While environmentalists look to China to replace the US as the leader on climate change, its relationship with coal financing continues to be conflicting and complex. Finbarr Bermingham reports.
In an editorial on March 30, a Chinese state-owned newspaper blasted the “selfishness” of the Trump administration’s abandonment of environmental initiatives.
“Some western media now pin their hopes on China to fill the vacuum left by Washington in the fight against climate change. But no matter how hard Beijing tries, it won’t be able to take on all the responsibilities that Washington refuses to take,” raged the Global Times’ visceral rebuttal of Donald Trump’s policy, after the US president effectively defanged his own Environmental Protection Agency (EPA).
Trump’s election last year raised real concerns that the US would abandon its commitments to tackling climate change. Worse, it would create a void in global leadership if it should withdraw from the Paris Agreement, the most significant multilateral effort to date on climate change.
People are naturally looking to China to fill this void. After all, it is the world’s largest emitter of carbon dioxide, and the second-largest economy. It is also at the forefront of renewable investment. On the flip side, it has a horrible record of building and exporting coal-fired power plants.
To understand the desperation of those looking to China, it’s worth remembering how optimistic people were when the US and China signed an agreement to cut their respective emissions by 2025 and 2030, respectively. That optimism carried over to the landmark accord in Paris a year later.
“I expect that this will work out as a game-changer,” Thomas Verhagen, a sustainable finance expert at the University of Cambridge Institute for Sustainable Leadership (CISL) told GTR at the time. “This will be seen by leaders across the financial sector as evidence that governments are serious about transforming the global economy such that it doesn’t add greenhouse gas emissions to the atmosphere before the end of the century. This scale of transition cannot fail to impact the trade of a whole range of goods and commodities, and therefore those that finance that trade.”
In the trade finance industry, it was hoped that these agreements would push more banks to withdraw from coal financing, and that optimism has borne fruit: this year Deutsche Bank became the latest financial institution to halt financing new coal projects. Others to have scrapped coal lending include ING, JP Morgan and a raft of export credit agencies (ECAs).
Chinese banks, however, are yet to get the memo. While the government has made very progressive pronouncements on the domestic front, it continues to aggressively finance coal abroad. The point made by the Global Times was that China is still industrialising and, thus, should not be expected to lead nations that followed that path more than 100 years ago into a new era. It makes for grim reading, but not all hope is lost.
“To some degree it’s just words: they acknowledge they have a post-Paris climate responsibility. That’s just the semantics. The Chinese don’t like to talk about what they’re going to do, but what they’ve already done,” says Tim Buckley, director of energy finance studies, Australasia, at the Institute for Energy Economics and Financial Analysis (IEEFA).
But experts are torn on whether China is ready to take the lead in the war on coal.
Is China ready to lead?
Before looking at China’s actions, it’s worth emphasising that in general, coal is in decline. A recent report authored by a group of climate lobby groups found that in 2016, there was a dramatic drop in coal-fired power plant development worldwide. This included a 48% decline in overall pre-construction activity, a 62% drop in new construction starts and – most relevant to this article – an 85% drop in new Chinese coal permits.
In the case of China, the numbers are, as usual, mind-boggling. In January, the National Energy Administration cancelled plans to build 103 coal-fired plants across 13 provinces, but mainly in the coal-rich north and west. This ruling barred new projects, but also halted work on dozens of projects already underway. In total, 120GW of future coal-fired capacity was pulled, 52GW of which was already under construction. Considering that the total electrical demand in the UK in 2015 was 52.7GW helps highlight the extent of China’s policy shift.
In the week before this news was announced, the same organisation said it would spend US$360bn on renewable power sources for domestic power in the years to 2020. This would create more than 13 million jobs and help rid major Chinese cities of the toxic plumes of smog that hang in the air (a recent study in the journal Preventative Medicine found that in 14 Chinese cities, cycling for over 90 minutes does more harm to your body than good, given the levels of pollution).
“I think China is more than 10 years ahead of their individually determined national contribution [as per the Paris Agreement]. Nobody two years ago was thinking China’s coal consumption would peak in 2013: In 2014, the International Energy Agency (IEA) said it would not peak until 2030. [Now] I think the jury is totally in: coal consumption peaked in 2013. The IEA acknowledges that in two years China has moved 17 years ahead of schedule,” says Buckley.
He is particularly bullish about China’s motives for moving ahead of its targets: namely citizens’ outcry about pollution, energy security, investment and employment opportunities. Chinese companies, Buckley says, want to be technology leaders and control the climate space.
“That’s not about climate change,” he explains, “that’s about industry leadership. What gets me even more excited is when you see that India is also moving at a pace that’s dramatically ahead of what anybody expected them to do. They [the Indian government] recently said India should not build any more coal-fired plants over the next decade.
“The two biggest countries in the world by population, two of the three largest producers and consumers of coal in the world, the two largest importers of coal in the world, two of the three largest electricity markets in the world… and we in the west spend our time looking to America for leadership, and Trump tells us we’re not going to get it. This just allows India and China to play a dramatically bigger role globally.”
The other side of the story
Even the most enthusiastic analyst, however, struggles to rationalise the dichotomy that exists with China and coal. Yes, it is making tremendous strides on the domestic front, and anybody who has had the misfortune of breathing the air in Beijing on a smoggy day will not begrudge China of prioritising cutting coal at home. But the zeal with which it is exporting carbon emissions and, in particular, coal-fired power, places a question mark against the notion that it can be the knight in shining armour many environmentalists are seeking.
All over the world, China Inc. is financing and building coal-fired plants galore. A study by China Dialogue and Bankwatch last year found that Chinese banks are currently involved in financing 79 such plants outside of China, with a combined generation capacity of 52GW. These are located all over the world, from Taiwan, the Philippines and Sri Lanka, to Turkey, Bulgaria and Zambia.
Perhaps the most complete study of China’s coal-financing was conducted in 2014 by the Climate Policy Initiative (CPI). The report found that in absolute terms, up to US$38bn-worth of Chinese finance went to overseas coal power projects in the 10 years to 2014. A further US$72bn had been pledged at the time of writing. The study may be slightly outdated, but co-author Xueying Wang, who works as an analyst at the CPI, says that China’s policies at home and abroad don’t really correlate.
She tells GTR: “Domestically, in 2015 they announced plans to restrict financing highly polluting, high-emissions projects. It’s easier to execute domestically because the government provides a list of companies they want to phase out. It includes companies that you absolutely cannot finance, other companies you can’t provide preferential finance to, and then others that you can provide finance to. Maybe they haven’t found a way of executing this overseas. You can’t come up with a list of companies. Policy-wise, I don’t think there’s any restrictions on financing coal plants.”
Furthermore, in the three years since the study was published, China has embarked on its One Belt One Road (OBOR) initiative, constructing infrastructure projects pan-Asia Pacific, into Europe. China’s government has openly encouraged Chinese companies to use OBOR as a way of internationalising. The sectors which have been most actively pushing out are energy-intensive ones, such as steel, cement and coal. Some view it as a way of extending China’s domestic fiscal stimulation policies beyond its own border: boosting domestic growth by building infrastructure overseas, and in turn, helping trim some of the country’s sectors mired in overcapacity.
One of the biggest recipients of OBOR debt finance to date has been Pakistan. In 2015, the China-Pakistan Economic Corridor (CPEC) was established, entailing a plethora of transport and power infrastructure projects throughout Pakistan. The ultimate goal is to link the west of China to the sea via Pakistan’s Gwadar Port. Concessional loans worth US$56bn have been earmarked for the initiative, which will allow commodity imports from the Gulf and Africa to reach China more quickly, and offer an outlet to Chinese exports that avoids more politically sensitive routes further east.
As part of the package, US$5.8bn-worth of coal power plants will be active by 2019. The 1.2GW plant at Sahiwal will cost US$1.8bn and will be paid for with a US$1.23bn loan from the Industrial and Commercial Bank of China and 20% equity from the Chinese construction consortium – a typical financial structure for projects such as this.
However, OBOR has also led to some heavy investment in renewable energy projects, including in Pakistan, where China is set to finance a host of solar facilities. In Bangladesh, China Development Bank is investing US$600mn in solar energy facilities which will add 250MW to the national grid. This is small fry by Chinese standards, but when you consider that the biggest solar project in Bangladesh before this was a 2MW plant, it seems more impressive. Still, to date, the bulk of energy projects along the New Silk Road have been carbon-based.
All eyes, too, are awaiting final confirmation of the Asian Infrastructure Investment Bank (AIIB)’s coal financing policy. The development bank is majority owned by China, but now has 70 member states, including the UK, Germany, France and Australia. Before it was launched, the bank’s president Jin Liqun promised it would be “lean, clean and green”. However, a draft energy policy released earlier this year indicated that it would consider funding thermal coal projects, in extraordinary circumstances.
“The AIIB faces pressure to build an international image as a green, sustainable bank,” says Wang at CPI. “It wants the international community’s support on its work and has faced a lot of questions from developed countries about its operational standards. It’s trying to structure according to the framework of the World Bank and other established development banks, so the pressure is still there.”
It’s worth pointing out that the World Bank and most other development banks do have coal investments still at play, but that most are phasing them out. It’s also important to note that the AIIB’s apparent volte-face on coal was under pressure from two important shareholders, Australia and Indonesia, both of which are extremely large exporters of coal.
In truth, the clamour for China to replace the US as the leader of the fight against coal is borne out of desperation. Trump’s election was unexpected and while his subsequent trashing of the US environmental policy was well-flagged, it is shocking nonetheless.
This desperation undoubtedly places unrealistic expectations on a country that is still developing at a rapid rate. China’s relationship with coal and the environment is complex – simultaneously encouraging and dismaying. But as it continues to move towards smashing its domestic targets on carbon emissions, we can only hope that Beijing soon turns its attention to reining in the irresponsible funding of its policy and commercial banks elsewhere in the world.
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