| Green credit is a credit policy supported by the Environmental Protection Authority together with the Monetary Authority for the purpose of constraining the enviromental pollution and ecological damage as well as supporting the development of clean energy technology and energy saving behaviours by means of controlling the supply of credit to polluters and manipulating polluters' price of funds. The green credit system is a set of principle, objective, target, content, instrument and tool designed according to green credit policy.China is now on the way of industrialization, urbanlization, internationalisation and moving towards free market system. But its economic growth relies too much on input of labour and capital rather than technology and innovation. I.E. the mode of China's economic growth has high environmental impact inherently which needs to be rapidly changed. Under this cicumstance the use of financial instruments in the envirnomental protection area should be one of most important parts of our economy sustainable development system. Therefore it is a key area of research interest of authorities and scholars who in desire of a sustainable development.In the context that environmental pollutions have seriously constrained China's sustainable development and damaged people's healthy, financial industry which is the core of mordern economy has social and polical responsibility and should play a more active role. Under the market condition, financial industry holds vast amount of economic resources. Leverage and the role of resources allocation are key advantages of financial industry on environmental protection. Compared to direct interventions of the government, environmental finance could minimize the efficiency loss of the economy, for the environment must be protect. Green credit is the most important part of environmental finance. However, althrough China has built up a system of 3 green finance regime, the performance of environmental finance is far from expection.Compared to developed nations who did similar things. China's green credit regime has a large gap to catch up. Oversea scholars and institutions have been able to build up robust green credit regime which is supported by studies on legal, financial market and financial innovation issues. Those regimes are able to archive objectives of such significantly impovement of enviromental quality, removement of enviromental risk and reduce of pollutions and emissions. In China, althrough scholarships do exist at very early stage, unfortunately little progess has been made in practice. China's regime is a consequence of the contradiction between fast economic growth and high environmental damge rather than a sophisticated forward-looking design. Therefore although it is highly relevant to issues generated by this fast-growth-and-high-damage economic mode, it is too simplistic, too difficult to be implemented, too much direct intervention, and too few market-driven, in the end it constrained, to a great extent, only its'own powerfulness.This study uses methodology from econometric theory and game theory. It did a empirical analysis on relationship between China's economic growth and the environmental damage, measures the effectiveness of green credit instrument on CO2 emission abatement and games play between parties who are involeved in green credit. The study conclude that economic growth is the major cause of environmental damages in the meanwhile environmental damages will constrain further growth. Therefore tighten environmental control might not slow down the growth but gain sustainability, improved profit rate and impove social welfare. From China's practice in recent years, we can see that emissions have been cut a lot through the joint effort of our garvenment and financial institutions, among which financial measures play a very important active role.This study suggests that bank supervision has to play a more active role in green credit regime. Comparing to supervision on pollution firms, supervision on banks is much more practical for the government. Therefore, it is necessary for government to raise environmental fines to such a level that it would thread bank's loan. In addition, firms have to internalize their externality, which means tax and subside could play another great role. Moreover, the government has to raise fines up to a significant level to stop firms' speculation and to reward the institutes who carry out supervisions. In the meawhile it is also necessary to improve our supervision authority's constrain-incentive mechanism.China needs to refine its orientation of green credit policy and to build up a robust regime. This study suggestes a project of promote this orientation based on the combination of government power and constrain-incentive mechanism. This project includes three parts: project plan, project target and project principle. The project requires the participation of the government, banks, firms and supervision authorities. The main body of the project should consist green credit organization system, green credit decision making system, green credit supervision system, commercial bank's internal reward/motivation system and green credit toolkit; it also needs to be supported by industrial policy, fiscal policy and the law.This study constructs the model and framework of China's green credit, refines environmental finance theory, provides a precondition for the building up of the system. This study could provide ideas to China's central bank as well as the the relevant government authorities.
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