Can Chinese aid go green?

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Feng Hao

China has come under a great deal of criticism for its funding of carbon intensive projects under the Belt and Road Initiative (BRI), but some within China see its future in renewables as necessary, both in environmental and economic terms.

China’s Energy Research Institute has proposed a “2C Asia” initiative to survey energy supply and demand in Asian nations and work with them to decarbonizes energy systems and meet the goals of the Paris Agreement.

Researchers believe that China’s foreign aid needs to be better targeted and that funding for the initiative could come from the South–South Climate Cooperation Fund set up in 2015, or the China Clean Development Mechanism Fund, which currently supports low-carbon growth domestically.

Rethinking China’s foreign investment

How China invests in countries signed up to the Belt and Road Initiative (BRI) will be crucial to the success or failure of the Paris Agreement. These investments are skewed towards coal power, meaning China is driving countries down higher emission pathways not aligned with the Paris Agreement, according to a recent report by institutions including Tsinghua University.

At the second Belt and Road forum earlier last year, Chinese leaders stressed the BRI should have a “green undertone” and promote sustainable investment. But so far there have only been preliminary discussions about an overseas low-carbon policy framework.

The 2C Asia Initiative is similar to the East Asia Low-Carbon Community proposal put forward in 2016 by another Chinese think-tank, the National Centre for Climate Change Strategy. That didn’t garner much attention but it would have brought together the Asian Infrastructure Investment Bank, the Silk Road Fund, the South-South Cooperation Fund and the China Clean Development Mechanism Fund to support low-carbon investments and capacity building in Southeast Asia. Developed economies, such as Korea and Japan, would also have been invited to participate.

Directing aid at clean energy

Researchers say China’s aid could support subsidies like feed-in tariffs, which have driven spectacular growth in China’s renewables sector, to promote renewable energy across Asia. At the moment, China’s climate-related aid is focused on building low-carbon generation – primarily hydropower, with some wind, solar and geothermal too. China also provides aid and equipment, such as solar panels, to Africa, as part of its South–South cooperation efforts. But China’s foreign aid has rarely involved supporting or funding macro activities such as energy sector policy and planning. They (researchers) think China may consider shifting foreign aid from traditional infrastructure projects which have high labour costs, towards early-stage funding for clean energy.

Coal power firms on government ‘blacklist’

Aid is only a small part of China’s foreign spending. The commercial programmes funded by Chinese policy banks have the biggest impact on emissions in Asian nations.

The government can exert some control over policy bank financing through the State Assets Supervision and Administration Commission (SASAC) which is responsible for overseeing China’s state-owned firms. Since 2017, it has been tightening up overseas investment, with stricter checks on processes, risks and returns and which sectors get financed.

Taking Indonesia as an example, recent research by Greenpeace and Shanxi University of Finance and Economics found that by 2022 many parts of the country will see a surplus of coal power – meaning any Chinese coal power investments there run the risk of becoming uneconomical.

Researchers believe that environmental standards will tighten and carbon costs will become a factor as Belt and Road countries align themselves with the Paris Agreement. Meanwhile, the cost of renewables is falling, increasing the risk that China’s overseas coal power assets will fail to be profitable.

Chinese firms investing in power projects overseas have their own concerns. As state-owned enterprises, they have an obligation to increase the value of their assets, and to provide jobs. Some Chinese companies and academics hold that too strict a blacklist will harm both company competitiveness and the broader national interest.

To these concerns researchers say, “The strategic significance of the Belt and Road Initiative goes far beyond the interests of a dozen or more coal-fired power plants. Overall, China has no need to develop or export coal technology, because the country’s renewables technology is lower-carbon, greener and more competitive.”

Support for renewables firms investing overseas

When it comes to renewable energy firms, overseas investment should be encouraged through simpler approval processes. But as things stand, Chinese renewables developers often struggle in overseas markets, where they lack the subsidies and other forms of support they received domestically. With limited assets, these small firms struggle to obtain bank loans and cannot shoulder much risk. Furthermore, their overseas investments have been hampered by a lack of capital because of delayed subsidy payments from the Chinese government for domestic projects, researchers suggest.

Chinese companies looking to invest overseas must also overcome domestic concerns about the effect of renewables on grids. Looking again at Indonesia, the Ministry of Energy and Mineral Resources targets 23% of the country’s energy mix to be drawn from renewable sources by 2025. But many of its power generators do not want to see a major expansion of wind and solar, citing intermittency concerns.

Yan Bingzhong of the China Renewable Energy Engineering Institute has been involved with China’s plans for energy investments in Asian Belt and Road countries. He says particular attention needs to be paid to the scale of renewables development, and coordinated development of power grids and power sources, to ensure local economic needs are met.

(The writer is a researcher at China Dialogue and this article was first published in the magazine)