China has made spectacular progress in economic growth and poverty reduction in the past four decades. On the flipside, the growth model is energy-intensive, impacting the climate and the local environment.

Facing the huge challenge of fundamentally changing its growth model to achieve net zero transition, China has deployed a multiplicity of instruments, leveraging its direct control of state-owned enterprises (SOEs), tapping more into private sector resources and innovative capacity, and increasing the role of market forces, particularly in the energy sector, and through the development of carbon markets.

SOE reforms, such as privatization in the power sector in the 2000s, increased economic efficiency without adversely affecting the environment. The SOE personnel and performance evaluation policy change in 2010 was effective in improving SOE environmental performance but more through the introduction of end-of-pipe technologies and less through production process innovation. SOEs are expected to respond in a similar manner to the evaluation policy change in 2021 that involves carbon emission reduction.

Private firms have played an important role in infrastructure investment through PPPs since 2014, particularly in environment related sectors. PPPs and private participation were initially associated with local fiscal constraints but have become more correlated with institutional strength since the tightening of PPP rules in 2017.

Market-oriented reforms in the power sector and for carbon emission reduction have been effective but with their limitations. The unbundling of power monopoly in the power sector in 2002 improved allocative efficiency but had no impact on the environment. The emission trading schemes (ETS) pilots in selective cities reduced carbon emissions through resource reallocation and imports of green equipment and raised climate awareness which may have profound implications for behavioural change. However, the effect is more subdued regarding green innovation. A coordinated policy mix is much needed to support markets and stimulate green innovation.