China Is Outsourcing Its Pollution

As the world speculated on the potential policies of climate change denier and U.S. President-elect Donald Trump, Xi Jinping breathed life into this year’s U.N. climate change conference in Marrakech, Morocco, by reaffirming his commitment to peak Chinese carbon dioxide emissions by 2030. Transitioning from rhetoric on historical responsibility for climate change, the Chinese president said his term as G-20 leader would be committed to developing China as an “ecological civilization,” because “green mountains and clear water are as good as mountains of gold and silver.”

But Xi’s environmental rhetoric shouldn’t be taken at face value. As he moves to reduce China’s use of coal in electricity generation at home, his government has been vigorously pushing coal overseas, frustrating the hope for “ecological civilizations” elsewhere.

Denis Zisko knows all about green mountains and clear water. He grew up swimming in Bosnia-Herzegovina’s Lake Modrac during the 1960s, before it was contaminated with coal dust and ash deposited by the Banovici coal mine and Tuzla coal-fired power plant. Now working as the energy campaign coordinator for Bosnia’s Center for Ecology and Energy, Zisko is challenging a planned 450 megawatt expansion to the Tuzla plant funded by China’s state-owned Export-Import Bank, known as Chexim. Accompanying the deal is an engineering, procurement, and construction (EPC) contract with China Gezhouba Group worth $750 million. Just a couple of miles away, China’s Dongfang Electric has made the winning EPC contract bid for another coal plant, this time greenfield, under financing consideration by the Chinese.

The Tuzla expansion and the Banovici greenfield plant are just two of nearly 80 overseas coal projects under consideration for financing or construction by China, according to research by the Central and Eastern European (CEE) Bankwatch Network. Collectively, these projects represent 52 gigawatts of capacity, more than the 40 gigawatts of expected retirements under U.S. President Barack Obama’s Mercury and Air Toxics Standards.

According to the International Energy Agency (IEA), the construction of new coal plants, if unabated by carbon capture and storage, is incompatible with the “deep decarbonization” needed to keep global temperatures from rising more than 2 degrees Celsius above pre-industrial levels.

“There is a multiplicity of goals here,” says Bo Kong, an assistant professor of international and area studies at the University of Oklahoma. China has become the largest destination for renewable investment and now accounts for 44 percent of global green bond sales. “China has made a 180-degree turn on the climate front, recognizing it, too, is a victim of climate change,” he says.

But at the same time, significant industrial overcapacity has emerged in China as a result of slowed domestic growth and a reduction in imports by developed nations in response to the global financial crisis. China’s coal power industry is currently only being used at less than 50 percent of its capacity, with each plant mandated to sit idle for three months of the year. “As with all industries suffering from overcapacity, China’s coal sector is looking to markets overseas as sources of growth,” says Erica Downs, a senior analyst with the Eurasia Group. China is now the largest exporter of coal power equipment, exporting at twice the rate of the runner-up, Japan.

“This clearly has support from the top,” Downs adds. Over the past decade, Beijing’s two policy banks, Chexim and the China Development Bank (CDB), doubled their financing for energy projects in developing countries — more than half of which has gone to coal power projects. That surge reflects China’s broader “going out” strategy known as the Belt and Road Initiative (BRI), with outward-flowing investment increasing tenfold in the last decade.

Local governments have been eager to participate, being unable to access capital markets themselves while at the same time under pressure from Beijing to generate investment and GDP. “There is immense competition between different localities,” says Kong, with provinces lobbying the central government for BRI dollars. As much as it is a top-down priority setting, there is bottom-up pragmatism at play. Yukon Huang, a senior fellow with the Carnegie Asia Program, agrees. “These institutions do not need to be persuaded to participate. They see these projects as moneymaking opportunities,” he says.

“The logic is quite similar to the Marshall Plan,” Kong says. “Like the United States after World War II, major exporting nations need to help their neighbors develop the means to become markets.” EPC contracts like those in Tuzla take place within broader cooperation efforts, such as those embedded in the 16+1 framework between China and CEE countries, on currency swaps, e-commerce, tariffs, customs, inspections, and visas. Trade between China and CEE countries grew by 28 percent between 2010 and 2015.

Without this “backdoor” to export equipment and labor to new markets, we might not have seen a cap on China’s domestic coal production capacity, suggests Kevin Gallagher, a professor of global development policy at Boston University. Eighty percent of coal companies in China incurred losses in 2015, and more than 1 million jobs are at risk as governments orchestrate the closure of more than 1 billion tons of mining capacity.

At the same time, 87 percent of coal power capacity under construction with the help of Chinese finance is sourcing at least one major piece of equipment, such as a turbine, from a China-affiliated company. “It makes real economic sense to take this show on the road given the economic headwinds China is up against,” says Jennifer Harris, a senior fellow at the Council on Foreign Relations, listing nonperforming loans and foreign exchange reserves in addition to industrial overcapacity and pending unemployment.

In light of these economic headwinds, there is no consensus within China’s top agencies as to whether facilitating an “ecological civilization” abroad should be as much of a policy priority as it is at home. Although in March 2015 the National Development and Reform Commission cited increasing “cooperation in the exploration and development of coal” as key to the BRI, Xi committed in September 2015 to “strictly control” public investment for projects overseas with “high pollution and carbon emissions.”

Since then, the China Banking Regulatory Commission (CBRC) has specifically endorsed the export of coal and coal technology to cope with domestic overcapacity. And since Xi’s September 2015 commitment, the CDB has approved more than $2.1 billion in coal financing. (China’s two policy banks receive more than 70 percent of their funding from bond markets, which suggests the coal industry should be able to switch between policy- and market-driven lending depending on which is more profitable, argues Kong.)

This September, seven top government agencies, including the CBRC, released green finance regulations that commit to enhancing the “‘greenness’ of China’s outward investment.” That directive, however, lacked any enforcement mechanism. “If you were a Chinese bank, which would you listen to?” Kong asks.

The Chinese government’s lack of consensus on environmentalism trickles through to local levels of government. “The country suffers from a fragmented bureaucracy,” says Ling Chen, an assistant professor at Johns Hopkins University’s School of Advanced International Studies. “There is not just ‘a’ China.”

The central government’s vision for international climate leadership competes with provincial interests. “Provinces are concerned with what is happening within their territory: the local economy, social stability, and taxes,” Kong says. The northern province of Shanxi, dependent on coal-related industries for 80 percent of its economy, is a case in point. “Local coal companies just rehash their logos and start singing the tune of green energy by talking about ‘advanced’ coal,” Kong says. Shanxi proposed relaxing export quotas instead of shutting down local production capacity. The province struggles to rein in illegal activities, with inspections revealing 14 coal mines under construction without official approval last year. China’s State Council acknowledged last week that the practice has continued in tandem with a coal price recovery this year, despite the country officially meeting its 2016 coal capacity reduction target of 250 million tons ahead of schedule. “It will take a substantial amount of time to get rid of the vested interests in coal,” Chen says.

November’s election results expose similar interests in the United States. While depressed natural gas prices challenge the economic plausibility of a “coal renaissance” at home, Obama’s efforts to ensure countries in the Organization for Economic Cooperation and Development (OECD) and China limit public financing of coal power abroad are in jeopardy. The OECD agreement last November to restrict official support and export credits for coal-fired power plants overseas was heavily opposed by Japan, South Korea, and Australia. It took two years of “intense negotiations” for each to accept a watered-down version and only after China agreed to do the same. Although it’s unlikely President-elect Trump will withdraw from the gentleman’s agreement, as it would require withdrawing from the entire Arrangement on Officially Supported Export Credits, its nonbinding and tenuous nature makes it subject to noncompliance and backsliding from key players like Japan. With no enforcement mechanism, OECD countries approved $2.4 billion in public coal finance this year — more than China — with an additional $15 billion considered pending. Similar backsliding is feared from Beijing, which, as Harris argues, “has managed to redefine commitments, after the fact, that were far more specific to begin with.” In such a case, the hospitality of host countries to the construction of coal-fired power plants becomes increasingly important. And that’s the rub.

Perhaps more than vested interests in exporting countries, the future of coal finance will rely on the market gods of supply and demand. “Chinese coal financing is really demand driven,” says Gallagher, since the countries China is investing in are looking specifically to develop coal. Zisko agrees: “I see a bigger problem with our authorities than with China.” During his conversations with Chinese companies and banks, Zisko often hears them say, “‘If the Bosnian government had come to us with a proposal for renewables, we would have built renewables.’”

Data compiled by Princeton University shows that planned electricity capacity additions in China rely less on coal-fired generation than those added in the past decade, but the opposite is true for its neighbors — India, Indonesia, the Philippines, Vietnam, Malaysia, Thailand, Myanmar, Bangladesh, and Pakistan. “Lower income economies cannot afford, for the moment, to neglect a low-cost source of energy even as they pursue others in parallel,” the IEA stated in a report this year. Coal-fired power generation is the only technology consistently gaining market share across the region, and China remains committed to a policy of “respecting each [country’s] independent choice of development path and accommodating each other’s core interests and major concerns.” Wawa Wang, CEE Bankwatch’s public finance policy officer, sees this playing out in the case of the planned Tuzla expansion.

Chexim approved project funding despite numerous permitting irregularities, including a potential breach of the European Union’s state aid restrictions to which Bosnia is beholden as a signatory to the Energy Community Treaty. “Chinese banks have not demonstrated environmental and social due diligence when screening these projects.” Wang says.

And so, despite being poised to assume the mantle of climate leadership, China may not be willing to deal with its vested interests at home and break with its “no questions asked” form of investment diplomacy abroad. With the country refining its expertise in renewable technology and ramping up exports of wind turbines and solar panels, “China now has the interests, and not just the passion, necessary to make it happen,” Gallagher says.

Local officials also now have an interest in going green, with environmental criteria being added to traditional metrics like GDP in the country’s evaluation system for career advancement. This initiative “shows the overall environment is gradually changing,” Chen says. But if the Chinese Communist Party isn’t willing to account for externalities like overseas emissions associated with domestic growth, this incentive could perversely result in even more pushing of polluting industries overseas — as could the State Council’s domestic guidelines on heavy metals, hazardous waste, and poisonous chemicals, announced mid-November. “Going green would be lovely,” Chen muses. “But dealing with overcapacity and other needed economic adjustments is simply more urgent.” In the meantime, NIMBYism looks like a convenient stopgap measure.

Photo Credit: KEVIN FRAYER/Stringer