Achieving the transition from an investment-driven economy to a real market economy based on consumption in the next five to 10 years is inextricably linked to China's ability to embrace the green revolution.

The blooming of green industries - the tip of an iceberg - will represent a comprehensive change in China's economic structure and social management, and, in a sense, China's transformation of its growth model signifies its transition toward a green economy.

The government has to play a leading role in this process by drafting an insightful policy framework to put the changes on the right track.

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Green growth is central to the task of economic structural transformation targeted by the 12th Five-Year Plan (2011-2015) and the government has a lot to do to achieve this ambitious task. For example, favorable investment policies should be introduced for green projects. A report by global management consultants McKinsey predicts China's green economy will absorb 40 trillion yuan ($6.13 trillion) before 2030 and China's decision-makers should be conscious of the difference they can make in increasing the returns from this investment.

Well-targeted financial policies are indispensable for the construction of a favorable institutional environment for the development of a green economy. On the one hand, some emerging green projects of strategic importance deserve preferential credit policies to raise capital in the market. On the other hand, green financial policies should be oriented to green consumption at the other end of the chain.

Preferential policies in finances can serve as a strong incentive to encourage green innovations in such crucial industries as real estate development and renewable energy vehicles.

However, reform in the pricing mechanism for natural resources and energies is more imminent than policymaking. China needs to price its rare resources at their real value, the environmental costs in obtaining the resources should be taken into account. Thus, it is advisable for the country to emphasize the function of the resource market in boosting green investment and cutting greenhouse gases.

As for carbon emissions, it is urgent for the Chinese government to build a carbon trade system. If a national carbon trade market can be established, it will help to rationalize the liquidity of carbon emissions and accelerate green research.

The maturing of a green market across the country will integrate China faster into the global roadmap addressing carbon issues, which involves the frequent cross-border transfer of technologies and capital.

In such a global context, the Chinese government is assigned multiple roles, both at home and abroad. The common concerns of all countries, such as climate change and the depletion of natural resources, are unifying the actions of governments around the world, which demands that the Chinese government adapts to changing circumstances.

Domestically, governments at various levels, which used to be the main propellers of economic development, must now serve as the main providers of public services, because the former GDP-centered development model is no longer sustainable.

Education, healthcare, culture and other public services are all important components of green consumption, and these will become the focus for governments. Equalization of social welfare and public services will not only stimulate consumption but also help maintain social stability in China.

Chinese civil servants' performances must be judged not only on GDP, but also on a more humanitarian set of indicators, such as public welfare coverage, the satisfaction of local residents and environmental protection, etc.

Therefore, green growth is not only a requirement of sustainable development, it also provides a golden opportunity for Chinese governments to modernize.

Green growth means more than just industrial structural transformation. It means deep institutional reforms that will affect almost every person in the country.

The author is director of the Hainan-based China Institute for Reform and Development.

(China Daily 04/19/2011 page16)