Editorial Note:

In many countries, human activities are highly intensive, whereas ecological environment is relatively weak and hardly adaptable to climate changes. Climate finance is therefore of great urgency to improve climate conditions and develop sustainable economy. In September and October 2013, Chinese President Xi Jinping proposed two economic development strategies – the Silk Road Economic Belt and the 21st Century Maritime Silk Road – that are in line with the economic integration in Eurasia. Since then, China, the largest developing country in the world, has been playing an active role not only in addressing climate change by itself, but also in providing assistance to other Eurasian and BRI countries through climate finance projects. The 2nd Belt and Road (BRI) Forum for International Cooperation was held in Beijing on 25-27 April 2019, at which climate change was listed as one of the key priorities for BRI cooperation.

The Research Center for Climate and Energy Finance (RCCEF) at the CUFE has published reports on China’s climate finance in the past 7 consecutive years. This article summarizes the previous research results of the RCCEF, explains the overall situation of China’s BRI climate finance, and raises corresponding policy suggestions.

Climate features of main BRI countries

The Belt and Road Initiative (BRI) covers a population of over 4.4 billion (accounting for 63% of the world’s population) in 65 countries and regions in Central Asia, West Asia, South Asia, the Middle East, Middle-South Asia, North Africa, East Africa, Central and Eastern Europe, with total GDP amounts to 21 trillion USD (taking up 29% of the world’s economic output).[1]

Fragility of ecological environment

In general, BRI countries have poor environmental carrying capacity, and their ecological environment is greatly affected by climate changes. The central Asian countries are mostly covered by desert with very little green vegetation and few water resources; the coverage of tropical rainforests in Southeast Asia has rapidly reduced because of commercial development and industrialization; many countries in Asia and North Africa also face destruction to the marine ecosystem due to marine pollution from coastal factories. In a word, the ecological environment in BRI countries can no longer bear investments that produce severe pollution and emission.[2]

High climate risks

By analyzing the physical effects and climate security threats of climate changes in BRI countries in Southeast Asia, South Asia, Central Asia, East and North Africa, and Central Europe, the findings can be summarized as follows [3]:

  • Southeast Asia: rising sea levels, shrinking coastal areas, declining food production, aggravated poverty and social instability.
  • South Asia: fresh water shortage, reducing food production, aggravated poverty, frequent occurrence of extreme weather, border conflicts and residential security problems.
  • Central Asia: water shortage, agricultural difficulties, increasing potential climate migration and reduced biodiversity.
  • East and North Africa: reducing food production, escalating violence over resources, and spread of extremism and terrorism.
  • Central Europe: water shortage, frequent occurrence of extreme weather, residential security problems and escalating violence over resources.
Climate threats in regions of the Belt and Road Initiative
Climate threats in regions of the Belt and Road Initiative (Source: IIGF)

Large emission with significant reduction potential

Many BRI countries, especially the Asian ones, have become the fastest growing countries in the world in terms of fossil energy consumption. The overall CO2 emissions in BRI countries (including some world’s largest CO2 emitters such as China, India and Russia) were on the rise from 2015 to 2017, and hit 22.758 billion tons solely in 2017, accounting for 63% of the world’s emission.[4] The production activities in these countries has been bringing significant burdens to local ecological environment, which calls for prompt adjustments of economic development and low-carbon investments. If effective measures are taken in time, reduction in emission is potentially achievable.

China’s climate finance projects in BRI countries

Since the initiative of the BRI, Chinese enterprises have been actively participated in climate finance projects in BRI countries to help them adapt to and mitigate climate change. These projects often consist of large investments in various means from several institutions.

Due to high climate risks, low levels of social and economic development and lagged infrastructure construction in most BRI countries, China’s climate finance investments mainly concentrate on clean energy and clean transportation (as compared to water and waste projects). On the one hand, these investments can address the pressing needs of BRI countries for sustained and stable development and improve the overall living standards. On the other, infrastructure construction brings enormous environmental benefits. For example, Nirum-Jelum, the largest hydropower station project in Pakistan invested and constructed by China, generates about 5.15 billion kWh of green-house gas emission free electricity per year (12% of Pakistan’s hydropower capacity).[5]

By the end of October 2018, China has invested in 20 clean transportation project and 31 clean energy projects in BRI countries (see Table 1). These projects, located in Southeast Asia, South Asia, West Asia, Central Asia, Europe and Africa, can not only meet the needs of local residents and improve the overall living standard, but also often improve the local climate conditions (e.g. through electrification of rail, provision of public transport).

Table 1. China’s climate finance projects in BRI countries [6]

No. Sector Country Project
1 Railway Laos China-Laos Railway
2 Railway Kenya Mombasa-Nairobi Railway
3 Railway Belarus Railway Electrification
4 Railway Russia Moscow-Kazan High-speed Railway
5 Railway Myanmar Muse-Mandalay Railway
6 Railway Myanmar China-Myanmar International Railway
7 Railway Bangladesh Dhaka- Chittagong High-Speed Railway
8 Railway Thailand China-Thailand Railway
9 Railway Thailand Monorail Mass Rapid Transit (Pink Line and Yellow Line)
10 Railway Hungary, Serbia Hungary-Serbia Railway
11 Railway Indonesia Jakarta-Bandung High-Speed Railway
12 Railway Ethiopia, Djibouti Addis Ababa-Djibouti Railway
13 Railway Pakistan Lahore Rail Transit (Orange Line)
14 Railway Saudi Arabia Mecca-Medina High-Speed Railway
15 Urban railway Israel Tel Aviv Light Rail (Red Line)
16 Urban railway Georgia Modern Railway
17 Urban railway Egypt Light Rail Transit (connecting Cairo with distant districts of Greater Cairo including Al-Salam City, Ramadan 10 City, Obour City, Badr City and Shorouk City)
18 Urban railway Bangladesh Dhaka Urban Railway System
19 Urban railway India Mumbai Metro Rail – Line 1
20 Waterway Bangladesh Padma Bridge
21 Wind turbine Ethiopia Adama Wind Power Project
22 Wind turbine Malta Mozura Wind Power Plant
23 Wind turbine Pakistan Jhimpir Wind Power Project
24 Solar photovoltaic Pakistan 900-Megawatt Solar Photovoltaic Power Plant In Punjab Province
25 Solar photovoltaic Pakistan 100-Megawatt Solar Photovoltaic Power Plant
26 Solar photovoltaic Algeria   233-Megawatt Solar Photovoltaic Power Station
27 Solar photovoltaic Eritrea Solar Photovoltaic Project in Eritrea
28 Solar photovoltaic Hungary GreenSolar Photovoltaic Power Station
29 Solar photovoltaic Argentina Gaocharay Photovoltaic Power Station
30 Solar photovoltaic Ukraine None
31 Solar thermal and solar photovoltaic Morocco Noor Ouarzazate Complex

Main participating institutions in BRI climate finance

According to an estimate, the annual shortage of infrastructure investment in the BRI region exceeds 600 billion USD.[7] If the infrastructure is built with climate resilience at the initial stage, the project will generate enormous and sustainable environmental benefits. Main institutions involved in the BRI include Chinese banks and international financial institutions initiated by China.

Chinese banks in BRI climate finance projects

1. China Development Bank (CDB)

In 2017, the CDB completed 22 major BRI international projects and extended 17.6 billion USD in new loans to BRI countries. Its investment fields cover infrastructure connectivity, cooperation in production capacity and equipment manufacturing, financial cooperation and construction of overseas industrial parks in BRI countries. The CDB has also realized the RMB special loan credit commitment of RMB 99.1 billion, initiated the establishment of the China-CEEC (Central and Eastern European Countries) Unionpay system, and promoted multilateral and bilateral financial cooperation with the Unionpay systems of the Shanghai Cooperation Organisation (SCO) and the China-ASEAN (Association of Southeast Asian Nations) and the New Development Bank.[8]

CDB climate investment (Source: IIGF)

2. China Exim Bank

The Karot Hydropower Station Project invested by the China Exim Bank in Pakistan was officially launched in 2016 and is predicted to be put into operation in 2020. This project has a planned installed capacity of 720,000 KW with a total investment of about 1.65 billion USD. Upon completion, the station will provide about 3.2 billion kWh of GHG-emission-free energy per year, effectively alleviating power shortages in the country.

On 22 December 2017, the China Exim Bank launched its first issuance of green bonds with a term of 3 years, an amount of RMB 2 billion and an issuing interest rate of 4.68%. Several banks, including the Singapore branch of the Bank of China and other investment institutions in Hong Kong and Europe actively participated in the issuance and subscription. The subscribed amount amounted to RMB 520 million, and the final allotment hit RMB 260 million. The funds raised were invested in clean energy and environmental improvement projects in BRI countries and are assessed to bring positive environmental benefits in reducing CO2, SO2 and oxynitride emission.[10]

China Exim Bank climate investment (Source: IIGF)

3. Bank of China

The Bank of China has branches in 23 BRI countries, making it the Chinese bank which has the largest amount of branches in BRI countries. It had followed up over 500 major BRI projects by the end of 2017, and provided about 100 billion USD of credit support to BRI countries between 2015 and 2017. The fund raised by the Hungarian government with the assistance of the Bank of China was invested in the first BRI sovereign panda bond.

Bank of China climate investment (Source: IIGF)

4. Industrial and Commercial Bank of China (ICBC)

The first BRI climate bond issued by the Luxembourg branch of ICBC valued 2.15 billion USD and was oversubscribed by international investors. The bond was issued in three tranches in USD and EUR. The proceeds were be invested in renewable energy, low-carbon and low-carbon transport. By the end of 2017, ICBC has supported 358 BRI projects, with a total loan commitment of 94.5 billion USD. In 2017, 123 new loan projects were undertaken, with a loan commitment of 33.9 billion USD. To date, ICBC has established 129 branches in 20 BRI countries and regions.[12]

ICBC climate investment (Source: IIGF)

Financial institutions in BRI climate finance projects

The Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund are two major funding institutions for BRI projects with two distinct investment methods. The former focuses on debt investment and mainly participates in projects by issuing loans, whereas the latter is inclined to direct equity financing with long investment terms. They can also raise more funds for BRI countries by collaborating for more fund-raising means.[13] At the same time, the capital of AIIB is mainly contribution from the governments of various countries, which represents government behaviors, while the Silk Road Fund mainly generates private capital and inject them into BRI projects.

1. AIIB

The AIIB is the first multilateral financial institution initiated by China with a focus on supporting infrastructure construction. As of December 2018, the AIIB had had 87 member states or candidate member states, among which there had been 44 Asian member states and 24 non-Asian member states that had contributed capital.[14]

The AIIB is an important source of funding for BRI projects. As of December 2018, there had been 31 approved projects listed on the official website of AIIB, involving amount of 6.295 billion USD. Among them include 19 climate-related investment projects, accounting for more than 60% of the total projects, with financing amount of 4.411 billion, taking up more than 70% of the total amount. These climate-related projects covers renewable energy, green transportation, urban waste disposal, sewage treatment, etc.[15]

In 2018, the AIIB participated in eight new investment projects in BRI countries.  The special one was the India’s National Investment and Infrastructure Fund project, which attracted private capital from institutional investors by investing in FoF, to alleviate the equity financing gap in India’s Infrastructure sector. The remaining seven projects were all related to climate mitigation and adaptation, where three were for clean energy, two were for water resource and two were for clean traffic class.

Concerning the countries where the eight new projects are located, three went to India with a total investment of 695 million USD, and two were in Turkey with a total investment of 800 million USD. The remaining three were located in Egypt, Indonesia and Bangladesh, with investments of 300 million, 250 million and 60 million USD respectively.

Overview of Asian Infrastructure and Investment Bank (AIIB) projects (Source: IIGF)

2. Silk Road Fund

Established in Beijing on 29 December 2014, the Silk Road Fund focuses on promoting cooperation within BRI countries on infrastructure, resource development, production capacity and finance. It mainly provides financing services in the form of equity investment in various methods, such as debt, fund and loan.

The Silk Road Fund has a capital scale of 40 billion USD and 100 billion RMB, among which the capital contributions by foreign exchange reserves (through Phoenix Tree Capital Co., Ltd.), China Investment Corporation (through Seres Investment Co., LTD.), the China Exim Bank, the China Development Bank (through China Development Bank Capital Co., Ltd.) take up 65%, 15%, 15% and 5% respectively.[16]

So far, the Silk Road Fund has been actively participating in BRI projects in a wide range of areas and of various types, including infrastructure, resource development, production capacity cooperation and financial cooperation. At present, more than 100 BRI projects are in track or reservation, covering key countries and regions such as Russia, Mongolia, Central Asia, Southeast Asia, South Asia, West Asia, North Africa, and Central and Eastern Europe.[17] A majority of the projects are related to clean energy, including hydropower, natural gas, clean coal power generation and photovoltaic power generation. By the end of March 2018, more than 70 percent of the investment of the Fund was equity investment.

For projects requiring a large amount of capital, the Fund also issues loans while subscribing for shares, and adopts an innovative mode of “equity + debt” investment to achieve a win-win situation between enterprises and the Fund. This means that, on the one hand, equity investment reduces the asset-liability ratio of the project, making it easier to obtain financial support, and, on the other hand, debt investment relatively ensures secure and stable income for the Fund, and reduces the risks of sole equity investments. Examples of such an investment mode are the Karot Hydropower Project in Pakistan, the Yamal LNG Integration Project in Russia and the Hassyan Clean Coal Power Station Project in Dubai.

In the process of project construction, the Fund also pays close attention to the environmental protection of the receiving countries, minimizes negative impact on the local ecosystem and biology, adopts the most advanced and strictest production technology standards in combination with the local CO2 emission standards, and takes corresponding protection measures.

Share holding of silk road fund (Source: IIGF)

Policy suggestions on China’s BRI climate finance

Continuing promoting infrastructure development against climate changes

Backward infrastructure construction and low levels of social and economic development are the common problems faced by BRI countries. Therefore, investments in infrastructure construction that is conducive to climate changes can not only lay a foundation for the economic development of these countries and solve their urgent needs, but also contribute to the protection of their ecological environment. Green and low-carbon construction can be achieved through attaching services and supports on protecting water, atmosphere, soil and biological diversity to infrastructure projects, as well as promoting clean transportation, clean energy and green building projects (e.g. railway, urban railway, urban and rural road).

Raising investments in clean energy

BRI countries possess enormous renewable energy potentials, including wind, solar, water and tidal energy, and therefore, leave huge rooms for development. For example, many countries in Central Asia and West Asia have long sunshine time, high light intensity and rich potential for solar energy development, as well as vast areas and abundant wind energy for wind turbine. Many countries in Southeast Asia and South Asia have water resources, such as waterfalls and rivers, for hydropower generation. By increasing investments in clean energy and giving full play to the energy advantages of BRI countries, the energy shortages of these countries can be largely alleviated while being environmentally friendly.

Creating new financing modes

At present, China’s investment projects in BRI countries are mainly on clean transportation infrastructure and clean energy, which normally have long construction and investment cycles. It is difficult to obtain investment returns in a short time when adopting the traditional equity financing. Therefore, it should be an effective measure to attract more investments by exploring new financing modes and maximizing the combination of long-term and short-term returns on the premise of controlling investment risks. For example, the innovative “equity + debt” financing mode of the Silk Road Fund, where share subscription and issuance of loans take place at the same time, balances the risks and returns of the investment as well as long-term and short-term returns.

Establishing a statistical system for BRI climate finance

So far, China has carried out many climate financing projects in BRI countries, which not only equip these countries with capacity to cope with climate changes but also help mitigate energy shortages and transportation inconvenience. To provide data support for international climate change negotiations and facilitate more targeted BRI climate finance, China should establish a statistical system recording these projects with concrete statistics and special management. By doing so, the projects with significant climate effects can be publicized, indirectly setting a positive example for other countries.

Strengthening international climate cooperation through existing platforms

China should promote international climate cooperation through existing platforms (e.g. the SCO, the Forum on China-Africa Cooperation and the Lancang-Mekong Cooperation Mechanism) and provide supportive services for relevant projects. By giving full play to the existing bilateral and multilateral international cooperation mechanisms on environmental protection, a climate cooperation network can be built in certain regions to facilitate related countries in climate governance. In addition, for the proposed international climate governance system, China should take the lead in exploring comparative advantages of all parties by building a cooperation platform involving governments, think tanks, enterprises, social organizations and the public.

References

[1] Ding Junfa, Getting Through the “Five Streams” to Promote the BRI [J], China Storage and Transport, 2016(10):46-46.

[2] Yang Zhen, Shen Enwei. Discussion on Accelerating Green Investment in BRI Countries [J], Economic Relations and Trade, 2016(9): 21-24.

[3] Wang Zhifang, Climate Risks Faced by China along the Belt and the Road [J]. The Journal of International Studies, 2015, Vol.36(4): 56-72.

[4] Summarized based on media (e.g. Xinhua Silk Road); statistics of CO2 emission:Global Carbon Atlas,http://www.globalcarbonatlas.org/en/CO2-emissions

[5] Source:https://www.yidaiyilu.gov.cn/xwzx/hwxw/52755.htm

[6] Source: https://www.yidaiyilu.gov.cn/info/iList.jsp?cat_id=10005; https://www.aiib.org/en/index.html.

[7]Source:https://baijiahao.baidu.com/s?id=1597522887730681238&wfr=spider&for=pc

[8] National Development Bank, Annual Report (2017).

[9] National Development Bank, Report on Sustainable Development (2017).

[10] China Exim Bank: http://www.eximbank.gov.cn/tm/Newlist/index_343_30615.html

[11] Bank of China, Annual Report (2017).

[12] Industrial and Commercial Bank of China,Annual Report 2017.

[13] Source:http://opinion.hexun.com/2017-05-20/189268794.html

[14] Source:https://www.aiib.org/en/about-aiib/governance/members-of-bank/index.html

[15] Source:https://www.aiib.org/en/projects/approved/index.html

[16] Source: http://www.silkroadfund.com.cn/cnweb/19854/19858/index.html

[17] Source:http://www.financialnews.com.cn/zgjrj/201704/t20170428_116703.html

About the author(s)

Research Associate at International Institute of Green Finance

Ruichen Hong is a research assistant at the International Institute of Green Finance (IIGF). He received a Master of Accounting from the University of Glasgow,  UK, and is in the process of receiving the certification by the Association of Chartered Certified Accountants (ACCA) . He is a main author of the 2018 China Climate Financing Report and Establishing China’s Green Financial System: Progress Report 2018. His research areas are climate finance, carbon finance, environment accounting and carbon accounting.

Director Climate and Carbon Finance at International Institute of Green Finance

Ying Cui is a Senior Research Fellow of the RCCEF (Research Center for Climate and Energy Finance) and is in charge of the Climate Finance Department and Carbon Finance Lab at the International Institute of Green Finance (IIGF).

She holds a master degree in environmental engineering from Queen's University Belfast, UK. Her major research areas are Carbon Markets and Climate Finance. She has more than 13 years of working experience in the field of climate change. Before joining IIGF, she was the Technical Director of EDF Trading China, conducting the development and management of more than 100 energy saving and emission reduction projects. She also developed the CDM methodology for waste incineration and successfully registered the 1st coal mine methane utilization CDM project and the 1st LNG power generation CDM project with the UNFCCC. She is the author of China ETS Development Report, China Environmental Rights Market Report and since 2016, she compiles the annual China Climate Financing Report.

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