquidity anchor, ensuring that funding costs do not become a binding constraint on green industrial expansion.
Rather than relying on the types of quantitative easing used by many central banks in the west and Japan, China uses targeted liquidity facilities and administrative coordination to link monetary policy directly to fiscal, industrial and climate objectives of the Chinese state.
Four mechanisms are central to the PBoC’s climate programme.
Green collateral in central bank lending
The PBoC allows qualifying green loans to be used as collateral in its standing lending facility and accepts high-grade green bonds in its medium-term lending facility. Therefore, banks that expand green lending gain cheaper access to central bank liquidity. Green assets are structurally privileged inside the monetary system itself.
Macroprudential incentives for green lending
Banks’ green performance is incorporated into the PBoC’s macroprudential assessment framework. Because the framework affects reserve requirements and the remuneration on required reserves, strong green performance directly lowers a bank’s funding costs.
Carbon emissions reduction facility
Introduced in 2021 following China’s “30-60” climate pledge (peaking emissions in 2030 and reaching net zero in 2060), CERF is a targeted refinancing facility for green loans. Banks can refinance up to 60% of eligible green lending at a highly subsidised interest rate, far below market funding costs. By 2024, the facility had supported well over US$150bn in lending to clean power, energy efficiency and low-carbon technologies.
Window guidance
Alongside formal instruments, the PBoC continues to use informal but authoritative credit guidance to steer lending toward green sectors in line with national industrial and climate strategies.
Together, these tools amount to direct credit steering through monetary policy, not merely the pricing of climate risk. The PBoC does not just measure climate exposure but actively reshapes credit allocation.
A way forward for monetary policy in the climate era
The contrast with western central banks is stark. The Federal Reserve has repeatedly stated that climate policy lies outside its mandate. The European Central Bank (ECB) and Bank of England (BoE) have developed climate risk frameworks but have avoided sustained green monetary intervention, explicitly citing independence and mandate limits.
In these systems, independence functions as a shield against politically contentious action considered to be beyond the purview of central banks. Central banks instead define their role as neutral risk managers rather than agents of structural transformation, even when governments have placed high political priority on decarbonisation, as in the case of the BoE and ECB.
The Chinese case demonstrates that this restraint is not a technical necessity but an institutional choice. Where governments issue binding climate directives and central banks are structurally embedded within those directives, green monetary policy becomes functional rather than exceptional.
The People’s Bank of China has become the world’s most important green central bank, not because it is rhetorically more ambitious but because it is institutionally empowered and politically instructed to act. This capacity rests on what western systems view as a danger: the absence of formal independence and to be seen as acting politically.
Yet in practice, China has combined political direction with operational discipline, allowing the PBoC to align monetary policy with industrial decarbonisation at an unprecedented scale. The Chinese case suggests that the main obstacle to green monetary policy elsewhere is not technical feasibility but institutional design.
As the urgency of the climate transition intensifies, it poses a direct challenge to the prevailing model of central bank independence: whether it can coexist with the scale of intervention that decarbonisation requires.
This page was last updated January 13, 2026
Written by
Mathias Larsen is a senior policy fellow at the Global School of Sustainability at the London School of Economics where he leads the work on China. His work focuses on assisting policymakers in China in advancing the country’s green transition, as well as supporting policymakers in other countries as they respond to China’s role in a global green transition.
James Jackson is a Hallsworth Research Fellow at the Sustainable Consumption Institute and Department of Politics at the University of Manchester. His research is focused on the political economy of climate change, particularly the intersection of fiscal, monetary and climate policy.
