Reuters A general view shows a coal-burning power station at night in Xiangfan, Hubei province, September 15, 2009.

China's Coal Problem

How It Undermines the Fight Against Climate Change

Ever since U.S. President Donald Trump became president, China has taken every opportunity to present itself as a new global leader on climate change. Most recently, President Xi Jinping convened official delegates from more than 50 countries for the inaugural Belt and Road Forum in Beijing in May, and got 29 heads of state to join him in declaring support for the implementation of the Paris agreement, a feat that proved too challenging for G7 leaders to repeat weeks later in Italy.

First revealed in 2013, Beijing’s ambitious One Belt, One Road initiative (recently rebranded as the Belt Road Initiative or BRI) promises nearly $1 trillion for infrastructure and energy development in more than 60 countries. Given that China is the world’s largest producer of solar panels, wind turbines, and batteries, the BRI would seem a natural complement to the country’s averred commitment to climate action.

But Beijing’s foreign energy investments so far paint a drastically different picture. Despite commitments to reducing domestic coal use, Chinese state-owned enterprises (SOEs) are looking to build coal projects abroad—often in BRI countries. Countries along this new Silk Road should be wary of Chinese investment and prevent China from prioritizing its own economic self-interest over global environmental needs.

THE COAL CONTRADICTION 

In response to the growing public outcry among Chinese citizens over hazardous air pollution levels, Chinese policymakers have made great strides in limiting domestic carbon emissions. Beijing has canceled the construction of 103 coal power plants in this year alone, and its efforts have resulted in decreased coal consumption for three consecutive years. China is also working to increase efficiency standards for both new and existing coal plants to further slash emissions. At this rate, Beijing is expected to hit peak carbon emission levels by 2025—five years earlier than planned—and has been heralded as the new leader for global climate action.

Yet at the same time, Chinese companies are on track to build roughly 140 coal plants in other countries, including Egypt and Pakistan, which hardly burn coal at present. Despite increasing international consensus on climate action, the receiving countries remain eager to find inexpensive opportunities to fuel economic growth and meet power needs. For many developing nations, coal remains the cheapest fuel. But introducing or ramping up the use of coal, which is the dirtiest fossil fuel, would be a nightmare for them. Pollutants from these plants will choke citizens in large cities. Coal generation is also highly water-intensive, which would limit freshwater supplies to regions already in drought. Overall, clean air, safe drinking water, and sufficient food supply will grow scarcer.

At the crux of this incongruity is Beijing’s policy of enlightened self-interest, whereby policies in other nations are ultimately subservient to China’s own interests. Although Beijing emphasizes “win-win cooperation” among BRI participants, its main focus is on the economic and geostrategic benefits that the initiative will bring it. BRI’s energy initiatives are no exception.

DEVELOPING DEVELOPMENT BANKS

Beijing sees increasing coal exports as a solution for its excess capacity. China tripled coal consumption between 2000 and 2013 to power its monstrous economic growth. But today, growth has slowed and the cost of clean energy alternatives such as wind and solar has dropped precipitously, pushing the Chinese government away from coal. This shift has left China with more companies that build coal plants and equipment than it needs. These firms may even go under because of insufficient demand.

Beijing has good reason, however, to try to keep these legacy coal-manufacturers afloat: economic and political stability. The coal industry (and steel industry, which is dependent on coal) supplies roughly 12 million Chinese jobs. Given that thousands of coal and steel workers have already protested Beijing’s limited plans to downsize China’s coal sector, it is likely that workers along the coal supply chain would forcefully take to the streets should the industry collapse.

Moreover, Chinese coal and steel companies hold more than $1.2 trillion in debt, much of which they are unable to repay. Chinese state banks own roughly one-third of this debt. If too many of these companies go out of business, the banks might fail as well, dragging down the Chinese and global economy with them.

To address the challenge of overcapacity without exacerbating domestic furor about China’s poor air quality, Beijing is encouraging its SOEs to invest abroad through the BRI. This is why Chinese companies are on track to build more than one hundred coal plants abroad, many of which are designated for BRI countries.

Beijing has supported these efforts accordingly with generous state funding. Over the past decade, Chinese development banks have doubled the supply of financing available for energy projects, providing roughly the same amount of money annually as the World Bank, Asian Development Bank, African Development Bank, and the Inter-American Development Bank combined—more than $117 billion in total. 

Although the BRI was not conceived to exclusively address excess industrial capacity, it is a convenient conduit to do so. China’s strategy seems to involve enticing foreign governments, particularly those that cannot easily borrow from global financial markets, to sign contracts for the construction of Chinese-manufactured coal plants. Beijing offers affordable loans to these countries, as long as recipient nations hire Chinese workers, contract Chinese firms, and purchase Chinese equipment. If successful, these projects would simultaneously reduce the glut of Chinese coal capacity and preserve the number of Chinese jobs by shipping them abroad.

To this end, the Chinese development banks have invested more than $43 billion in coal projects, representing 20 percent of their investment portfolio, mostly in countries where their Western equivalents do not operate because of political risk and inadequate safety and environmental standards. This investment strategy is not new for Beijing, the BRI is simply the latest, most ambitious iteration. As Beijing seeks to integrate Africa, Asia, and Europe through infrastructure investments, Chinese firms are capitalizing on the opportunity. China has already become the world’s largest exporter of coal equipment.

Ironically, when the World Bank pledged not to finance coal projects in order to mitigate climate change, it left an opening for Beijing to do so. China’s development banks are funding 45 coal plants, which Chinese companies are building across the world from Romania to Indonesia. Taken together, Chinese-financed coal plants abroad would be the eighth-largest emitter of greenhouse gases among the world’s countries?.

BUYERS BEWARE

So far, China has faced little opposition to its plans to build overseas coal plants. But these projects need to be closely scrutinized. China is not only exporting energy infrastructure, but also the negative externalities associated with them. The financial damage from climate change will surely outweigh whatever is saved with low-cost financing. Reduced agricultural output and deteriorating health outcomes alone would shatter economic activity.

The effects could be immediate. Take Pakistan, for example, where tens of thousands of people already die annually because of air pollution. Although Pakistan’s climate makes it particularly suited to solar power, its government has an agreement with Beijing to open five new coal plants next year to stave off staggering electricity deficits.

Investment in coal is not necessarily in Beijing’s long-term interest either. Backing technologies that wreak havoc on public health and undermine climate plans will likely prove unpopular in the long run. Around the world, coal may be pushed out as countries opt for cleaner, increasingly inexpensive energy alternatives, reducing China’s return on investment. In fact, considering the sheer scale of Chinese investment, ignoring climate risk is a dangerous gamble. To diversify its portfolio, Beijing should prioritize its well-established wind and solar firms when pitching energy projects abroad.

The World Bank and other U.S.-backed international financial institutions could also do more to offer clean energy financing in parts of the world where China remains unchallenged. Where appropriate, Western development banks should also offer aid for advanced nuclear and carbon capture and storage projects, fulfilling their mandate to combat climate change and expand energy access. The competition could drive China to offer lower-carbon options. 

Meanwhile, BRI countries that have signed deals to build coal plants should recognize that China is simply looking for new markets and should be wary of its intentions. As such, they should be more discerning about their energy investments rather than accepting what suits Chinese needs. As the BRI revs up, China’s partners cannot afford to just go along for the ride.

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