China's foreign energy investments can swing coal and climate future

When blackouts roiled Pakistan in 2014-15, China stepped in to help the country build a coal sector from scratch.

At the time, Pakistan generated less than 1 percent of its electricity from coal. As part of its Belt and Road Initiative (BRI), China now steers major coal investment through the China-Pakistan Economic Corridor, which plans to grow Pakistan’s coal production from 190 to 15,300 megawatts. This will help Pakistan meet its electricity needs and fuel the development that follows. It may also lead to Pakistan’s greenhouse gas emissions quadrupling between 2015 and 2030.      

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Pakistan is no outlier. The International Energy Agency just reported strong greenhouse gas growth from energy production in 2018, with an emerging fleet of Asian coal-fired power plants leading the way. 

Coal plants are being planned or constructed in 14 countries with no current coal power to speak of, and in 19 countries where new coal plants would more than double coal-fired capacity. These plants could bring more than 860 gigawatts of new capacity online in the next 15 years, and risk putting global climate targets truly out of reach.  

While there are multiple drivers of coal investment, China is the pivotal player. 

As its massive domestic coal sector is squeezed by a saturation of existing plants, economic transitions away from heavy industry and a ‘war on pollution,’ China’s powerful state-owned companies look abroad. The Shanghai Electric Group will build coal plants in Egypt, Pakistan and Iran with a combined capacity of 6,285 megawatts; that is nearly tenfold its planned constructions in China. The China Energy Engineering Corporation has no plans to build at home, but is constructing 2,200 megawatts of capacity in Vietnam and Malawi. Like Pakistan, the nascent coal sector in Malawi is being built essentially from zero.

Meanwhile, the China’s public Development Bank and Export-Import Bank have provided more than $43 billion in overseas coal financing since 2000. Other Chinese banks underwrite nearly 73 percent of global coal plant development. Eleven of the world’s 20 largest coal developers are Chinese, and firms are involved across project contracting, equipment export, equity, construction and direct bank loans. 

The implications are clear: Coal plants help meet immediate electricity needs, but threaten to lock-in decades of conventional air pollution that will accelerate health care demands and have rippling direct and indirect social costs.

There are other viable paths, and China can be a change agent. Demand for non-fossil energy is high: For 31 BRI countries that have committed to specific emissions reductions there is a need for some $470 billion in investment, mostly for solar, hydro and wind projects. With bourgeoning manufacturing and building capacities in these sectors, along with a demonstrated appetite for financing energy projects through debt and equity, China could lead this charge. Doing so would go a long way toward making its proclamations on sustainable foreign investment — including its pledge to control public investment flowing into high-carbon overseas projects — ring less hollow. 

Shifting energy investment in such a way requires changing risk and reward valuations in China, in recipient countries and at various points in between. Internationally, the climate negotiation track on ‘enhanced transparency measures,’ G-20 deliberations on ‘responsible investment’ or more tangible commitments to reach Sustainable Development Goals could deter coal expansion. Growing coal-divestment actions signaled by actors from Goldman Sachs to Allianz to the Norwegian Government Pension Fund may combine to make coal seem more risky. But none of these forces is poised to shake China’s outbound energy investment in the near term.    

Recipient states could develop or enhance emissions levies, pollution pricing markets and valuation instruments like the social cost of carbon to account more fully for the cost of coal. They could also consider their own international climate commitments when accepting inbound investment, making coal production above certain levels a non-starter. Such measures have the potential for rapid impacts where there is political will to pursue them. 

Ultimately, however, decisions made in Beijing will prove most important, and China’s own self-interest could yield vital changes. The Belt and Road Initiative is predicated on enlivening foreign markets and bringing them more fully into China’s commercial sphere. Plaguing these markets with the socioeconomic and fiscal burdens of coal risks diminishing returns for China in the long view. 

Advancing a broader accounting of coal investments requires strategic directives from China’s leaders, including President Xi and the powerful Ministry of Finance. Such direction from on high would modify the actions of Chinese policy banks, its state-owned insurance apparatus and wider state-owned builder and financier communities throughout the country. That is the best bet for change.

Jackson Ewing is a senior fellow at Duke University’s Nicholas Institute for Environmental Policy Solutions.