As the US Retreats, China Is Taking the Lead on Green Energy

Finance ministers from across the world will converge on Washington this week for the annual meetings of the World Bank and IMF.

At last year’s annual meetings, these ministers pledged to commit more of their balance sheets to financing global energy and infrastructure — and to do so in a manner that helps combat global climate change.

What a difference a year makes. The United States is no longer led by President Obama. His commitment to combatting climate change has been both ridiculed and abandoned by “let’s go for coal” Donald Trump.

Little surprise then that just as the meetings are about to start, President Trump has trashed the U.S.’ clean power plan and slashed the U.S. budget for the World Bank by $650 million.

China to the rescue

From a global vantage point, China has come to the rescue in some ways. China’s two global policy banks — the China Development Bank (CDB) and the Export-Import Bank of China (EXIM) — are becoming the largest sources of energy finance for governments across the world.

Since 2000, these two Chinese banking institutions have provided upwards of $160 billion in financing to foreign governments ($43.2 billion in 2016 alone).

That is close to triple the average annual energy lending of the World Bank and all the Western-backed multi-lateral development banks combined.

These estimates stem from a new interactive database — China’s Global Energy database — created and published by the Global Economic Governance Initiative (GEGI) at Boston University.

Roughly 60% of the $160 billion in energy finance provided by these banks over the period was concentrated across the Asian continent, with Latin America (25%) and Africa (14%) receiving the bulk of the rest.

Just in time delivery

Such a massive increase in global development finance arrives just in time. The world faces major infrastructure and energy gaps and has just committed to increasing finance for sustainable development on a global scale through the Sustainable Development Goals and at the G-20.

Meanwhile, the United States is retreating from its long-held global leadership role. On the global plain, Donald Trump seems to focus on breaking things much more so than on building things.

China doesn’t finance modernization – yet

That said, China’s portfolio of overseas energy finance is heavily concentrated in fossil fuel operations that accentuate climate change, especially in coal.

Indeed, Chinese banks have provided upwards of $40 billion in financing for global coal projects—projects that accentuate climate change and social risks. Investing in coal poses risks to Chinese financial institutions and to society.

In terms of China’s bottom line, there is a growing consensus that many coal plants will be decommissioned over the next decades due to climate change and air pollution regulations.

What is more, coal plants are increasingly controversial at the community level, and community conflicts can lead to plant closings as well. There is therefore an increasing likelihood that some Chinese coal assets will become stranded assets.

Coal also poses significant health and climate risks as well in terms of localized air pollution from sulfur emissions and global climate change from carbon emissions from coal power plants.

Using conservative estimates of the climate and local health costs of coal plant emissions, in our broader study we estimate that the yearly social cost of Chinese overseas coal-fired power plants amounts to $29.7 billion.

Time for China to shift

However, China’s development finance model is such that Chinese development financial institutions could make a swifter and more decisive shift toward cleaner energy finance for all.

China’s model currently matches excess savings and reserves with national oil, gas and coal companies –channeling reserves and savings through these development banks to foreign governments who in turn purchase goods from China’s champion energy companies like Sinopec and SinoHydro, China’s mammoth oil and hydro firms.

It could easily use the same model to globalize its world class solar and wind industries. The aforementioned realities, thus raise the stakes for, and importance of, China’s new interest in green finance.

China has made bold national commitments in terms of reducing financing and incentives for coal and fossil fuels on the mainland under the US-China climate agreement and is poised to globalize those national policies.

China taking over from the US

Such a shift will not only help China’s banks mitigate the significant risks associated with the current portfolio of its policy banks. It will also enable China to meet its broader global commitments and improve the bottom line of these banks.

What is more, China could fill the vacuum being created by the Trump administration on climate finance.

If China chose to use the China Development Bank and the Export-Import Bank of China as tools for meeting expanding green energy, China would quickly become the global leader in sustainable development finance.