Help or hindrance? Subsidies by local governments in response to China’s green credit policy
Year: 2025
Type: article
Abstract: Green credit policies direct financial resources to sustainable firms while restricting polluting ones, promoting environmental goals, and mitigating climate change. Despite extensive research on how China's punitive green credit policy (GCP) affects polluting firms, far less attention has been paid to how local governments respond to the policy and shape its overall impact. This study explores how the punitive GCP affects local government responses, particularly through subsidies. Using a staggered difference-in-differences approach based on variation in firm-level exposure to the GCP, we analyze data on Chinese A-share listed firms from 2010 to 2018. Our findings indicate that the GCP led to approximately a 30% increase in non-tax subsidies from local governments to polluting firms as short-term economic relief. This suggests that such subsidies may partly offset the financial constraints imposed by the central policy. We further categorize these subsidies into ‘green’ and ‘non-green’ and observe regional divergences: while all regions increased non-green subsidies post-GCP, only developed eastern regions saw a marginally significant rise in green subsidies. This highlights differing local strategies in supporting firms’ green transformation. Our results contribute to the ongoing debate on the GCP's effectiveness, emphasizing the importance of aligning local incentives. Policymakers should avoid a one-size-fits-all approach and refine the GCP to better support green projects in polluting firms. Poorly designed local subsidies may undermine the intended impact of the central government's GCP, while well-structured local subsidies can enhance it. Clearer guidance is needed to align local subsidies with national green goals and support firms’ green transformations. China's Punitive Green Credit Policy that cuts off bank loans to polluting firms has triggered local government responses by significantly increasing non-tax subsidies, likely intended to ease short-term financial constraints.This response varies across regions: while all regions increased non-green subsidies, which may be counterproductive to the policy's intended effects, only developed regions utilized green subsidies to guide and support polluting firms in transforming towards sustainable development. In contrast, less developed regions did not exhibit such supportive behaviour.Promoting effective subsidies like green subsidies and phasing out ineffective subsidies may be key to driving green transformation. China's Punitive Green Credit Policy that cuts off bank loans to polluting firms has triggered local government responses by significantly increasing non-tax subsidies, likely intended to ease short-term financial constraints. This response varies across regions: while all regions increased non-green subsidies, which may be counterproductive to the policy's intended effects, only developed regions utilized green subsidies to guide and support polluting firms in transforming towards sustainable development. In contrast, less developed regions did not exhibit such supportive behaviour. Promoting effective subsidies like green subsidies and phasing out ineffective subsidies may be key to driving green transformation.
Source: Figshare
Authors: Chang Liu, Dayong Zhang, Huayan Geng
Language: English
Subfield: Strategy and Management
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W6902220485
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