South-South Coal: If Recipient Countries Go Green, so Would the BRI
By Rishikesh Ram Bhandary, Easwaran Narassimhan and Fang Zhang
China’s recent pledge to achieve ‘net-zero’ emissions by 2060 garnered much international attention. Europe and Japan are already committing to net zero targets that phase out most coal usage by 2030, and a re-entry of the United States into the Paris Agreement will mean greater pressure on China to exit from coal. China’s top academic experts are suggesting the country’s coal use needs to fall to 5 percent or less by 2050, unless coupled with carbon capture and storage. While China’s pledge covers emissions within its own territory, it continues to accumulate a major footprint overseas with its financing of coal-fired power plants. China’s external financing of coal is likely to face greater scrutiny as well with a growing number of countries and international institutions pledging to stop the funding of coal projects.
Under its Belt and Road Initiative, China has provided $251 billion in energy infrastructure and power plants finance through its policy banks in developing countries since 2000. But a large chunk of that has gone to financing coal – more than $52 billion- in important emerging economies with high emissions such as Indonesia, Russia, Pakistan, South Africa, and India.
China’s policy on overseas coal financing is only one dimension of the problem. The latest study from Climate Policy Lab finds that there is overwhelming evidence that recipient countries sought out financing and technology from China to supply their own preferential policies for coal plant construction, especially in South and Southeast Asia. Our data suggests that the strongest driver to recipient country demand for Chinese-built coal plants is each individual recipient country’s domestic energy policy. We found that in every case, recipient country policies and energy plans explicitly called for expanding coal fired capacity. Since China’s own international finance policies direct banks to comply with host-country regulations, structurally there is no incentive for Chinese financial institutions to try to lead recipient countries away from coal related projects unless the Chinese government itself decides that it will not let its policy banks finance coal.
While our research shows evidence that China’s lenders appear to be fuel-neutral, they offer competitive financing rates that are perceived as concessional, making it easier to build coal-fired power plants. Chinese financing and technology are also perceived to be cheaper than other international suppliers, and China offers small unit sizes that are not available from other countries, giving China a distinct advantage when it comes to building and financing coal. The availability of Chinese finance allows policy makers in recipient countries to choose coal as a “good enough” alternative, even if it is not the most optimum choice. We also found evidence of a “stop rule” where policy makers end their search for a solution once a minimally acceptable option emerges.
China has many entities that have been financing coal development, including its national development bank, China Development Bank (CDB), and China Export-Import Bank (Chexim). China Export-Import Credit Insurance Association (Sinosure) and the Silk Road Fund also have no restrictions on investment in coal-fired plants abroad. China’s hands-off approach to prescribing fuel choice to recipient country infrastructure finance reflects Beijing’s long standing non-interference stance in “south-south” cooperation as well as its domestic interest to find markets for its own surplus capacities. China is not the only Asian nation financing overseas coal-fired capacity. Japan and South Korea also underwrote substantial coal investment between 2000 and 2019, according to Global Energy Monitor. As Article 2 of the Paris Climate Agreement calls for the greening of all financial flows, the build-out and financing of coal-fired power plants goes against its spirit.
Eyes will be on financiers of coal like China as we get closer to the next round of climate talks scheduled for next year in Glasgow. United Nations Secretary General Antonio Guterres has repeatedly called on finance ministers to ensure that their national development banks stop financing coal. International agencies such as the World Bank have already stopped financing coal and many major commercial banks have similarly withdrawn from that market. Last week, at the Finance in Common meeting, the first major global convening of major public national development banks, the bank representatives stopped short of a promise to halt financing of coal and only committed to “consider” implementing “explicit policies to exit from coal financing” before the COP26 global climate meeting in Glasgow.
Importantly, the upshot of our findings suggest that the strongest lever to reduce the demand for coal-fired generation will be domestic policies of host countries. With countries preparing to enhance and update their NDCs, they could be better positioned to use their continued commitment to the global climate agreement process to free themselves from energy policies set many years ago and craft updated national policies that reflect current realities such as the massive cost reduction of renewable energy, a tightening credit market for coal, and the imperative of building more resilient societies in the wake of the global pandemic.
To read the full research paper on Chinese overseas investment in coal, click here.
Rishikesh Bhandary is a postdoctoral scholar at The Fletcher School, Tufts University. Easwaran Narassimhan is a predoctoral fellow at The Fletcher School, Tufts University. Fang Zhang is a postdoctoral scholar at The Fletcher School, Tufts University.