China’s Commitment to Stop Overseas Financing of New Coal Plants in Perspective
September 24, 2021
On September 21, 2021, Chinese president Xi Jinping announced at the United Nations General Assembly debate that China would not build any new coal-fired power plants abroad and would step up its support for developing green and low-carbon energy in developing countries. He also reiterated the country’s goal to become carbon neutral by 2060 and peak carbon emissions by 2030, targets which he had first announced last year. This new announcement sets the tone for the upcoming UN climate change conference, COP26, which will be held in Glasgow in early November.
Q1: Why does this new climate commitment matter?
A1: Xi Jinping’s speech at last year’s UN General Assembly was noteworthy because it set a timeline for China’s decarbonization. However, in addition to not specifying a peak level of emissions, it also left unanswered the question of whether the country would shoulder the responsibility for climate action outside its borders. China’s role as the largest public financier of coal projects globally has come into particular focus this past year as other governments, such as the G7 members, have pledged to slash their public financing of such projects. There were multiple calls from the international community, including U.S. special envoy for climate John Kerry, for China to end its support for coal projects globally.
While data suggests that China’s financing of new coal-fired power plants has already been declining, with no new projects approved so far this year, the announcement is a new and important development. First, it aligns China’s position with that of other major economies including the United States and the European Union and bolsters the country’s credibility as a climate leader. Second, it provides an unambiguous signal to financial institutions, investors, and companies both outside and within China that coal is no longer a safe investment. Third, consequently, this policy adjustment may help shift investment toward low-carbon projects, a welcome development given the dire need for more resilient infrastructure and low-carbon energy solutions globally.
Q2: Are there loopholes?
A2: While the announcement is a welcome development, it remains open for interpretation until further clarification is provided. While many, including the UN secretary-general António Guterres, have interpreted the statement to refer to China’s role in financing coal, President Xi said that China would not build new coal-fired projects (不再新建境外煤电项目). This leaves the door open for a stricter interpretation that includes financing as well as holding equity, or even state-owned enterprise involvement in construction. But vagueness over the definition of “building” or “new” may also lend itself to a laxer interpretation that, for example, would allow financing of projects already in the pipeline. According to Boston University’s China’s Global Power Database, China is currently financing projects under construction or in the planning stage that add up to 33.5 gigawatts (GW) of coal capacity.
Finally, many of the world’s coal projects are funded through private rather than public financing. So, if China’s commitment is, as most are interpreting it, limited to state financing, it only does so much to stop the construction of new coal plants. UN secretary-general Guterres has repeatedly called for a global moratorium on new coal-fired power plants. Such a move would require international coordination and commitment from countries including but not limited to China in providing carbon-neutral alternatives for energy generation in developing countries, among other things.
Q3: Does this mean that John Kerry has succeeded in his diplomatic mission and that his style of engagement with China works?
A3: The Chinese leadership may have timed the unilateral announcement to signal a certain level of goodwill toward the United States and the European Union. In fact, the announcement comes on the heels of a call between President Biden and President Xi and John Kerry’s trip to China in early September and less than a month and a half from the COP26 conference. The Biden administration and EU governments had been mounting pressure on China specifically to put a stop to financing coal overseas.
International pressure, however, only partially explains the announcement, which has been welcomed by many within China, too. The decline in coal plants financed along the Belt and Road this past year suggests that the government had already decided to distance itself from such types of projects. Coal-fired power plants are now less economically competitive than a decade ago thanks to the declining cost of renewables, and they have been politically controversial in some of the countries hosting Chinese projects.
Q4: Does this accelerate China’s commitment to decarbonization at home?
A4: The announcement is not directly related to China’s domestic policy, but it represents a further blow to the coal industry and a powerful signal to domestic actors, including local governments, that the leadership is serious about the clean energy transition. Importantly, Xi Jinping’s announcement indicates that coal-fired projects overseas will not provide an alternative for companies unable to build new plants in China.
However, while the latest announcement is a powerful signal, peaking carbon emissions—and doing so at a relatively low level—will require far more industrial, regulatory, and bureaucratic restructuring than is currently planned. Despite the rapid expansion of renewables over the past decade, coal’s importance in the country’s energy mix, and its politics, is still the biggest hurdle in reducing China’s emissions (see the above graph). Ultimately, China will have to stop building coal-fired power plants at home if it wants to meet its climate goals. More on the country’s decarbonization strategy and whether it will restrict the construction of new coal plants domestically may be revealed over the next few months as more detailed documents are made public.
Ilaria Mazzocco is a fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies in Washington, D.C.
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