This paper critically examines the economic and welfare implications of financing green and brown sectors. Drawing on a comprehensive review of recent theoretical and empirical literature, it is shown that while conventional green finance—allocating capital toward environmentally friendly (“green”) sectors and away from carbon-intensive (“brown”) sectors—can promote decarbonisation, it may also produce unintended externalities. In particular, such an approach may inadvertently incentivise higher emissions from brown firms and contribute to economic disruption. Using a dynamic stochastic general equilibrium (DSGE) model, the findings reveal that lowering the cost of capital for green sectors leads to only modest reductions in emissions, whereas raising it for brown sectors can paradoxically increase emissions. These results underscore the importance of transition finance, which channels capital to support the decarbonisation of brown sectors, especially in the context of Asia’s carbon-intensive economies. The paper concludes with policy recommendations to strengthen transition finance markets across the region.