A Greener Belt and Road Initiative? China’s Commitment to Sustainability

In March 2022, China released a set of opinions to push green infrastructure development in its Belt and Road Initiative (BRI), a trillion-dollar strategy to fund infrastructure projects across 100 countries. Under its “Opinions on Jointly Promoting Green Development of the Belt and Road,” China pledged to develop green capabilities of overseas enterprises and encourage domestic renewable energy companies to go global.

The “Opinions” are ambitious. They establish time-bound targets and demand clear progress “towards a green BRI by 2025.” The projects for green development range across green infrastructure, energy, transportation, industry, and trade. The “Opinions” could encourage drastic investment into greening the BRI. However, parts of the “Opinions” are vague and need clarification to be fully effective.

Why now?

Although the BRI was established in 2013, China published the “Opinions” now to address emerging market and developing economies’s (EMDEs) urgent need for BRI targets. These opinions increase pressure on EMDEs, countries that have lower levels of income than developed economies, to quickly decarbonize and to transform to renewable energy. Under the International Energy Agency’s Net-Zero Emissions scenario, EMDEs will require annual investments of $157 billion in solar power, $243 billion in wind power, and $133 billion in electric vehicles (EVs) during 2026–2030. Due to the Russia-Ukraine conflict, EMDEs have less access to renewable energy, which EU countries are purchasing at higher prices.

Greening the BRI aligns with China’s strategy of driving sustainability. In September 2020, China announced its goals to achieve peak carbon emissions by 2030 and carbon neutrality by 2060. It serves China’s national strategy to reduce emissions along the BRI, which creates large emissions by funding roads, ports, and transport infrastructure, and helps China respond to criticisms. The World Wildlife Fund and HSBC, for instance, warned that BRI could impact many critical biodiversity spots and endanger 265 threatened species.

China has also developed capabilities to meet the increasing demands for green energy. As the world’s largest manufacturer of solar panels, wind turbines, batteries and EVs, China is well-positioned to bring low-carbon technologies to EMDEs. China’s domestic market has already scaled up several low-carbon technologies that could help advance the green development of the BRI.

How effective are the “Opinions”?

The “Opinions” emphasize green finance, technology, and standards as key pillars to greening the BRI. They are the backbones of infrastructure projects and are evolving quickly.

Building low-carbon infrastructures entails high upfront investment costs, incurring high risks for investors. The “Opinions” seek to mitigate such risks. For example, Article 18 asks financial institutions to assess projects’ environmental impact before investing and to adopt the Green Investment Principles (GIP) , an international initiative requiring signatories to establish green investment goals.

The “Opinions” also call upon financial entities to issue more green bonds, a financial instrument used to fund environmentally friendly projects. Green bonds are also a win-win solution. For issuers, banks can’t fund all projects on their own, so they need bonds to mobilize private capital for green BRI projects. For institutional investors, green bonds issued by the Chinese government are low risk since the Chinese banks are stringently supervised.

China is advancing quickly in green finance. During the first half of 2021, the China Development Bank issued $3.1 billion of green bonds and became the world’s seventh largest issuer. However, few of the bonds adhere to international standards, and Global Environmental, Social, and Governance (ESG) investors question the legitimacy of the Chinese standards and fear their inability to detect greenwashing claims. China recognizes this challenge in the “Opinions” by calling for the alignment of standards and taxonomies. It also proposes to publish more industry regulations and guidelines in line with international standards to mitigate risks for investors.

Technology is another success determinator of green infrastructure projects in BRI. As the cost of green technologies falls, BRI projects yield increasing economic and environmental benefits. Many low-carbon technologies–from solar and wind power to battery storage and EVs–have become technologically feasible and commercially viable. To further encourage innovative development of sustainable technology, the “Opinions” support the building of environmental technology demonstration and promotion bases, as well as green science and technology parks.

While the “Opinions” are comprehensive in outlining next steps, their language remains ambiguous. Article 14, for example, states China will “cautiously implement existing coal power projects.” What counts as existing projects, however, remains unclear. Projects under construction will survive, but projects that are being planned may pass as well. The word “cautiously” also doesn’t specify what the Chinese government will do; it may haul or allow projects that encounter difficulties.
Such ambiguity in language can fail an ambitious plan. In September 2021, Chinese President Xi pledged to stop building new coal plants overseas. The pledge led to the immediate cancellation of several overseas projects, but since the pledge didn’t specify the definition of “new”, it enabled dozens of developers to build plants. Developers could push through projects that are on the verge of construction or are located inside industrial parks. Five months after Xi’s pledge, for example, a Chinese company signed a contract to build a new coal plant at an Indonesian industrial park.

Going forward, China needs to be closely watched

Despite being hammered by the Chinese pledge, the coal industry remains lucrative. The research organization Just Finance reported that Chinese state-owned companies racked up nearly $19 billion in new coal power contracts abroad in 2021. The coal industry landscape will create enough incentives for Chinese firms to exploit policy loopholes.

Therefore, China’s move on greening the BRI should be closely watched. EMDEs will benefit if the “Opinions” are implemented successfully. If implemented poorly, the BRI could lock countries in debt traps and cause financial losses. According to the World Economic Forum, today’s infrastructure investment decisions will lock in the emissions trajectories of emerging and developing economies for decades.

As EMDEs face an urgent need to improve sustainability, large-scale progress in green investment, technologies, and standards are essential. The ambitious “Opinions” address these areas, but despite being issued by four ministries –a solid endorsement by the central government — the “Opinions” have no legally binding power and cannot be enforced in court. Thus, to motivate private parties, which are key in greening the BRI, China needs to specify pathways to reduce environmental risks and formulate green development guidelines for its overseas investment projects.

Further clarification of the policy is required to ensure good implementation, rather than violations such as those in China’s previous coal pledge. With clarification, Chinese banks are often quick to follow. The Exim Bank, a major state-owned financial institution of China, issued $425 million in green bonds for clean energy investment a few months after the government published green guidelines for financial institutions. Now that Xi has secured his third term and pledged support for the country’s green development in the 20th Communist Party Congress, the BRI will become his flagship project as he is likely to follow through on his green pledge. Hopefully it comes with more implementation plans soon.

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