China tells potential recipient countries that financing coal is no longer an option
Chinese President Xi Jinping recently announced to the United Nations General Assembly that China “will not build new overseas coal-fired power projects.”
Chinese banks have already shifted into high gear. Three days after Xi’s speech, the Bank of China said it would no longer fund new coal and power projects outside of China from the last quarter of 2021.
Xi’s statement is expected to affect at least 54 gigawatts of coal-fired power plants proposed by China that are not yet under construction. Putting them on the shelves would save CO2 emissions equivalent to three months of global emissions.
This commitment from the world’s largest public funder to overseas coal-fired power plants could usher in a new era of low-carbon development. But it depends on what happens in the countries where China has injected the money into coal. Many of these places are in urgent need of new energy infrastructure. Will China’s investments here be redirected to renewables – or will they just disappear?
Chinese support for renewable energies abroad
A positive sign appeared in the same speech at the UN, when Xi said that “China will step up its support to other developing countries in the development of green and low-carbon energy.”
China’s overseas energy investment has increased under the Belt and Road Initiative. Launched in 2013, Xi’s signature foreign policy effort has increased China’s cooperation with the rest of the world through infrastructure development, unhindered trade, financial integration, and policy coordination.
China continued to fund the Belt and Road Initiative during the pandemic, and renewable energy investments made up the bulk (57%) of the country’s financial support for overseas energy projects in 2020 – against 38% in 2019.
Beijing has supported wind and solar projects in more than 20 developing countries since 2013, including Ethiopia and Kenya. And Chinese banks and companies have also increased their overseas investment in renewable energy over the past decade.
While the trends are positive, challenges remain. China’s foreign investment policy remains guided by the principle of non-interference. This means Beijing is supposed to let host countries determine the type of energy projects and only requires Chinese companies to comply with host nation regulations.
Research shows that China’s funding for coal in Asia was largely driven by demand in recipient countries. This is because the national policies of these countries prioritized improving access to energy rather than reducing emissions, and coal was a cheap and proven source.
Inadequate grid infrastructure and politicians skeptical of renewables in countries receiving Chinese investment have also hampered development. In Indonesia, business leaders and politicians formed pro-charcoal lobby groups to influence the design of Chinese-backed projects.
China’s new pledge signals to potential recipient countries that financing coal is no longer an option. China must now promote its investment offer in renewable energies. Based on its domestic experiences, Beijing is expected to grant subsidies or tax cuts to companies wishing to build renewable energy projects outside of China.
Chinese energy developers are often wary of the risks of investing in developing countries due to their ignorance of local politics. The Chinese government can help by increasing coordination between Chinese companies and local governments, businesses and communities in host countries.
Over the past decade, China has helped many developing countries increase their power generation capacity through financing, affordable technology, and rapid project delivery. China has taken the first step to stop funding coal. Now is the time to adopt policies that support the overseas activities of its renewable energy developers.
Yixian Sun is Senior Lecturer (Assistant Professor) in International Development, University of Bath. This article first appeared in Conversation UK and has been reprinted by special arrangement.