Alternative-energy investors have pointed to China as the fastest way on the planet to make money in the green revolution. I guess they never went beyond the executive summary of a recent report titled “The Green Evolution – Environmental Policies and Practice in China’s Banking Sector.”

Written by Friends of the Earth in San Francisco, and distributed by BankTrack, the international network that monitors commercial and investment banks, the report offers a promising future for China’s massive and lucrative clean-up – until you reach page 15.

The report is an 18-month update of key developments on a program that China implemented to cut funding for companies that contribute to the country’s devastating pollution.

The program, China’s Green Securities policy, was launched in February 2008 by China’s Ministry of Environmental Protection (MEP) and the China Securities Regulatory Commission (CSRC). Beijing was trying to cut polluters off at the knees by making it more difficult for them to raise money.

Pollution in China is costing the economy billions, and the Communist Party knows full well that something needs to be done to maintain its blistering growth.

In 2007, the World Bank published a 151-page report that concluded the total cost of air and water pollution in China in 2003 hit $114.1 billion, or about 5.78% of its GDP.

If China continues to increase greenhouse gas emissions at the 2007 rate of 8% per year, it will double those of the entire European Union by 2020.

The destructive powers of filthy air also become apparent in acid rain. According to the World Bank report, acid rain caused over $4.3 billion in damages to crops, or about 1.8% of the value of China’s agricultural output. But it’s not just living things that suffer from acid rain. It caused over $1 billion in damages to houses and office buildings.

That’s why the clean-energy market in China is expected to generate revenues of $186 billion in 2010 and $555 billion in 2020, according to a U.S. government report.

To put that into perspective, $555 billion is what President Bush budgeted for domestic spending in 2007.

But are those huge revenue projections realistic for China?

If you get through the Friends of Earth report to page 15, you may start wondering how much money can really be made through green investments in China in the coming decade.

The Friends of Earth discovered that at the local level, banks are ignoring government mandates to verify a company’s environmental record before lending money.

The MEP has run into opposition from some local governments and banks unwilling to sanction or reduce loans for heavy polluters or high-energy consuming businesses because they are reliant on those companies for their tax base and short-term profits, according to the report.

The problem, of course, comes down to money. Locally, many provinces rely on pollution-spewing enterprises to keep the economy well-oiled. In 2008, 78% of China’s energy output came from coal, a figure that is expected to continue with no significant change until at least 2020.

Based on the Friends of Earth report, it will be another six years before the green mandate becomes national policy – and who knows how much longer after that before the local banks are forced to comply.

Advocates of alternative energy embrace the dogma “Think global, live local.” Unfortunately, that’s exactly what local bankers in China are doing today — a setback for investors contemplating green profits in China.