China, Japan, and South Korea aren’t financing as many coal plants abroad anymore
Fifteen years ago, coal was entering a new golden age. China began commissioning dozens of new coal-fired power plants every year, and India, along with other developing countries, followed in its footsteps to meet growing electricity demand.
Coal plants in developed countries like the US and Germany have been major contributors to climate change, to be sure. But the more recent projects financed by East Asian countries pose a unique threat: Their conventional lifespan means they would run past the 2050 deadline by which the use of coal must be phased out to limit the global temperature rise to 1.5 degrees Celsius, according to the Intergovernmental Panel on Climate Change. If carbon-capture technology isn’t added to coal plants to reduce their emissions, that deadline moves up to 2040, a Climate Analytics study found.
Fortunately, the spree in coal development is slowing down. China and India have been cutting back on construction of new coal power plants since 2015 (although far too many plants are still in the pipeline), and other developing countries have started reconsidering the coal-first development model in favor of cheaper and less-polluting alternatives. In recent years, a number of major new coal projects have been delayed or canceled in countries from Kenya to Vietnam.
Whether they can attract financing is a decisive factor in how quickly developing countries move away from coal power. Over the last decade, Japanese, South Korean, and Chinese banks have poured money into coal power development globally. Their public financial institutions, which help domestic coal-related businesses pursue lucrative overseas markets, have been particularly critical enablers. But that money is starting to dry up.
In July, Japan announced it would restrict its public institutions from supporting coal power development abroad (while not banning it completely — more on that below). Later that month, South Korean lawmakers proposed bills to prohibit two state-run banks and its largest utility, Korea Electric Power Corp., from servicing coal projects. And in early December, China became the latest country to signal a move away from coal financing.
A new study co-authored by experts from China’s environmental ministry proposed discouraging the country’s investment in coal projects on its Belt and Road Initiative, which now officially includes 138 countries.
“If I recall correctly, this is the first time any Chinese policymaker publicly endorsed the notion of actually shifting Chinese investment away from coal regardless of its efficiency,” said Shuang Liu, a climate finance expert at the World Resources Institute and a member of the study’s research team. For China, the largest public financier of the world’s coal power development in recent years, this shift would have huge implications for the global climate.
However, until these East Asian countries definitively ban government support for all new projects, these publicly backed coal projects will continue to be a significant source of emissions. China, South Korea, and Japan currently enable a little more than 69 gigawatts of new coal power under development outside their borders, according to the Global Coal Public Finance Tracker. That’s roughly one-third of the US’s current coal-generating capacity. Coal power projects under development with support from Chinese state banks and companies alone would lead to 433 million tons of annual carbon dioxide emissions by 2030 — the equivalent of Turkey’s emissions in 2018.
The recent signals from the East Asian coal financiers suggest a change in course may indeed be coming. Domestically, Japan, South Korea, and China have shifted toward taking climate change more seriously: Starting with China, all three countries committed this fall to reach net-zero emissions by the middle of the century — ahead of their biggest economic competitor, the United States.
But strong political and economic forces are still driving their support of coal power at home and overseas, with deadly air pollution and greenhouse gas emissions as massive, overlooked costs.
The last lenders: How China, Japan, and South Korea became so critical to developing countries’ coal power ambitions
If you look at a map of global coal projects in recent years, almost all of the public finance flows from East Asia.
Formerly, Western governments financed coal projects to support their coal businesses’ international ventures. But a decade ago, that all began to change. Then-President Barack Obama announced in 2013 that the US would no longer put taxpayer money behind foreign coal projects. The World Bank, several European countries, and other major lenders also banned or restricted coal finance that year due to climate concerns.
But China, Japan, and South Korea continued to back coal power as the top three public financiers. Their support is, in large part, because overseas coal projects have provided huge business opportunities for their companies, according to Tim Buckley, an expert on energy finance at the Institute for Energy Economics and Financial Analysis (IEEFA).
Through their own domestic coal power development, East Asian companies have become leaders in all aspects of the coal business, from turbine manufacturing to construction. And those businesses have expanded overseas through government support.
“The reason they are able to win the vast majority of the tenders for building new coal-fired power plant is because they have ECA finance in their back pocket,” said Buckley, referring to government export credit agencies (ECAs) and banks that are designed to support their homegrown industries.
Since 2013, these three countries have supplied financing for 84 gigawatts of coal power development, with Indonesia, Vietnam, and South Africa as the top recipients, according to the Global Coal Public Finance Tracker. China has dominated, with state-owned bank financing or state-owned enterprise investment going toward mining and power projects totaling 53 gigawatts of capacity. (The capacity of a large coal power plant is about 1 gigawatt.)
This doesn’t mean China, Japan, and South Korea have been forcing coal plants on developing countries. Their financial support makes coal projects more attractive, according to Buckley, but research has also shown strong demand to boost power generation from rapidly growing developing countries. A recent study published in Energy Research & Social Science found that Chinese-backed coal projects in India, Indonesia, Vietnam, and Bangladesh were largely driven by policies in these countries that are friendly to coal development and, in some cases, hostile to renewable energy.
But if the financial lifelines from East Asia disappeared, these projects would have a harder time getting off the ground. Public finance from China, Japan, and South Korea has been a “key de-risker” for developing countries looking to build coal plants without taking on the financial burden, Buckley said. “If you don’t have [ECA] finance, you are not going to go and build a [multibillion-dollar] project that will take you five or 10 years,” he added.
Coal financiers’ climate awakening
China and Japan have defended their support for overseas coal plant construction in recent years by arguing their companies build high-efficiency coal projects and that the power plants are a path to economic development for low-income countries.
Although Japan and China do increasingly finance highly efficient coal plants, the most efficient (ultra-supercritical) plants cut carbon emissions by only 9 percent compared to subcritical plants, according to the Natural Resources Defense Council (NRDC). Again, coal needs to be phased out by between 2040 and 2050 to stay below 1.5°C of warming, which is the aim of the Paris climate agreement. Meanwhile, renewable energy is already more economical than coal in a number of developing countries, and BloombergNEF projects that by 2025, it will be less expensive to build new wind and solar plants than to run coal plants.
One by one, Japan, South Korea, and China have begun to acknowledge this reality over the last few months.
Japan has made the clearest commitment of the three to date. Its new policy, announced in July, is set to take effect this month. It bars the Japanese government from supporting foreign coal projects “in principle.” Japanese Environment Minister Shinjiro Koizumi called the move a “turning point” in a July interview with the Financial Times.
In a joint statement released that month, domestic and foreign environmental NGOs in Japan said it was “one step forward” but also listed several concerns. The policy leaves room for financing the most efficient coal plants, if the recipient country has a comprehensive decarbonization plan in place and no currently available alternative. It also allows projects already in the pipeline to proceed while Japanese environmental groups call for an immediate withdrawal from projects in development.
Along with this overarching government policy, individual Japanese public and private banks have also announced coal exits. The governor of the Japan Bank for International Cooperation, the public bank responsible for most of the country’s overseas coal financing, told the Japanese media outlet Diamond Online in April that the bank would accept no further applications for coal power projects.
Meanwhile, lawmakers in South Korea proposed four bills in late July that would prevent government-backed companies and banks from pursuing global coal projects. The bills are still under review in the National Assembly, according to Joojin Kim, managing director of the South Korea-based environmental nonprofit Solutions for Our Climate, but pressure is mounting. He said a record number of legislators questioned the country’s coal finance plans during the annual audit of state affairs in October, and the state-owned utility KEPCO announced it had no plans to pursue development of new coal-fired power plants abroad moving forward.
Until December 1, the biggest outstanding question was whether China — the top coal lender — would also begin to align its overseas energy finance policies with its ambitious domestic carbon-neutrality pledge made in September.
A new study co-authored by the Chinese Ministry of Ecology and Environment and non-governmental experts shows that some officials are starting to think seriously about the climate risks of its overseas projects. The researchers propose categorizing projects as red, yellow, or green based on their potential negative impacts on “climate change mitigation, pollution prevention, and biodiversity protection,” according to the report. The authors placed coal power projects in the high-risk red category due to their carbon footprint and clarified that no mitigation measures can be used to bump these projects into the green category.
“I think it is huge progress that we have a very clear statement from the folks who are trying to green the Belt and Road that there are clearly technologies that don’t fit into that category anymore,” said Han Chen, an energy expert at the NRDC who tracks global coal finance. [Editor’s note: The author worked as a research fellow for the NRDC in Beijing from 2016 to 2017.]
However, the authors do not say that red projects should be fully banned from receiving Chinese investment, but rather that they require “strict supervision and regulation.” They also do not clarify how the traffic-light system might be converted into a binding policy.
Nonetheless, the World Resources Institute’s Shuang Liu, who co-authored the study, also sees it as a significant step toward such a policy. “The report has been endorsed and backed by the environmental ministry, and our understanding is that the environmental ministry is willing to translate the report into policy recommendations, which will be a much more significant policy signal to all the Chinese stakeholders involved in overseas investment,” she said.
With more than 56 gigawatts of coal-fired power plants supported by Chinese public financing under development, how and when the proposal is made concrete could have a significant influence on the future emissions of several developing countries.
What’s driving East Asian finance away from overseas coal projects?
While these policy changes and statements from Japan, South Korea, and China do not yet amount to a ban on new coal financing, they represent an undeniable trend toward winding down future involvement.
What has caused these countries to start coming around on this issue in only a matter of years? Recently, the coal power industry — and its financiers — are starting to feel pressure from all sides.
International and domestic criticism directed at coal projects has certainly played a role. At COP25, the latest round of UN climate negotiations held in 2019 in Madrid, Spain, UN Secretary-General António Guterres called for no new coal plants to be built after 2020. Koizumi, Japan’s environment minister, told the Financial Times that the outcry over Japan’s coal support at COP25 — which included a protest featuring giant inflated Pikachu outfits — spurred the government to take further action on the issue.
Asset managers are also pushing the banks and companies on the issue. Last month, European funds wrote a letter criticizing Korean and Japanese groups for their involvement in the Vung Ang 2 coal power station being built in Vietnam.
Along with international pressure, countries that had been planning major coal power expansion have started to change course, too. According to the International Energy Agency’s 2019 report on energy in Southeast Asia, recent revisions to energy plans in the region have increased the share of renewable energy at the expense of coal due to concerns about pollution and the increasing price competitiveness of renewables. Vietnam had led the way with solar development, and other countries in the region are following suit — including the Philippines, which announced a moratorium on new coal power development in October.
Activists have successfully stopped in their tracks a number of coal projects that had secured financing from East Asian banks, including a 1,050-megawatt project in Lamu, Kenya, and the 600-megawatt Thabametsi plant in South Africa, both of which have been tabled after lengthy environmental lawsuits and advocacy campaigns.
Coal power is still attractive to some governments, particularly those that have domestic coal reserves, such as Pakistan and Indonesia, said Yiting Wang, a senior strategist with the Sunrise Project who focuses on the climate implications of China’s overseas investments.
But, as the IEEFA’s Buckley pointed out, government-subsidized financing has been a critical component of what has made coal power so enticing. “The big issue is that a coal project is not going to win if it doesn’t have a subsidy,” he said.
So, with the exception of a few significant hot spots, it appears the era of new coal power plants may be starting to draw to a close.
“Outside of some of the major countries that are still pursuing coal, like China, India, and Japan, I feel like there is genuine hope that we will probably be seeing some of the last coal power plants that are still being actively pursued by developers,” Wang said.
We’ll have to wait on further details from China, South Korea, and Japan to see whether they’ll hinder or help hasten the transition.