Written by Alley Zhu
The Belt and Road Initiative (BRI) is China’s main international cooperation and economic strategy in the 21st century.
Over the past few years, the concept of BRI 2.0 has emerged with an emphasis on “green” and “sustainable” development. A green and sustainable development of the BRI was also at the center of the discussion during the 2019 Belt and Road Forum, in which Christine Lagarde, IMF Managing Director, announced that:
Over the years, environmental protection has always been a point of debate when people discuss projects under the Belt and Road Initiative.
Does China have what it takes to fulfill a green Belt and Road Initiative?
What are the policy implications of President Xi’s carbon pledge?
What’s the connection between the recently unveiled 14th Five-Year Plan and the Green Belt and Road initiative?
A new phase of national development
China has entered into a new phase of development in which innovation and technological advancement, social welfare and security, ecological civilization, structural changes have become the focal points.
From a domestic policy standpoint, the newly announced 14th Five-Year Plan (2021-2025) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035 (hereafter the Vision 2035) departs from the emphasis on economic growth target to put more focus on sustainability and structural change.
The Five-Year Plan stresses that the nation will make new strides in building an ecological civilization. In Vision 2035, a green and low-carbon development is pointed out as indispensable to establish an ecological civilization ( a term that describes the final goal of social and environmental reform within a given society based on ecological principles), which is aligned with the policy goal of achieving carbon neutrality by 2060.
On the global stage, China has also shown its strong commitment to climate action in line with the Paris agreement.
At the Climate Ambition Summit in December 2020, President Xi announced some further commitments for 2030: China will lower its carbon dioxide emissions per unit of GDP by over 65 percent from the 2005 level, increase the share of non-fossil fuels in primary energy consumption to around 25 percent, increase the forest stock volume by 6 billion cubic meters from the 2005 level, and bring its total installed capacity of wind and solar power to over 1.2 billion kilowatts.
To this end, it is expected that by the end of the 14th Five-Year Plan (2025), coal shall account for less than 50% of the primary energy consumption. Non-fossil primary energy consumption shall reach 20% of the primary energy consumption.
This suggests that the transformation of the energy sector will further be accelerated as new investment in fossil fuels is simply going to be stranded and less likely to generate profit in a couple of years. And the demand for investment in renewables will continue to rise especially when there has been almost a price parity for renewables due to continuous capital and technological inputs over the past few years.
While details on carbon emission reduction targets and sector-wise roadmap of emission cuts have yet to be finalized and released, in-depth research by Tsinghua University’s Institute for Climate Change and Sustainable Development (ICCSD) indicated a possible roadmap under both 1.5 C and 2.0 C scenario. And it is suggested that rapid implementation of absolute cuts is unfeasible. Hence, the main focus before 2030, is on bringing about a carbon peak by structural changes especially in the power and energy sectors, transport and industrial process with negative-emission technologies, and carbon capture and sequestration technologies playing a key role in resolving excessive capacity.
In additions, although there has not been a clear national target of “total CO2 reduction”, it is suggested that this might allow for bottom-up approaches by which key provinces and sectors are encouraged to come up with their CO2 reduction targets based on local industrial structure, carbon reduction potentials, resource endowments, and development stage, etc.,
In short, from a policy standpoint, the key focus on China’s future carbon reduction trajectory from 2021 to 2025 will be on CO2 intensity as well as energy intensity under the overarching principles of ecological civilization achieved by green, sustainable, and high-quality development.
In terms of the implications for BRI projects, the strong policy signals mentioned above imply that China will firmly accelerate its low-carbon transformation both internationally and domestically, which presents greater policy incentives for a green belt and road initiative.
Green Finance and Investment
For policy efforts to be translated and implemented on the ground, growing attention has been directed to the sector of green finance in China.
Indeed, the claim that China remains a towering presence in coal markets in BRI is justifiable as China accounts for a quarter of coal plants under development in other countries with a total investment of $43 billion in coal. However, it worth noticing that in 2015, China was already the world’s largest investor in renewables-based generation accounting for one-third of the global total amount according to World-Energy Outlook 2017.
The trend of increasing green investment in the energy sector has already been discerned since 2017 when renewables (solar and hydro) account for only roughly 35% of the total BRI energy investment. And in 2020, 56% of the BRI investments went into renewables. For the very first time, the renewable energy investment made up the majority of BRI investment, according to the 2020 annual report of the Green Belt and Road Initiative Center.
Therefore, a narrow focus on the volume of BRI investment on coals might deflect the discussion away from the composition and transition of the BRI investment profile.
From a holistic and long-term view of looking into the BRI’s energy investment profile, it is not hard to see the transition of Chinese energy investment shifting from non-renewables (coal, oil) to renewables (hydro, solar, wind). Let alone that it has always been the case for most of the international development aids to invest in coal-fired power plants until very recently. And in fact, from 2016 to 2019, China’s two policy banks have cut back lending to carbon-intensive energy projects involving oil, gas, and coal by 85%.
BRI Investment Is Set to Become Greener
Firstly, with more focus on Foreign Direct Investment and its impact on the local environment, there has been a great number of international frameworks and regulations cover the issues of transboundary environmental pollution, including Basel Convention, UN Biodiversity Conservation Conventions (UN-CBD), United Nation Framework Convention of Climate Change (UNFCCC), Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES)
Secondly, increasing environmental governance, local community awareness, and engagement in sustainable development have been seen in the host countries of BRI. The Charter of the Association of Southeast Asian Nations promotes sustainable development to ensure the protection of the region’s environment, the sustainability of its natural resources, the preservation of its cultural heritage, and the high living quality of its peoples.
A few countries in South East Asia along the BRI have incorporated and institutionalized a series of ambitious goals and objectives of sustainable development into the vision of national development. Besides, the local community and NGOs in South East Asia have been active in issues of environmental protection. As a result, we have seen the Philippines Government proposing a moratorium on new coal power plants in 2020 and the Pakistan Prime Minister spoke at the Climate Ambition Summit 2020 that the country would not build coal-fired power plants in an effort to mitigate climate change.
The factors mentioned above all together demand green BRI investments in the countries of BRI.
At the same time, there are a few internal motivations within China to promote green BRI investments.
Firstly, China has emerged as a key producer in clean energy technologies in terms of the world’s solar photovoltaics, wind turbine, hydrogen, etc., which means that China has the sound technology capacity to transfer its technologies to countries along the BRI that are in need.
Secondly, the idea that fossil fuel investment is associated with massive financial risk has been well-understood and will further be strengthened by many Chinese investors in light of the national carbon neutrality goal and the 14th Five-Year Plan.
In fact, in response to the global demand for green finance and investment, the Green Investment Principle (GIP) was published as a remarkable manifestation of green finance and investment in BRI. With 7 core principles for greening investment in BRI, GIP aims to incorporate sustainability and ESG factors in corporate strategy, innovation, implementation, and management. GIP signatories are expected to report regularly on their performance to the GIP Secretariat. By 2020, the membership of GIP has had 37 signatories, 23 of which have submitted data evaluated and published in the latest performance report under the four-reporting theme: Governance and Strategy, Risk Management and Assessment, Investment and Corporate Footprint, and Disclosure and Engagement.
An example of a green investment project in BRI countries is the Mozura Wind Power Station built by Maltese state-owned utility Enemalta and China’s Shanghai Electric Power Company. With 23 smart wind turbines that are able to regulate the flow of electricity and generate power at lower wind speeds, the station is estimated to produce 112 GWh of clean electricity annually.
As the second-largest wind farm in Montenegro, the Mozura Wind Power Station with its 46 MW installed capacity is estimated to account for 5% of the national electricity generation, meeting the needs of 10 thousand local residents from the cities of Bar and Ulcinj after it was put into trial operation in April 2020.
Before the project, around 32% of Montenegro’s electricity consumptions are imported with occasional power rationing and blackouts experienced locally by the citizens of Bar and Ulcili.
The Minister of Economy Ms. Dragica Sekulić said
“the Mozura Wind Power Station provides a guarantee for stable power supply and tangible benefits in the coastal areas of Montenegro.”
What is next for a green BRI moving forward
Moving ahead, it is very clear that the realization of a green Belt and Road Initiative should start with stop financing coal-fired power plants in all of the 130 BRI countries.
On that note, financial institutions should stop underwriting projects of coal-fired power plants. And there should be a stronger push for a green finance system in both financial institutions, insurance companies as well as state owned enterprises and private enterprises in the BRI with clear finance performance evaluation system and guidelines that align the existing standards on green credit, green industry, and green bonds. For this to happen, further institutional arrangements and guidance from the government after the 14th Five-Year Plan are required.
On the possibilities of greening the BRI, IIGF Green BRI Center Director Christoph Nedopil highlighted the need to invest not only in renewable electricity generation but equally into electricity grids to balance wind, solar and other forms of renewable energy.
For a more balanced perspective, it should be noted that an investor risk approach (raising the investment risks of fossil fuel assets) on its own is not sufficient to prevent carbon-intensive investment in BRI countries as noted by the researcher from Tsinghua University that many cross-border, carbon-intensive assets will still sit on the public balance sheets because those assets might be de-risked by development banks and financial institutions in China and also in the receiving countries.
Despite all challenges, China has showed its firm determinations and capacity to achieve green development both nationally and internationally, which is in alignment with the national advocacy for a green Belt and Road Initiative.
Eventually, a green Belt and Road Initiative should be achieved in conjunction with joint efforts and collective interests in resolving global issues such as climate change and therefore actions will need to come from all sides, including the BRI countries and other global investors and institutions.