How China shapes the world's coal

By Catherine EarlyFeatures correspondent

The world's largest funder of coal is closing down its finance for the industry overseas. What does that mean for the world on climate change?

Coal, the most carbon intensive fossil fuel, has come under increasing pressure from climate campaigners and communities affected by pollution from the industry. In recent years, at least 100 major banks – including the World Bank, Inter-American Development Bank, the European Investment Bank and many others – have divested from coal mining or coal-fired power plants.

But as many financial institutions have taken a step away from coal, some countries moved in to fill the void, such as China, South Korea and Japan. China has played a particularly big role – the country provided half of overseas public finance to coal-fired power plants between 2013 and 2018.

China's massive foreign investments in coal have given it the reputation as a lender of last resort for many African and Asian countries eager to boost power capacity to fuel economic growth. But developing countries reliant on China could now find their energy policies turned on their heads. At the UN General Assembly in September, Chinese president Xi Jinping announced plans to abandon building new coal power plants abroad.

The announcement has been seen as the "death knell" for overseas funding of coal, and its ramifications could be huge.

As of September, China was considering financing 44 new overseas coal plants across 20 countries, says Christine Shearer, programme manager for coal at the non-profit Global Energy Monitor. That represents about a third of the world's planned coal plants that have not yet been built. In addition, Chinese state-owned power utilities and engineering companies directly own a total of 30 gigawatts (30 billion Watts) of projects outside China, according to a 2019 report from the Institute for Energy Economics and Financial Analysis (IEEFA) co-authored by Shearer. That's an amount equivalent to the entire coal power capacity of Poland.

So far, the government has provided no details on when the policy will come into play, and it is also not clear exactly what it includes.

"The ambiguity of the announcement is also the beauty of it, a Chinese financier will have to think twice before any new investments can go ahead," says Byford Tsang, senior policy advisor for China at climate think tank E3G.

Many believe the impact of the announcement is already showing. Just days after Xi's speech, the Bank of China announced it would no longer fund coal projects from 1 October.

"There's a lot that needs to be clarified," says Li Shuo, senior climate and energy policy officer at Greenpeace China. "That said, my sense is that most of the important players will be covered, given the high-level nature of this statement and how the Chinese political system works." For example, backing financing for coal may now not be a great career move for the chief executive of a Chinese state-owned bank, he says.

It's hard to overstate the impact that China pulling funding in a big way from overseas coal plants would have.

China's development finance institutions and state-controlled banks had committed $36bn (£26bn) in funding for 102 gigawatts of new coal plant projects under development in 2018, the IEEFA report found. That covered a quarter of all coal plants being developed outside China at the time. These investments were in 27 countries, with the largest sums going to Bangladesh, Vietnam, South Africa, Pakistan and Indonesia.

Easy access to finance for coal has had a huge influence on the energy policy of many countries, leading them to build coal plants they might not have otherwise, says Isabella Suarez, analyst at research organisation the Center for Research on Energy and Clean Air. Chinese-backed coal plants in Vietnam emit around 51 million tonnes of CO2 each year (roughly the annual emissions of Portugal), while plants in Indonesia emit 80 million tonnes (about the annual emissions of Chile), Suarez says. "[Developing nations have] doubled down on coal technology and built out far more than they needed, which is why we have a lot of developing nations with a huge chunk of their energy mix coming from coal."

Among the most controversial projects backed by Chinese state-owned enterprises was Kenya's planned Lamu coal plant, a $2bn (£1.5bn) project just 20km (12 miles) from Lamu Old Town on the country's north coast, an ancient Swahili settlement and Unesco World Heritage site.

The project was to be designed, built and operated by Power China, a state-owned Chinese construction conglomerate. The civil society group DeCOALonize report for the UN Environment Programme raised concerns that the plant would have damaged nearby mangroves, and its air pollution would have led to some 1,600 premature deaths over its 40-year operating life.

It would also have made it hard for Kenya to meet its commitment to reduce its CO2 emissions 30% below business-as-usual levels by 2030. The plant was expected to release nearly nine million tonnes of CO2 per year, doubling the emissions of Kenya's energy sector and increasing national emissions by up to 10%, according to DeCOALonize. The Kenyan government pulled the plug on the project in November 2020 after the country's National Environment Tribunal ruled against it on the grounds that the authorities had failed to do a thorough environmental assessment.

The case illustrates the financial risks, and potential damage, Chinese public financiers face in the pursuit of coal, says Dimitri de Boer, head of the China office of environmental law group Client Earth. "It's good that it was cancelled, but wasn't because China didn't want it, it was local opposition and a court victory," De Boer says.

However, even before the China's announcement, there had been signs from the country of a change in stance on overseas coal investment. The capacity of Chinese-backed coal projects abroad which were shelved or cancelled between 2017 and 2021 was four and half times higher than the amount that entered into construction in the same period, a sign that interest in coal in these countries is waning.

Earlier this year, Japan and South Korea pulled out of financing overseas coal, apparently leaving China out in the cold. However, according to de Boer, the Chinese government's decision not to invest in new coal plants was actually taken at the beginning of 2021, even though it was not publicly announced until September. China did not invest in any new foreign coal plants during the first six months of 2021, analysis by the Green Finance and Development Center found.

In June, China's biggest bank, the state-owned Industrial and Commercial Bank of China, scrapped a plan to finance a $3bn (£2.2bn) coal-fired power plant in northern Zimbabwe. The move was believed by analysts to be the first time that a Chinese bank proactively walked away from a coal power project.

E3G's Tsang believes that of many developing countries China invests in are responding to domestic public opposition as well as the broader global trend to move to clean energy. "I think this has contributed to a shift – that demand is changing," he says. "I think that is why China is also changing."

China's phase-out of coal funding could put several countries in a position to commit to UN secretary general António Guterres' call in August for no new coal plants to be built after 2021, according to E3G. This includes Bangladesh, which ranks as sixth in the world in terms of planned new coal plants, and which is reliant on Chinese finance for all but one plant. Both Bangladesh and Mongolia could see their coal pipeline slashed by 90% without Chinese funding, according to GEM.

Many have pointed out that China's own domestic coal consumption and funding remains untouched. China currently consumes more than half the world's coal, burning three billion tonnes in 2020 alone. It has by far the largest amount of proposed coal capacity, with nearly 97 gigawatts under construction and another 163 gigawatts in planning – on top of China's existing 1,100 gigawatts, according to GEM.

In September 2020, China announced its intention to become carbon neutral before 2060. It followed this up in April 2021 with a pledge to limit the increase in coal generation until 2025, and start to gradually phase it out after this. However, energy shortages in the country have led the government to increase coal mining output, leading to record high outputs for the year.

"I don't think China can say they're a leader on climate," says Tsang. "They'll have to have a clear timeline on phasing out domestic coal in China in order to be able to say that."

China released its latest update on its national strategy to reduce emissions just ahead of the UN's climate conference (COP26) in Glasgow. The country's level of ambition was the same as had been proposed in an earlier announcement in December 2020, according to the research organisation Climate Action Tracker, which at the time classed those commitments as "highly insufficient" to meet a 1.5C limit on global warming.

However, alongside ending support for coal financing, China pledged to step up support for green and low-carbon energy in developing countries.

China is already the biggest global market for wind and solar power. This puts the country in good stead to shift its overseas energy focus from coal to renewable energy, says Li. "The good news is that we have the know-how, China has the equipment, expertise, the manufacturing capacity and the economic incentive. There's a real opportunity to make a shift, and the latest announcement will hopefully just cement that transition."

However, Li adds that China's commitment will need to be mirrored by policy changes in the countries that receive its support. "If Chinese companies can make money from solar and wind projects in a country, they will go there," says Li. "The reason they haven't so far is related to the economic conditions and policy frameworks in those countries, which need to make their own markets more friendly to renewable energy."

Energy infrastructure is not China's only overseas investment interest. The country is mobilising vast amounts of capital through its Belt and Road Initiative, which aims to boost trade and economic growth in around 120 developing nations, predominantly across Asia. The infrastructure investments by China in the initiative could be as high as $652bn (£476bn) by 2030 in the 17 main recipient countries, according to economic analysts Vivid Economics.

The new ports, railways and roads being built as part of the initiative will themselves have a huge influence the carbon emissions of the countries where they are being developed. The share of global emissions from the 126 Belt and Road Initiative countries could rise from 28% to 66% by 2050 if they develop following historical trends, according to Vivid Economics. This means annual global emissions could be almost double what scientists say is required to keep global temperature rise below 2C, even if the rest of the world decarbonises.

However, there are signs that China means to step up its environmental standards in its overseas developments.

Until recently, China's overseas development was guided by government policy introduced in 2013, which contained much weaker environmental standards than those governing investments inside China at the time, according to a 2021 analysis by researchers from Tufts University in Massachusetts. It did not include any objectives to limit greenhouse gas emissions, with self-reporting by Chinese firms the only way it was monitored.

However, in July 2021, the government published significantly stronger guidance which shifted towards promoting green development, including reducing carbon emissions and setting higher environmental standards than those used in host countries.

The new guidance is an "evolution" from the previous version, says Kelly Gallagher, professor of energy and environmental policy at Tufts University, author of the 2021 analysis. "The previous policy was not a very high bar for firms to comply with," she says. "They're clearly encouraging a higher standard of practice now."

De Boer says that although this is still only guidance and not law, he believes companies are taking it much more seriously than the 2013 guidance. "The difference is that much more work and engagement went into it, and there is more commitment to it higher up in government."

Some of the most powerful financial institutions in China (and largest in the world) are now trying hard to interpret the latest guidance and work out what kind of standards will apply to green development so they can change their internal procedures, De Boer says.

Suarez believes that China made its recent announcements with its negotiating position at the UN climate talks at COP26 in mind. "Maybe this is to give them some leeway in what they would like to negotiate," Suarez says. Although President Xi is not attending the talks, high-level officials are present. But even though other countries will be looking for commitments from China on its domestic use of coal, the country's ongoing energy crisis could make such commitments less likely, she adds.

Li, on the other hand, believes that China is moving into a new phase in its stance on climate change, which will be about providing real solutions. "You'll see a lot of organisations that had been working on overseas coal now shift to developing renewable energy in developing countries," he says. "This area will get less political or more practical, which is what's needed."

The importance of such a change in stance from China cannot be underestimated. Just as it had gained itself the reputation as the developing world's "lender of last resort" for coal finance, so it could be for the clean, green energy the world so desperately needs.

--

Data research and visualisation by Kajsa Rosenblad

Animation by Adam Proctor

--

Towards Net Zero

Since signing the Paris Agreement, how are countries performing on their climate pledges? Towards Net Zero analyses nine countries on their progress, major climate challenges and their lessons for the rest of the world in cutting emissions.

--

The emissions from travel it took to report this story were 0kg CO2. The digital emissions from this story are an estimated 1.2g to 3.6g CO2 per page view. Find out more about how we calculated this figure here.

--

Join one million Future fans by liking us on Facebook, or follow us on Twitter or Instagram.

If you liked this story, sign up for the weekly bbc.com features newsletter, called "The Essential List". A handpicked selection of stories from BBC Future, Culture, Worklife, Travel and Reel delivered to your inbox every Friday.

ncG1vNJzZmivp6x7o67CZ5qopV%2BbwrXB0Z5mmqqknrCtsY5rZ2tpYWV%2FeXnHqK5mm5ieu6K%2FjJyjoqWRqbJusMScoKyhn6PAbq3Fn5ycrF2ptaZ51qippZw%3D