China is becoming the global leader in financing energy projects in developing countries — a trend that has positive and negative ramifications, according to researchers at Boston University.
From 2007–2014, Chinese development banks collectively loaned $117.5 billion to fund construction of coal-fired power plants, large hydropower dams and other energy projects in foreign countries. That nearly equaled all energy-related financing from the four largest Western-backed development banks during the same period, according to researchers at Boston University’s Global Economic Governance Initiative.
The influx of Chinese financing will increase access to energy in developing countries, where more than 1 billion people lack access to modern electricity. The drawback: two-thirds of China’s energy financing from 2007–2014 funded coal-fired power plants, coal mines and large hydropower dams, which the study said would exacerbate climate change and deforestation in the Amazon.
“China has leapfrogged the world of development finance with an incredible amount of money for energy projects, which developing countries have been calling for, and we applaud that,” said Kevin Gallagher, a professor of global development policy at Boston University who co-authored the study. “The challenge is to direct more of that financing into sustainable energy projects that are socially inclusive and accepted by local communities.”
The study, which was supported by the Charles Stewart Mott Foundation, was the first to document the extent of China’s financing in the global energy sector. Researchers are developing an interactive database that policymakers and journalists will be able to access for information on China’s growing, global energy footprint.
“To understand the challenges of climate change for developing countries, it’s important to understand where and what kinds of energy investments are being made, and then begin discussions about how to shift to cleaner energy,” said Sandra Smithey, an Environment program officer at the Mott Foundation. “With China becoming the global leader in energy investment, those discussions are particularly timely.”
Chinese banks are funding energy projects around the world and expanding the roster of countries that receive money, according to the study. However, China’s development banks lag behind the World Bank Group and other Western-backed development banks when it comes to funding renewable energy projects, such as wind and solar power.
“China has leapfrogged the world of development finance with an incredible amount of money for energy projects, which developing countries have been calling for, and we applaud that. The challenge is to direct more of that financing into sustainable energy projects that are socially inclusive and accepted by local communities.”— Kevin Gallagher, professor of global development policy at Boston University
From 2007–2014, Chinese banks focused 66 percent of foreign energy investments on coal mines and coal power plants, 28 percent on renewables (hydropower dams and wind power), and the remainder on oil and gas. During that same period, the four largest Western-backed development banks invested an average of 88 percent of their energy finance portfolio on renewables.
Gallagher said China’s international energy investments could transform communities in developing countries, but added that there are significant social and environmental costs associated with coal-fired power plants and large hydropower dams.
Collectively, the foreign coal-fired power plants that China financed from 2007–2014 will emit 594 million metric tons of carbon dioxide (CO2) into the atmosphere annually — exceeding the annual CO2 emissions of entire countries, such as Canada, Brazil and the United Kingdom. Gallagher’s team estimated, conservatively, that air pollution from those coal plants will intensify climate change and create health problems and other social costs that amount to $29 billion annually.
Although Chinese banks are investing heavily in coal-fired power plants, Gallagher said they are merely meeting market demand. He said government officials in many developing countries want coal-fired power plants and hydropower dams because they believe those types of facilities are cheaper and more effective than renewable energy systems, such as wind or solar power.
At the Paris Climate Summit of 2015, China and other countries committed to steering more international financing into energy projects that are sustainable and socially inclusive. China and the United States also agreed last year to limit public investment, both domestic and international, in energy projects with elevated levels of pollution and carbon dioxide emissions.
Within its own borders, China is the world leader in building wind, solar and other sustainable energy systems. Gallagher said China has the resources to export its domestic model of sustainable energy to developing countries, but making that shift won’t be easy.
“China can tee up financing for clean energy projects, but if the host country wants a coal plant or a dam, instead of wind or solar, Chinese lenders are very quick to say they don’t want to meddle in foreign affairs,” Gallagher said. “We need to create demand for clean energy in host countries, and we need those countries to request financing for clean energy projects.”