Less overseas coal is good, but developing countries still need more electricity

President Xi announced last month that China is stopping its financing for new coal-fired power plants overseas. With this announcement from Beijing, the governments of the world’s largest economies have now achieved a consensus to halt their overseas funding of coal plants in developing countries, thereby advancing global efforts to reduce future carbon dioxide (CO2) emissions. Energized by this success on climate, these governments should now turn their efforts to mobilizing the massive financing required to build the clean power projects that the developing world still needs to fight poverty.

Globally, nearly 30% of the energy sector’s CO2 emissions come from coal-fired power plants. Even as various developed countries moved to reduce their own coal use to lower emissions domestically, new coal power plants were being proposed across the developing world, often with financing from China under its massive Belt and Road Initiative.
As China, as well as notably Japan and South Korea, funded coal plants abroad (cumulatively providing 90% of overseas public sector financing), climate specialists raised the alarm that these new plants would threaten global emissions reduction efforts. Given these concerns, the EU, the U.S. (beginning under Biden) and others have been campaigning for governments to end their financing for new overseas coal-fired projects. China’s announcement last month, following on similar ones by South Korea and Japan (as well as the G-7) earlier this year, represents the culmination of a successful international campaign against this financing.

Even though there are other sources of financing for coal power plants (by some estimates, substantially larger than China’s), the decisions by Beijing, Tokyo and Seoul, as well as the parallel international effort among private banks and other financial institutions, will significantly slow new coal power investments in the developing world. For example, it has been estimated that China’s new commitment could impact 44 power projects in Asia and Africa, resulting in a cut of $50 billion in investment. Moreover, the U.S. recently announced that it would oppose any new coal-based projects by multilateral development banks (MDBs), shutting off another source of potential financing.

And yet this success presents its own challenges, at least for poorer countries that were looking to benefit from the additional electricity these coal plants would provide. For example, the International Energy Agency (IEA) foresees that Africa’s electricity generation will need to more than double over the next 20 years under a business-as-usual case, and more than triple under a high development scenario.To achieve this high development scenario, Africa will need to add about 700 gigawatts in new plants, which is nearly three times the continent’s existing installed generating capacity. Similarly, the IEA projects that the countries of the ASEAN region (such as Indonesia and Vietnam) will in the aggregate need to invest $350 billion in the power sector between 2025 and 2030 to further their economic development, a figure that rises to $490 billion under the Agency’s low-carbon scenario.

But will poorer countries be able to mobilize the financing for these electricity investments, especially as overseas financing for new coal plants disappears?

The U.S. and China have both recently announced their intention to increase funding to help developing countries meet the climate challenge, with Biden looking to double the U.S.’s annual contribution to $11.4 billion and Xi coupling his decision to end overseas financing for coal plants with a pledge to step up China’s support for green and low-carbon investments in developing countries. Unfortunately, there are concerns that poorer countries will nevertheless be left wanting, especially as previous pledges to provide them financing have failed to fully materialize, notably the $100 billion per year in climate finance that developed countries committed to mobilize by 2020 to address the needs of developing countries.

To avoid this outcome and enable poorer countries to obtain the additional electricity they need, the successful diplomatic efforts that have gone into eliminating public funding for overseas coal projects need to be matched, and even exceeded, by a drive to boost funding for clean power plants. This should not only involve increasing flows from the large development finance institutions of the U.S., China, the EU, Japan, etc. and from their other overseas investment agencies, but also mobilizing more private sector investment in developing countries, both foreign and domestic.

Non-traditional funders (including private foundations) also have a role to play. In addition, as the U.S. moves to block any coal projects and severely curtail other MDB investments in fossil fuel-based electricity, it and other wealthy nations should increase their shareholder contributions to these banks to increase lending to developing countries for clean electricity.

The rationale supporting these efforts is not only that the U.S., China, the EU, Japan, and South Korea are the world’s largest economies (representing over two thirds of global GDP), but also that they themselves continue to rely on coal plants to power their own economic growth. These coal plants, in turn, are generating large amounts of emissions that are using up the common carbon budget and leaving less room for electricity-related emissions from poorer countries. For example, in 2019, 65% of China’s electricity came from coal-fired power plants that generated 4.9 gigatons in CO2 emissions (GtCO2), while the U.S. emitted 1.0 GtCO2 and the EU 0.5 GtCO2 from these plants. By comparison, all of Africa’s coal-fired power plants produced less than 0.3 GtCO2.

As a result, there are also important equity considerations which justify stronger action by these wealthier countries to support clean power investments in poorer ones. While many also point to the need for wealthier nations to reduce their own domestic coal emissions, the focus of this article is not on how these countries choose to run their national power systems, but rather on what poorer countries need and how wealthier ones can help.

As President Biden has repeatedly remarked, “climate change poses an existential threat to our future.” Ending investment in new overseas coal-fired plants will help to address this danger, for the benefit of both rich and poor. But poverty is also an existential threat, albeit one that does not imperil everyone. Rather it is a life-threatening menace principally aimed at the poor of the developing world. It is also one which wealthier countries can help to counter.

To fight poverty, the developing countries of Africa, Asia and Latin America need a lot more electricity. In the interest of climate, wealthy countries have succeeded in cutting off coal financing to these regions. These wealthy countries now should build off this success by carrying out an even more ambitious poverty alleviation program funding clean power across the developing world.

Philippe Benoit has over 25 years of experience working in international energy affairs, including prior management positions at the World Bank and International Energy Agency. He is currently Managing Director-Energy and Sustainability at Global Infrastructure Advisory Services 2050.