AIIB uproar reveals the East-West divide on coal

It is telling how important coal is to the economies of Asia that an entire international conference on liquefied natural gas (LNG) was dominated by talk about coal. The bosses of Asia’s largest LNG providers were compelled to admit to the world that coal in East and Southeast Asia is not only there to stay, but its use is even set to rise.

In light of this, the recent criticism by environmental activists and ecological groups surrounding the Asian Infrastructure Investment Bank’s (AIIB) willingness to support coal-powered development projects is a reminder of how far apart the West and Asia’s emerging economies stand on coal. While the West plans to move away from coal, in the Asian context, the AIIB’s decision seems more consequential than controversial.

Launched by China as a “lean, clean and green” lender for development and infrastructure projects across Asia, the AIIB has branded itself a climate-conscious bank. Its inaugural president, Jin Liqun, spoke of its “sacred mission” to promote economic development in Asia “without leaving an environmental footprint.” However, the bank’s energy strategy drew the ire of environmentalists because of its failure to exclude coal as an energy source. Instead, the AIIB insisted these would “continue to play a significant role in the energy mix of most […] member countries.”

The AIIB’s nod to coal projects may be indicative of the realization that the transition away from traditional to other fuel sources is no mean feat, especially not in Asia. As Europe’s experience shows, accessible alternatives and expanding renewable capacity have not led to a uniform reduction in coal consumption across Europe, where notable holdouts like Poland and Germany have struggled to wean themselves off it.

Largely due largely to social, electoral and security concerns – as opposed to rising industrial demand for energy or the absence of viable alternatives as in Asia – coal still counts for 40% and 50% of the energy mix in Poland and Germany respectively. But where burning coal for power looks on aggregate to have peaked in the US and Europe, continued high rates of growth in the world’s emerging markets mean that global demand for cheap, accessible fuel continues to rise.

At the same time, alternatives such as natural gas that have served as substitutes for coal in Europe and North America remain comparatively expensive further east. To governments striving to electrify homes, boost industry and lift populations out of poverty, coal is often the only viable fuel on a large scale. After China’s and India’s economic growth was driven almost entirely on the back of coal-fired energy, others are set to follow, particularly Southeast Asia. With a total population of 640 million, 65 million remain without electricity and 250 million burn solid biomass for everyday needs – a highly polluting fuel, responsible for tens of thousands of deaths every year.

After China’s and India’s economic growth was driven almost entirely on the back of coal-fired energy, others are set to follow, particularly Southeast Asia

As a consequence, the region has increasingly expanded its coal use, and has collectively been the third-largest investor in coal-fired power generation after China and India since 2000. In an attempt to bolster ongoing electrification efforts, the Indonesian government is planning to increase coal’s share in the domestic energy mix after electrification targets for 2015-2017 were unexpectedly exceeded.

Laos is also actively promoting the development of coal-burning technologies among Asean (Association of Southeast Asian Nations) member states, on the basis that energy development will generate resources to support other development sectors. Meanwhile, Vietnamese coal use is expected to soar between now and 2030 as new plants are built to meet a surge in electricity demand.

However, these trends mean that Southeast Asia is facing a dilemma. Policy-makers face the difficult task of balancing domestic industrial development with adhering to the Paris climate goals – a commitment Asean reaffirmed only last year. The dilemma extends to the AIIB as well. But as a major player in promoting economic development with environmental protection duties, the AIIB seems to recognize that efforts to be “clean and green” in Asia must for now concentrate on mitigating CO2 emissions.

All its criticism notwithstanding, the AIIB’s energy-sector strategy is cognizant of that pressing need. Indeed, the strategy includes a “conditionality,” in which funding will be provided only for cleaner, more efficient coal plants employing technologies such as “high-efficiency low emissions” (HELE) systems. Furthermore, funding is restricted to cases where HELE plants “replace older equipment or in regions that are unable to use alternative forms of energy.” The strategy therefore implies that HELE plants are being built as the very means to addressing commitments made under the Paris climate agreement.

The AIIB’s decision to fund coal power is significant since it contrasts starkly with the funding policies of other international monetary institutions. In 2013, the World Bank cut off funding for coal power to invest in other forms of energy instead, a move that drew widespread criticism at the time for slowing down electrification of millions of households.

Since then, however, Western states have slowly begun to realize that many developing countries cannot and will not say no to coal any time soon. For example, US President Donald Trump’s idea of a global clean coal alliance incentivizing HELE technologies in developing countries is increasingly taking shape. The AIIB – and Asean in general – may consider taking advantage of this more coal-friendly environment at a time when both societal and environmental pressures are mounting.

However, for the AIIB this is not an option. After all, it works in emerging markets that see coal as indispensable to their energy mix. For this reason, the AIIB invests in cleaner, more efficient plants across Asean, choosing rather to use incentives and investment to stimulate a race to the top than to simply observe a race to the bottom.

As far as Asia is concerned, the choices seem already made. Asia is clearly not ready to relinquish coal use yet, but it is working towards mitigating its environmental impact.