Watershed moment

China's decision to drop coal in overseas investments will accelerate the global transition to green energy

President Xi Jinping made it clear at the United Nations General Assembly on Sept 21 that "China will not build new coal-fired power projects abroad". China's pulling out of overseas coal financing thus cuts off the last big source of money for such projects, a decision that will send shock waves through the global energy community.

Attention will now shift to the rapid deployment of renewable energy solutions. New coal plants are expected to reduce to a trickle. Given the high risk of default and stranded assets, it would take a very bold investor to continue backing new coal plants. And the stranded asset risk isn't limited to coal-basically all new fossil power plants are increasingly exposed.

This means that developed and developing countries alike will now focus on the deployment of renewable energy. The timing is excellent, as so many economies need to boost their post-pandemic recovery. Developing countries need renewable energy to power economic growth, while developed countries need it to replace outdated fossil-fuel capacity. The move opens the way for huge investment in renewables and provides opportunities to address the key challenges: How to balance a grid with a high share of renewables? How to deal with storage? What about countries with very few sources of renewable energy? The net result will hopefully be that many developing countries will leapfrog directly to low-carbon energy systems.

The UN General Assembly is a very suitable forum, and the timing ahead of the 26th UN Climate Change Conference of the Parties (COP 26) in Glasgow, from Oct 31 to Nov 12, is excellent. China wants to make its contributions to global climate action on its own terms, and it considers the United Nations the appropriate forum for making such announcements. Its promise to stop building new coal-fired projects is coupled with a commitment to "step up support for other developing countries in developing green and low-carbon energy".

Actually, China stopped investing in new coal projects overseas at the start of 2021, apparently following instructions from the central government to the State-owned financial institutions. President Xi's announcement at the UN is China's first public confirmation of this new policy. In the Chinese context, this formal commitment before the international community means that the decision is cast in stone, alleviating worries that China might backtrack, or that there could be exceptions to the rule.

Some people have asked if it's still possible for China to finance new coal projects overseas. That's no longer possible. In fact, even other countries are unlikely to finance new coal projects now. Japan may be the only country that has been somewhat ambivalent, but the G7 has hammered Japan on this, and given China's decision to drop coal, it is untenable for Japan to continue.

In theory, it's still possible that new coal plants would be approved within China. But there are not likely to be many. The central government is deploying some of the most powerful tools at its disposal in this regard. And just a few weeks ago it was announced that China's public interest prosecutors, who bring thousands of environmental cases every year, are eyeing climate litigation.

On top of those efforts, I would suggest the option for China should also conduct a Central Environmental Inspection-led review of all heavy emissions projects which have been approved in recent years, both within China and overseas. Projects which haven't yet or have only partly started construction, or which are at great risk of becoming a liability, might still be canceled.

Every coal plant will contribute to increased climate risks, and lead to vested interests in a heavily polluting business model. Dropping them now may be a tough choice, but it would prove to be much more economic than closing them down later.

China is expected to submit its updated Nationally Determined Contribution ahead of COP 26 in Glasgow. Hopefully, it will present a clear road map, coupled with absolute targets for total greenhouse gas emissions.

China's decision to stop building coal-fired plants overseas is a watershed moment which will boost global confidence in the climate transition. New coal power is no longer an option, so all other forms of energy will be in greater demand, accelerating the deployment of renewables like solar and wind power. Investors will think twice about further investments in all fossil fuels.

And the climate agenda continues to be very urgent. To limit temperature rise below 1.5 C above preindustrial levels, we need to reduce global carbon emissions by 45 percent by 2030 compared to 2010 levels, but the world appears to be falling far short of this target, with current NDCs indicating a possible 16 percent rise in emissions by 2030.

China's decision to stop building coal-fired projects overseas will help the world to achieve a green post-COVID economic recovery. Hopefully, it will also boost its domestic coal phase-out, and inspire other countries to further accelerate their climate transition and provide more financial and technical support to climate mitigation and adaptation in the developing world.

With the world's major powers competing for who makes the greenest overseas investments, the dream of true sustainable development may finally be coming within reach.

The author is chief representative of ClientEarth's China office. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.