Comment on “The Effects of Financing Green and Brown Sectors: What Do Theories and Evidence Say?”

Abstract

Liang and Punzi (2026) argue that there are important distinctions between the strategy of “growing the green economy” and the strategy of “greening the economy” when it comes to the efficacy of the strategies and the financing tools supporting each strategy. Under the “growing the green economy” strategy, financial markets reallocate capital towards green companies and divert resources away from brown companies, typically through the cost-of-capital channel. Under the “greening the economy” strategy, financial markets develop tools to help brown companies transition their energy sources and production modes towards more sustainable ones. The relative efficacy of the strategies depends on things like the production functions of green and brown firms, their elasticities to financing costs, and the endowment of different economies.

Liang and Punzi (2026) then use a Dynamic Stochastic General Equilibrium (DSGE) model to illustrate their points. In their model, firms raise external capital to transition from carbon-emitting energy sources to clean energy sources. Under the model's parameters, a reduction in green firms' cost of capital and an increase in brown firms' cost of capital do not necessarily reduce aggregate carbon emissions, as brown firms find it more difficult to raise capital to invest in transition. I see this DSGE exercise more as proof of concept for the theoretical framework laid out in the earlier part of the Liang and Punzi (2026), rather than a piece of corroborating evidence. As brown firms are set in the model to all be able to transition towards clean energy, the strategy of “greening the economy” is given a larger scope to be effective. I would encourage the Liang and Punzi to think more seriously about the model and to either calibrate the model using empirical moments or to provide some analysis under different sets of parametrizations. Under some parametrizations, costs of capital differences between green and brown firms may lower aggregate emissions; under other parametrizations, they may backfire.

Liang and Punzi (2026) in this current form stays away from discussing brown firms' incentives in transitioning towards greener production functions. An important rationale of the existing green financing tools is that they provide “carrots and sticks” for firms' green activities while penalizing brown ones. In contrast, the transition finance framework discussed here appears more permissive towards companies currently engaged in pollution-generating activities. This permissiveness creates a fundamental implementation challenge: without proper constraints, transition financing risks channeling funds towards business-as-usual operations rather than genuine greening efforts. Such misallocation would undermine sustainability objectives by effectively subsidizing brown activities under the guise of transition finance.

Liang and Punzi's (2026) policy discussion highlights a critical yet underexplored dimension of green transition: the distinct challenges facing Asian economies given their developmental stages and industrialization trajectories. This nuanced reality is inadequately addressed in the contemporary sustainability literature, which often prioritizes developed markets without sufficient consideration of regional heterogeneity. Liang and Punzi's analysis fills this gap by demonstrating how developmental context fundamentally shapes transition financing needs and constraints. These insights should inform future research on regionally differentiated approaches to sustainable finance and guide policymakers toward more contextually appropriate mechanisms for financing Asia's green economic transformation.