The Climate Challenge and China’s Belt and Road Initiative
The following is a guest post from Jennifer hillman, principal researcher for international business and political economy, and Alex tippett, associate researcher in international economics, at the Council on Foreign Relations.
Jennifer hillman and David Sacks are co-chairs of the CFR-sponsored independent task force on a US response to the China Belt and Road Initiative, which is co-chaired by Jacob J. Lew and Gary Roughead.
Belt and Road Initiative
During the debt negotiations between Bangladesh and China in February 2021, China informed Bangladesh’s finance ministry said it “will no longer consider high pollution and energy intensive projects, such as coal mining. [and] coal-fired power stations. It remains to be seen whether this represents a real change in China’s approach to financing and building coal-fired power plants, or whether it is just a one-time initiative.
As our new CFR sponsored bipartisan Report of the independent working group shows that since the creation of the Belt and Road Initiative (BRI), billions of dollars in Chinese funds have been spent on fossil fuel projects around the world. These investments promise to make climate change mitigation much more difficult.
To curb Chinese investment in fossil fuels, the United States must offer developing countries an alternative way to acquire clean energy. He should also work with his allies and partners to push China to keep its promise to “green” the BRI. To gain the necessary credibility to put pressure on China, however, the United States should also be prepared to take aggressive action at the domestic level.
The BRI of China is a large-scale infrastructure project, intended to link China to Africa, Asia and Europe. Although expenditure estimates vary, Morgan Stanley anticipates that BIS spending could reach $ 1.2 trillion to $ 1.3 trillion by 2027. To date, the energy and transport sectors have been main objective of the BIS investment, with energy valued to make up 44 percent of all BIS expenses.
Most of China’s energy funding goes to non-renewable sources. Between 2014 and 2017, 91 percent energy sector loans by six major Chinese banks to BIS countries were for fossil fuel projects. In 2018, 40% of loans from the energy sector went to coal projects. In 2016, China participated 240 coal-fired power stations in the BIS countries, a number that has probably increased.
Belt and Road Initiative
Large-scale investments in coal and other fossil fuels can lock in carbon emissions for years, with modern coal-fired power plants having a operating life over thirty-five years old. Environmental groups to suggest that coal must be completely phased out by 2040 – in less than 20 years – if the world is to meet the goals of the Paris Agreements. Continued investment in fossil fuels will make responding to climate change much more expensive – and politically difficult.
Domestically, China is in fact the world’s leading producer renewable energy. Generous subsidies and protection, as well as foreign demand, help China’s wind and solar industries are becoming world leaders. In 2019, China too engaged to make its investments in the BRI “open, green and clean”.
Despite this commitment, the BRI remains dominated by fossil fuels. China’s refusal to consider new coal projects in Bangladesh is a promising sign, as is the fact that renewable energy constituted the majority new energy investments by the BRI in 2020. Still, from 2020, non-hydroelectric renewable energies explained only 11 percent of the capacity of Chinese power plants abroad, compared to forty percent for coal.
The BRI’s focus on coal is driven by China’s excess capacity and demand from developing countries. China is the world’s largest producer of coal, representing 46% of world production in 2019. China’s BRI investments in coal-fired power plants help create new markets for Chinese coal. They also allow Chinese companies, constrained by national environmental regulations, to recover certain losses abroad. In a notable case, an unprofitable Chinese coal-fired power plant was completely dismantled, then shipped and reassembled in Cambodia.
The Import-Export Bank of China and the China Development Bank, the BIS’s main backers, are also often skeptical that renewable projects suit their partners. These institutions have helped promote the adoption of renewable energy in China, and their mistrust is likely influenced by the various challenges – from expensive subsidies to struggle with a inflexible Grid– which China itself has faced.
Developing countries, for their part, tend to consider fossil fuels are cheaper and more reliable than renewables. In Bangladesh, India and Indonesia, for example, state development plans explicitly call for the construction of new coal-fired power plants. Restrictions imposed by the World Bank, Asian Development Bank and the Obama administration have made China the world’s primary source of financing for coal.
To address the climate threat from the BRI, the United States, along with its partners, will need to provide developing countries with a viable alternative that meets their demands for affordable electricity and addresses technical concerns. USAID Power Africa Program, which has provided technical support for the purchase of clean energy and helped mobilize private capital for clean energy projects, should serve as a model.
The United States is also expected to make larger investments in clean energy at home. Domestic investments can help make renewables even more price competitive, while accelerating the growth of US companies capable of meeting the energy needs of developing countries.
The United States and its allies should also insist that China lives up to its green belt and road promises. Beijing should be urged to be more transparent about investments and encouraged to set binding standards for what constitutes a green BRI investment. Holding China accountable, however, will require significant US action at home.
The Biden administration has already braked US government funding of overseas fossil fuel projects. Next steps should include a focus on lending to the private sector. While Chinese institutions have piloted the financing of coal projects, four American banks – JPMorgan Chase, Wells Fargo, Citi and Bank of America – remain the the biggest financiers fossil fuel projects in total, having collectively funded more than $ 800 billion of such projects around the world since 2016. If the United States wants China to strictly adhere to its Principles of green investment—Developed to create common standards for what constitutes a green project — it should push US financial institutions to adopt similar guidelines.
BRI’s investments in fossil fuels will make tackling climate change more difficult. To avoid a new carbon lock, the United States should offer alternative sources of energy to developing countries while taking measures at the national level that give them the technological and institutional capacity, as well as the moral authority, to insist that China’s actions in Bangladesh become the norm.