How China and Multilateral Development Banks Can Shape the Trajectory for Natural Gas Financing

By Rishikesh Ram Bhandary

It’s ‘now or never’ to keep global warming below 1.5°C, but achieving this target requires a substantial coordinated effort to increase the scale and pace of efforts to transition away from fossil fuels. A key part of this transition is putting an end to financing of new fossil fuel projects around the world.

Multilateral development banks (MDBs) have stopped financing coal, and major public funders of overseas coal, such as China, have also followed suit. Now, attention has shifted to natural gas, which is less polluting than coal but still a significant source of carbon dioxide emissions, particularly when used in power generation. Methane, a key component of natural gas, is itself a highly potent greenhouse gas.

Given the warming profile of natural gas, experts and advocates have sought to limit financing of gas infrastructure projects. Some also worry that investing in natural gas is becoming a risky proposition because governments and financiers may never be able to recoup the investments made if economies shift away from carbon-intensive sources of energy.

Unlike coal, however, MDBs do not have a common position on natural gas. How invested are MDBs in natural gas? What parts of the gas value chain do they finance? If MDBs stopped financing natural gas projects, would Chinese policy banks step in to fill the void?

In a new policy brief, we explore the policy commitments and financing activities for natural gas of eight major MDBs and two Chinese policy banks. Our findings contribute to understanding the scale and composition of public finance related to natural gas and can inform the global green transition.

Key findings

We collected data from eight major MDBs (World Bank Group, European Investment Bank, Inter-American Development Bank, European Bank for Reconstruction and Development, African Development Bank, Asian Infrastructure Investment Bank, Asian Development Bank and New Development Bank) to track their commitments to the natural gas sector. We also collected data on China’s overseas development finance for gas. China’s official overseas development finance is defined as lending commitments from China’s two policy banks, the China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM), to overseas borrowers with public ownership. We used data from the China’s Global Energy Finance Database to identify gas projects receiving Chinese overseas development finance. For both MDBs and Chinese DFIs, we tracked projects that have already reached financial closure.

We found $112 billion – a substantial investment – has been made in natural gas by the MDBs and the Chinese policy banks between 2008 and 2021. Lending from development finance institutions (DFIs) rose to an all-time high of $16.2 billion in 2016, though there has been a steady downturn since then. As this financing decreases, however, we argue it is unlikely China will fill an MDB gas finance gap, as domestic drivers limit Chinese overseas development finance for gas.

During 2008-2021, MDBs provided more overall gas financing than Chinese policy banks, contributing $63.7 billion to gas projects while Chinese policy banks provided $47.8 billion. Among the MDBs, the European Investment Bank was the largest gas lender, financing a total of $37.5 billion. Chinese financing fluctuated more on a year-to-year basis.

We also find a clear distinction between MDBs and Chinese policy banks in their funding approach. The MDBs mostly focused on mid-stream (such as storage and transportation) and downstream activities, having restricted support for extraction and exploration of natural gas. Meanwhile, nearly half of Chinese policy bank financing was dedicated towards extraction and exploration. Unlike coal and hydropower where Chinese policy banks have played a major role in overseas power generation, the Chinese policy bank footprint is light on natural gas power projects.

Policy recommendations

Governments, particularly in developing countries, face a double-edged challenge in green energy transitions: at the same time China and other global energy financiers phase out fossil fuels, there remains a pressing demand for global energy infrastructure. The International Energy Agency estimates investment in clean energy projects and infrastructure will need to increase to nearly $4 trillion annually to meet Paris Agreement goals. Given this, policies of the MDBs and Chinese policy banks will be critical in shaping the trajectory of natural gas financing for years to come. Our research points to three key policy recommendations for this transition.

First, the MDBs should lead China on natural gas policies. China has not historically led on fossil fuel transition policies, but as in the case of coal, has clearly shown that it will follow strides made by other entities. By articulating a common policy and framework rooted in science-based climate targets, the MDBs can remove ambiguity around aligning natural gas financing with Paris Agreement goals and potentially stop further upstream development and other possible growth areas for gas-related activity.

Second, a focus on the private sector in natural gas financing will be crucial, as foreign direct investment (FDI) and contracting arrangements are also major channels for China’s involvement with overseas gas. Both international and domestic private sectors are important sources of finance for natural gas, though transparent data to guide policies is currently lacking. Policies that govern the private sector will be critical to creating and adjusting financing policies.

Third, natural gas policies must be complemented by support for alternatives. If DFIs steer away from natural gas, they must also simultaneously increase support for cleaner alternatives. This shift should include a focus on communities that are affected by the just transition, as well as helping diversify revenue bases in countries that heavily rely on natural gas revenue.

DFIs face a critical inflection point to signal stronger support for renewable energy. By explicitly stating policies on natural gases and supporting communities and governments through the spillover economic stress of green energy transitions, they can help shape low-carbon growth in the world economy.

*

Never miss an update: Subscribe to the Global Economic Governance Newsletter.