During his virtual speech at the 76th session of the United Nations General Assembly, Chinese President Xi Jinping pledged to end the financing of new coal-fired power plants overseas. Many observers cheered this move, seeing it as a game changer for the coal phase-out process the world urgently needs.
In reality, China’s financing of coal-power plants overseas is quite limited compared with its own production. In 2020 alone, the country installed 38 gigawatts of new coal-fired power capacity at home, an amount that equals the entire coal-fired power capacity currently installed in Germany, to reach a total installed capacity of 1,095GW.
This year looks even more threatening, at least from the perspective of climate policies, as China has an additional 100GW capacity either under construction or approved for construction within its borders – and these estimates do not incorporate the likely increase in coal production as a consequence of the country’s ongoing power crunch.
This contrasts sharply with the 20GW that Chinese institutions are currently financing overseas, according to the Boston University China’s Global Power Database, notably considering that many of these projects are been delayed or canceled altogether.
That is, the commitment to stop overseas coal funding is of course welcome, but it comes at a time of firm decline of such funding in any case. A key driver of the reduced demand for coal power plants overseas lies in the increasing price competitiveness of renewable energy, especially solar and wind, let alone their cheaper financing as financial institutions have gained a better understanding of climate-related financial risks.
All in all, given China’s dominance in solar and wind energy, Chinese institutions might actually gain from President Xi’s pledge, as they will move from financing riskier coal plants to renewable. This is, thus, not only a win for the global fight against climate change, but also for China.
The most difficult task, indeed, as regards China’s commitments to reduce emissions, is to reduce domestic production. On this front, Beijing is clearly far from setting the right incentives. China’s huge coal production at home is supported by generous subsidies, the full amount of which is yet to be known. As a rough reference, the International Energy Agency estimates that direct coal subsidies hovered around US$10 billion for 2019.
So far, China has not really offered a detailed plan as to how to reduce coal-related emissions. In the 14th Five Year Plan presented in March, no breakthrough on China’s existing energy mix was offered, with coal keeping a staggering poll position among the different sources of energy at 57%. On the contrary, the plan also makes several references to the further development of coal, instead of introducing a coal consumption cap.
In the same vein, China’s commitments for the upcoming 26th UN Climate Change Conference (COP26) lack bite, as the country missed the July 31 deadline set by the UN to submit new emissions-reduction pledges ahead of the conference, sparking doubts about its contribution under the Paris Agreement.
One might wonder why a country with the largest production of solar panels on the planet cannot reduce the huge role that coal still plays in the economy. Political-economy reasons come to the forefront.
First, coal mining represents one of the main economic activities in northeastern provinces, with a vast number of jobs at stake. Second, cheap electricity production remains an inherent comparative advantage for Chinese exports.
China’s current power crunch can only make matters worse. Local governments have started rationing electricity given the lack of price signals – electricity being heavily subsidized – while local governments struggle to reach their emission targets without enough coal imports after Australia’s coal has been banned in the political fight between the two countries.
China’s manufacturing capacity is starting to feel the pinch of electricity constraints at a time of cyclical deceleration for the Chinese economy. Therefore it seems unlikely there will be a reduction in coal plants in China at this juncture no matter Xi’s pledges at the UN.
Alicia Garcia Herrero is senior research fellow at Bruegel and chief economist for Asia-Pacific at Natixis. Simone Tagliapietra is a senior fellow at Bruegel.