How China, Japan and the US Have Been Financing Carbon Lock-in in Developing Countries

Photo via Shutterstock.

By Xu Chen

International finance of low carbon technologies is a major driver for the global transition towards a net-zero emissions energy system. As more and more countries work towards national decarbonization targets and align domestic finance with their targets, it is imperative that cross-border finance is also aligned with the Paris Agreement.

A new Applied Energy study by our team of authors at Princeton University and the Boston University Global Development Policy Center finds that since 2000, bilateral finance from the world’s three largest economies, the United States, China and Japan, has mostly been devoted to fossil fuel power technologies. Bilateral finance from these three economies has greatly facilitated power generation capacity growth beyond their borders; however, this finance is not well aligned with global decarbonization goals. In addition, to date, policy restrictions regarding bilateral finance of fossil fuel technologies remain limited.

In the study, we analyze the influence of bilateral finance from China, Japan and the US on overseas power generation development between 2000 and 2018 through public financing committed by their national development finance institutions and private financing via foreign direct investment. We find that financing commitments from China, Japan and the US facilitated 101 GW, 95 GW and 47 GW power capacity additions beyond their borders, respectively. Over 60 percent of China and US financed capacity additions, and over 80 percent of those financed by Japan, are fossil fuel plants. While China’s overseas power finance has mostly been committed to coal power, bilateral finance from Japan and the US has largely contributed to overseas gas power development. Less than 15 percent of capacity additions financed by each country went towards non-hydro renewable generation.

Bilateral finance of coal-fired power plants has received widespread attention among environmental communities due to coal plants’ high carbon emission intensity, as well as the potential harm to local air quality. East Asian countries including China, Japan and South Korea were the largest public financiers for overseas coal plants in the 2010s, but are all moving in the direction of a transition. At the 2021 Leaders’ Summit on Climate, South Korea announced it would end public financing of overseas coal plants. Most recently, Japan, along with other G7 countries, agreed to end government support for international financing of coal plants by the end of 2021. China is now the only large public financier without formal policy restrictions. Nevertheless, its overseas public finance of coal has decreased dramatically since 2018.

Bilateral finance of gas power has received much less attention and policy restrictions compared with coal, but can also be problematic in terms of climate impacts. Natural gas plants make up over 50 percent of Japan-financed overseas capacity growth and nearly 40 percent of US-financed capacity growth, funded both by Japanese and US national development finance institutions and through private investment. Although the emission intensity of gas plants is lower than that of coal plants, the financed gas plants can still lock in CO2 emissions for decades over their lifetime. Additionally, methane leakage during upstream gas extraction processes is a significant source of greenhouse gas emissions. Therefore, continued financing of natural gas infrastructure can interfere with the global decarbonization process.

To date, disclosure of bilateral finance of various energy technologies lacks transparency. This inhibits continuous tracking of international financial flows and makes it difficult to ensure countries are not financing fossil fuel infrastructure beyond their borders. With countries making major efforts to decarbonize domestically, they must not continue to finance fossil fuel technology and infrastructure export and lock in carbon emissions elsewhere in the world.

Read the Journal Article

Xu Chen is a postdoctoral research associate at the Center for Policy Research on Energy and the Environment at Princeton School of Public and International Affairs. Her research focuses on environmental and policy issues of energy use and investment.