China’s Belt and Road is conduit for polluting investments

China’s Belt and Road is spreading polluting investments around the world 
By Kelly Sims Gallagher

China’s Belt and Road Initiative (BRI) is the biggest vehicle for foreign direct investment in the world, but it is presently locking in outdated, dirty, and inefficient technologies in recipient countries rather than preparing them for sustainable prosperity in a carbon-constrained world.
 China must overhaul its social and environmental policies governing overseas investments to make them consistent with its domestic policies.
As China seeks to reduce its overseas investment risks, it should be conscious that social instability caused by air pollution and climate damage rank among the biggest risks of all.
 According to official Chinese government sources, the BRI is motivated by a desire to “promote an orderly and free flow of economic factors, highly efficient allocation of resources, and deep integration of markets by enhancing the connectivity of the Asian, European, and African continents and their adjacent seas”.
 China’s overseas investment flows hit a record $183bn in 2016, second only to the US and representing a 44 per cent increase over the previous year, according to Unctad.
In terms of overall stocks of foreign direct investment, China is also second only to the US with $4.7tn compared with the US investment of $6.4tn.
In terms of FDI stock, China is the largest investor in least-developed countries, the top investor in developing Asia, the third-largest investor in Russia, eastern Europe, and Central Asia, and the fourth-largest investor in Africa.
 For energy-specific projects, Chinese-led policy banks lent $160bn in overseas finance for the energy sector since 2000, nearly equalling total energy finance from the World Bank and regional development banks during the same period.
Some 80 per cent of China’s overseas energy investments are in fossil fuels compared with only 3 per cent in solar and wind and 17 per cent in hydro.
Although there are undoubtedly economic and development benefits created for Chinese investors and host countries deriving from China’s substantial FDI, there is growing controversy over the significant social and environmental impacts of China’s overseas investments.
 While local communities have protested the localised environmental effects of certain investment projects, broader concerns about the greenhouse gas emissions resulting from new long-lived infrastructure projects that could last 50-75 years for a new power plant, for example, are also emerging.
In addition, concerns have emerged about debt sustainability as well as geopolitical and national security issues.
 China’s policy banks, specifically the China Development Bank and China ExIm Bank, and state-owned commercial banks like the Industrial and Commercial Bank of China still actively lend for coal-fired power plants. 
 While China’s policy or state-owned commercial banks have never formally limited their investments in coal-fired power plants, the Chinese government did state that “China will strengthen green and low-carbon policies and regulations with a view to strictly controlling public investment flowing into projects with high pollution and carbon emissions both domestically and internationally” in the context of a 2015 US-China Joint Statement on Climate Change at the Presidential level.
 Of course, recipient countries could limit new coal power plant construction through their own domestic energy, air quality, water, and climate policies.
In 2016, colleagues and I determined that between 2001 and 2016, Chinese financial institutions supported the construction of more than 50 coal-fired power plants abroad that were either under construction or operational. 
 A majority of these power plants, or 58 per cent, used sub-critical coal technology, which is the most energy inefficient form of coal-fired power plant and, therefore, the type that is most carbon intensive. 
We then estimated that on an annual basis, this fleet of more than 50 coal-fired power plants would release nearly 600m metric tons of carbon dioxide per year, which is equivalent to 11 per cent of total US emissions in 2015. 
 While the governance system for overseas investments has matured, the policies governing the environmental dimensions of China’s FDI are relatively weak and mostly voluntary in nature.
 The policies governing China’s overseas investments remain inconsistent with the policies that govern domestic investments.
Chinese companies and investors are solely required to adhere to the environmental policies and preferences of the recipient country governments, and even then, there do not appear to be serious enforcement consequences for companies or banks that fail to do so.
 Policies specifically aimed at limiting emissions of climate-altering greenhouse gases from China’s FDI do not exist.
 Many observers have suspected that one purpose of the BRI is to provide a pressure relief valve for China’s legacy industries. 
On the other hand, the Chinese government’s go-out strategy and industrial policies in support of strategic industries could result in a considerable amount of new “green” investment overseas given many of China’s strategic industries are, in fact, green industries.
 The relatively recent solar investments in Pakistan are a good example of the alignment between strategic industry promotion and the provision of green finance.
It is important to remember, however, that the predominance of China’s global energy investments between 2000 and 2016 were in fossil fuels — $54.6bn in oil, $43.5bn in coal, $18.8bn in natural gas — compared with $2.4bn in solar, $1.7bn in wind, and $24.9bn in hydropower.
 Domestically, the Chinese government is making a tremendous effort to promote and unlock green finance, and there are undoubtedly spillovers from the domestic provision of green finance to BRI countries.
The remarkable growth of China’s green bond market, for example, provides evidence that there is a strong appetite for green growth inside China.
International investors also appear eager to invest in green financial instruments within China.
The question now is how to apply these same instruments to outbound investments, especially within the BRI.
The first place for the Chinese government to start is to overhaul the policies governing those overseas investments.