New ecological code to drive green growth

The stakes are unmistakable. This year, wildfires have burned close to half a million hectares of woodland across the European Union, while rivers ran too low and too warm to cool the nuclear reactors on their banks, forcing reductions in electricity generation as water restrictions spread.

Fire, water and electricity are not three problems but one, climate change. At the same time, the loss of ecosystem services threatens economic viability itself.

The European Central Bank found that 72 percent of euro-area companies are critically dependent on at least one ecosystem service, with water scarcity alone putting up to 24 percent of output at risk.

China’s Ecological and Environmental Code, which enters into force on Aug 15 – the National Ecology Day – therefore deserves attention, less as a domestic achievement than as an institutional experiment whose results matter well beyond China.

Adopted by the National People’s Congress in March, the 1,242-article code has five chapters, covering areas including pollution control, ecological protection and green and low-carbon development.

It is China’s second legal code, after the Civil Code.

What distinguishes it is its systems-engineering approach, reflecting China’s emphasis on coordinated environmental governance. Regulation accumulates in silos – air, water, soil, then waste – and silos do not solve problems; they multiply them.

The deeper flaw, however, lies upstream, at the level of system design.

Climate change and ecological breakdown are not accidents of economic activity but, as the Stern Review put it, the greatest and widest-ranging market failure ever seen: a price system that records what is extracted and says nothing about what is destroyed.

Correcting it is a design problem. EU analysis finds that over 80 percent of a product’s lifetime environmental impact is fixed at the design stage.

Damage prevented costs a fraction of damage repaired. The code mainstreams environmental performance into industrial processes and sectoral policy rather than confining it to an annex.

Two provisions stand out.

The first are those on green and low-carbon development. Carbon peaking and neutrality objectives become a statutory foundation, under the guidance of the Communist Party of China Central Committee and the State Council.

This reflects a judgment that decarbonisation and pollution control are the same task seen from different angles.

The second are those establishing the ecological compensation system: fiscal transfers to localities conserving important ecological assets, horizontal compensation negotiated between regions that benefit and regions that protect, and an obligation on governments at the county level and above to build stable funding.

Its placement in the General Provisions, beside monitoring and standards, marks it as structural rather than supplementary.

Under the Beautiful China assessment measures introduced in May 2026, provincial governments are graded on a 100-point scale across responsibility, annual targets, key tasks, fund use and public satisfaction, making their obligations measurable.

Behind all this lies the harder question of our time: how to redesign the economy so that sustainable models are financially viable. How China resolves that tension will matter to global markets.

Shangyou county in East China’s Jiangxi province sits in the upper catchment area of the Ganjiang River.

Its forests are largely intact and the services they supply are of national significance. It also has schools to run and roads to maintain. Its officials face two questions: How to protect the local ecology while pursuing economic development? And how does the value it produces for others appear in its own accounts?

Shangyou has begun to answer: It has built an institutional chain that turns the ecological product value of a specific geographical unit into a bankable asset.

The province has issued its first such loan on this basis, 200 million yuan ($30 million), secured on the projected ecosystem service value of Bijiashan ecological industrial park.

It is an example of the accounting infrastructure the code is designed to scale.

In July 2025, the European Commission published a roadmap towards Nature Credits, proposing certified units for verified improvements in ecosystem condition, so that land managers can be paid for what they protect.

The diagnosis is the same as in Shangyou: what markets cannot see, they will not fund. China and Europe are working on the same problem with different instruments – codified obligation and fiscal transfer, certification and markets.

Neither has yet proved itself at scale. The common ground is measurement: how a service is quantified and verified. Carbon accounting took three decades to reach even partial comparability.

The code commits China to participate actively in the formulation of international environmental rules – an outward-facing provision that lays the ground for collaboration.

The 11th EU-China Environment Policy Dialogue took place in Brussels in June and the 7th High-Level Environment and Climate Dialogue follows later this year.

While methodology makes for a dull communiqué, common green standards are foundational to solve shared challenges.

Implementing regulations, accounting methods and cross-departmental coordination will take years to put in place. The code is an ambitious foundation, not a completed building.

But a foundation well laid is worth a great deal – and this summer has shown what the alternative costs.

This article is also published on Qiushi. illuminem Voices is a democratic space presenting the opinions of leading Sustainability Thought Leaders, their views do not necessarily represent those of illuminem.

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