Overseas Public Financing for Coal: Bringing China into the Debate

The fight over the reauthorization of the U.S. Export-Import Bank (EXIM) heated up again in March when two competing bills were introduced in the Senate. While the bills are primarily part of the debate about U.S. trade promotion, they are also the latest chapter in a longer-running debate about the future of U.S. climate and energy policy. One of the bills, cosponsored by Senators Mark Kirk (R-IL) and Heidi Heitkamp (D-ND), prohibits EXIM from denying any application for financing energy projects “regardless of the energy source involved.” While the language of the bill does not mention it by name, the provision is nonetheless all about coal.

Understanding the oblique reference requires background on the latest fight. In 2013, as part of president’s broader push on climate policy, the Obama administration announced that it would no longer support public financing for new coal plants overseas, with two exceptions: if the plants use carbon-capture technology, or in extreme cases in least-developed countries where no other alternatives are available to meet energy needs. The policy not only applied to EXIM, but extended to the Overseas Private Investment Corporation and the Treasury Department (the latter plays a role in financing decisions made by the World Bank and other international development banks). Shortly thereafter, the World Bank followed suit, announcing that it would only fund coal plants in “rare circumstances where there are no feasible alternatives.” Congressional Republicans (and some Democrats) blocked the policy for FY2014 in a recent spending bill, but the policy’s longer-term fate remains uncertain (as does the ultimate fate of the EXIM bank itself). After the most recent Senate bill was released last month, the White House restated its commitment to the policy. It is not clear if Republicans have the votes to override any potential veto.

The administration’s policy targets one of the largest sources of global greenhouse gas emissions: international coal plants (coal accounts for 44 percent of global carbon dioxide emissions). According to a senior administration official, as reported by the New York Times, the United States, along with several other members of the Organization for Economic Cooperation and Development (OECD), aim to leverage “public finance to help developing countries move in the direction of cleaner energy” as well as provide direction for private finance.

The policy has been controversial, both at home and abroad, for several reasons. First, the United States is exercising leadership, but it is not clear that even some of our closest allies are interested in following. Within the OECD, there has been a clear split. France, the United Kingdom, the Netherlands, and northern European countries have adopted similar policies, while other major coal project funders have declined to follow suit. In particular, Germany, Japan, and South Korea—major funders of overseas coal plants—as well as some other development banks have continued to provide public finance for overseas coal. Japan, keen to sell its high-efficiency coal technology and of the view that such technology “is one of the realistic, pragmatic and effective approaches to cope with the issue of climate change,” continues not only to fund highly efficient coal plants overseas, but to use funds earmarked for climate finance to do so, most recently in India and Bangladesh.

Second, and more pointedly, the policy is part of a larger, ongoing battle about whether to prioritize climate change or economic development. While much recent research has emphasized that climate policy and economic development are not mutually exclusive—primarily by pointing to the declining costs for renewable energy—coal is still much cheaper and easier to finance in many parts of the world where energy demand is rising. Some critics contend that it is hypocritical for the administration to tout energy access and decry energy poverty while blocking support for a cheap and reliable source of power.

Third, some critics have argued that the policy is not as meaningful without more comprehensive action. The ban on public financing support for coal-fired power plants does not extend to coal mining or to other fossil fuels (for example, EXIM supports natural gas plants, oil exploration, pipelines, and refineries).

Finally, the policy has been contentious due to reservations about its efficacy. Some observers have questioned whether the policy will have much impact, as many coal plants are funded either by commercial banks or through support from other sources. While the United States may not be using public funds to support overseas power plants, critics and others have questioned whether other countries (or the private sector) are simply “moving to fill the gap”—or worse, if the plants that do get built are lower efficiency, subcritical coal plants. If the United States or World Bank financed coal plants, the argument goes, they might be able to ensure financing for advanced coal power generation equipment and components that private finance or other countries are unwilling to finance.

While it is useful to debate the merits of the administration’s policy, an informed debate about public financing for coal needs to look beyond the OECD to the role China is playing in financing overseas coal. A recent study (which was coauthored by CSIS’s Jane Nakano) suggests that China—not the United States, Japan, Germany, or other OECD country—is the largest provider of public financing for overseas coal power plants. While the study suffers from the basic and familiar challenge of data scarcity and lack of transparency associated with Chinese financing activities, as well as possible lack of comparability in Chinese overseas lending practices, it does draw attention to the role China is playing in coal power plant projects overseas.

There is no doubt that the administration’s policy is a principled stance against coal-fired power. And while principles matter, the actual impact of the policy may be diminished by the willingness and ability of the Chinese to use public financing to build low-efficiency coal plants overseas. The ultimate success of the administration’s policy should be judged not only by the principle involved but whether it actually reduces emissions by preventing the construction of coal plants that would have otherwise been built. So far, the jury is out on that question, and there is unlikely to be clarity due to the opacity of Chinese data and information.

Even without this information, however, the data does suggest that China is playing a large and growing role in providing financing for overseas coal. Leading by example is important, but to assess the effectiveness of the U.S. policy it is also necessary to, first, further understanding of the scope of Chinese financing, and second, to acknowledge the large and ongoing role that China plays in financing coal plants in the developing world. The former could be achieved by obtaining more information about Chinese public financing, including what plants it funds, what its financial stake is in overseas lending projects, and how the loans are structured. Such information would allow for better determination of the true extent to which the Chinese financing practices are comparable to those of U.S. or international policy banks, or comparable to market-rate loans such as those that would be provided by private-sector institutions in OECD countries.

The administration’s policy initiative and ensuing debate have helped crystalize the urgency of engaging China in formulating a more comprehensive approach to addressing the carbon emissions challenge at the global level. Driving long-term emissions reductions from coal-fired power plants cannot be accomplished without addressing financing from all sources, including non-OECD public financing and financing from commercial banks.

Michelle Melton is a research associate with the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jane Nakano is a senior fellow with the CSIS Energy and National Security Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Jane Nakano
Senior Fellow, Energy Security and Climate Change Program

Michelle Melton