Lauri Myllyvirta
Last week, Chinese President Xi Jinping announced at the United Nations General Assembly that “China … will no more build new coal power plants abroad.” A new policy for Beijing’s overseas energy finance had been expected for months, but Xi’s statement was still surprising in its bluntness and scope. China now joins the ranks of South Korea and Japan—the only other countries that still fund coal plants abroad—that have recently pledged to end public financing for new coal power.
Beijing’s new stance will make countries that are still planning for new coal and rely on international financing—such as Indonesia, Vietnam, Pakistan, Zimbabwe, and Turkey—seriously rethink their power development plans. And now that both China and the United States are pledging support for green energy in developing countries, the move also sets the stage for an even more competitive race to build clean energy.
How big a deal is this?
For more than a decade, China has been the largest supporter of coal projects that rely on international financing. From 2010 to 2020, 180 gigawatts of China-backed coal plants were built or began construction—more than half of the global total outside of China—amounting to 1.5 times the entire coal-fired capacity of the European Union and the United Kingdom.
But coal power was already facing strong headwinds outside of China. Our recent research at the Centre for Research on Energy and Clean Air found that in the past four years, 4.5 times as many China-backed projects had been canceled than entered construction. This made Beijing’s decision to get out easier.
Yet although the spree had already slowed, the center’s research still tallied 54 gigawatts of China-backed coal power projects in active development but not yet under construction—a third of the global total outside of China. These are the projects that could be directly affected. If built and operated, these plants would emit around 250 to 280 metric tons of carbon dioxide per year, roughly equivalent to Spain’s total emissions. Assuming an operating life of 35 years, the cumulative emissions would amount to 10 metric gigatons—or one year of China’s emissions.
Furthermore, while the new project pipeline was collapsing, there was always a risk that once power demand resurged after the COVID-19 pandemic, countries would restore plans for coal plants. And most countries that were only now considering their first coal plant were planning on overseas financing.
As South Korea and Japan, the only other remaining financiers, had already taken steps to exit, China’s role in these plans was only going to grow. Taken together, moves by China, South Korea, and Japan make it clear there is no international financing on the table for coal and countries need to turn to cleaner options.
What do the new rules cover?
In line with Xi’s concise style, the announcement was just six words in Chinese, leaving open questions about what the government is actually prohibiting.
Since Xi used the word “build” rather than “finance,” onlookers questioned whether that only includes construction services and supplies. But the Bank of China already announced on Friday it would not enter any new financing agreements for coal power or coal mining starting in October, appearing to confirm the policy’s broad scope.
At least until Beijing issues a detailed policy, new financing or equity investment commitments to coal power projects overseas will be politically toxic for any Chinese bank or power company.
The more pressing question now is where the line will be drawn for projects that have already been announced or initiated. Companies that have only signed memoranda of understanding or done photo-ops with their Chinese partners can likely say farewell to their financing, but it’s unclear what will become of the projects where contracts have already been signed.
This question is relevant, for example, in Indonesia, where the main power grid already has massive overcapacity, but an earlier building spree left an overhang of contracts for new coal plants with Chinese and Japanese firms that are still being pursued.
What does the move say about China’s foreign policy?
Notably, exactly one year after Xi announced China’s 2060 carbon neutrality goal at the 2020 U.N. General Assembly, this was another unilateral, high-profile announcement that surprised both domestic actors and the international community. There was no quid pro quo with other powers, even if many leaders of developed countries would have loved a photo-op announcing this with Xi.
Although there had been signs that a new policy was imminent—Chinese banks were instructed months ago to avoid new coal financing—Xi’s clear-cut pledge represents a sharp U-turn from earlier years, when coal power projects were touted as flagship examples of China’s Belt and Road Initiative. China’s foreign policy in Africa and the western Balkans, for instance, relies heavily on infrastructure investment, including for coal plants.
It seems mounting local opposition; plummeting demand for new coal power; and continued criticism from diplomats, media, and civil society flipped Beijing’s cost-benefit calculus. The announcement is a strong signal to China’s diplomatic corps that energy diplomacy and the Belt and Road Initiative need to focus on green energy rather than attempting to capitalize on projects few want to touch.
What about China’s domestic coal use?
Although the announcement is aimed at developing countries, it’s also symbolically significant for China’s domestic energy policy. As international financing of new coal plants comes to a halt, China will be even more isolated as the only country in the world still building notable amounts of new coal domestically: In 2020, China added three times as much new coal power capacity than the rest of the world combined.
This may thus be a positive shift in the winds domestically since it represents the country’s first recognition of the immediate need to shift power sector investments entirely away from coal.
It’s also an important signal to state-owned power, construction, and manufacturing firms that there will be no overseas outlet for their coal businesses once the domestic market starts to dry up.
What does this mean for countries relying on foreign funding?
Indonesia, Vietnam, Bangladesh, Pakistan, Mongolia, Turkey, Zimbabwe, and others will have to rethink their power sector plans. In most cases, financing their current ambitions domestically will prove infeasible or uneconomical.
Both Xi and U.S. President Joe Biden made commitments at the U.N. General Assembly to boost support for green energy in developing countries. Xi pledged to “vigorously support green energy development in developing countries” while Biden vowed that Washington will double its financial aid to developing countries and become the world’s leading provider of climate finance to “help developing nations tackle the climate crisis.” If developing countries receive a clear message that there is ample financing and risk appetite available to support clean energy development rather than coal, they will be more likely to change course.
China is already the largest manufacturer and developer of wind, solar, and nuclear power in the world. If China finances and exports more of these technologies, as it’s expected to do, it will enable developing countries to meet their power needs affordably without relying on fossil fuels.
After long-standing and justified complaints on the lack of clean energy financing for developing countries, the statements opened up new opportunities. Vietnam, for instance, has already carefully balanced the coal power project pipeline with China, Japan, and South Korea, so it doesn’t rely on just one country for its power sector financing and technology. It’s crucial that a variety of financiers are available for clean energy development too—and if a bit of competition among the United States, China, Japan, European Union, and others prompts everyone to increase clean energy financing, manufacturing investment, and other support, then that’s even better.
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