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China's carbon reduction target looks elusive as banks keep throwing cash at coal mines and power plants, undercutting Xi Jinping's plan to slash fossil fuels

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On an unseasonably warm autumn day last October, the world's largest coal-fired power plant fired up in the Anhui provincial city of Huaibei in eastern China.

Sitting in an economic development zone carved out of verdant paddy fields, phase two of Shenergy Group's Pingshan power plant is installed with 1,350 megawatts of generation capacity, enough to meet the annual needs of 1.1 million households. Almost four years after receiving the construction approval, the plant was formally connected to the national grid in mid-December.

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The Chinese government and the nation's state-owned power producers have set aggressive goals on renewable energy, but plans to retire or rein back coal-powered plants - they produce a third of China's carbon emission - failed to keep up. China commissioned 38.4 gigawatts (GW) of coal plants in 2020, three times the 11.9GW fired up by the rest of the world, according to a February report by the Global Energy Monitor in San Francisco and the Centre for Research on Energy and Clean Air (CREA) in Helsinki.

An undated photo of Phase Two of Shenergy Group's Pingshan coal-fired power plant in the Anhui provincial city of Huaibei. alt=An undated photo of Phase Two of Shenergy Group's Pingshan coal-fired power plant in the Anhui provincial city of Huaibei.>

After accounting for shutdowns, China's net addition last year was 29.8GW, compared with the world's net reduction of 17.2GW. The pace of construction approvals have also tripled to 36.9GW last year alone, five times more than those initiated outside China, according to the report.

"That has put the central government's emphasis on new climate commitment in a bad light," said Greenpeace East Asia's climate and energy project manager Zhang Kai in Beijing.

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"If the central government allows the current levels of coal plant development to be maintained, it will at best divert important resources away from its clean energy transition, and at worst make China's carbon neutral goals difficult if not impossible to achieve," said the Global Energy Monitor-CREA report.

China's coal mines, coal-fired power plants are still growing, funded by an endless stream of cheap financing by the nation's state-owned banks, as they keep one of the country's biggest industrial sectors humming amid an economic slowdown. Millions of jobs and trillions of yuan of assets are at stake in the coal industry.

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The nation's big five state-owned power firms, generating more than half of China's coal-fired electricity - State Energy Investment Group, China Huaneng Group, China Datang Group, China Huadian Group and State Power Investment Group - employ 2 million people, and have 5.5 trillion yuan (US$836 billion) of assets between them.

As many as 60 of the world's largest banks lent or underwrote US$752 billion of debt or equity issuances to the fossil fuel industry last year, down by 9 per cent from 2019 but 6 per cent higher than 2016 when the Paris Agreement took effect, according to a March 24 study by six non-government organisations (NGOs) including the Rainforest Action Network and BankTrack.

"The overall fossil fuel financing trend of the last five years is still heading definitively in the wrong direction, reinforcing the need for banks to establish policies that lock in the fossil fuel financing declines of 2020," the coalition said.

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American and Canadian banks led almost half of the US$3.8 trillion in global fossil fuel financing deals over the past five years. European, UK, Chinese and Japanese financial institutions pale in comparison, but their financing volume rose during the period, with Chinese financing rising by a third to almost US$160 billion, according to the data.

While US banks are among the biggest oil and gas funders, Chinese financial institutions lead on coal mining and coal-fired power plants financing. This was echoed by findings from a separate research by 29 NGOs including Urgewald and Reclaim Finance, which tracked loans provided by 380 banks, as well as stock and bond issuances underwritten by 427 financial institutions that helped sustained 934 coal mines and power producers.

Japanese banks are the top lenders, while Chinese financial institutions are the biggest shares and bond underwriters to coal companies, the NGOs said.

Coal financing led by Chinese institutions - including projects in many developing nations - grew to US$222 billion in the first 10 months of 2020 - almost half the global total, more than the US$215 billion for the whole of 2019, the NGOs said.

"Banks in Japan and China, such as the Industrial and Commercial Bank of China (ICBC) must support their countries' climate goals by withdrawing coal investments, not just within their countries but also abroad," said Chuck Baclagon, a finance campaigner at 350.org, an environmental advocacy group in East Asia.

China's National Energy Administration has implemented a "traffic light system" since 2016 to classify and impose restrictions on domestic coal power projects, while the bank regulator ordered Chinese banks to reduce lending to certain emission-prone and energy-intensive sectors including coal electricity since 2007. But the implementation has been criticised as poor.

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China's Ministry of Ecology and Environment recently endorsed a plan to extend the policies to Chinese-invested energy projects overseas based on their environment and climate impact, Liu Shuang, a senior associate at Washington-based World Resource Institute said.

"There's clear evidence that looser standards in the National energy Administration's early warning system and the coal approval spree are connected," said Zhang of Greenpeace. "The financial regulators should also impose more control over coal capacity approvals."

State-backed ICBC and China Construction Bank declined to comment. Bank of China, China Merchants Group and China Banking and Insurance Regulatory Commission have not responded to requests for comment.

A senior manager at Shanghai Pudong Development Bank, speaking on condition of anonymity, said loans are only ever granted in exceptional cases such as large-scale coal mines and coal-powered plants that are key to local economic growth. Only a handful of existing mines and power plants are eligible for fresh loans, while most new projects are barred from borrowing, he said.

An undated photo of workers at work at Phase Two of Shenergy Group's Pingshan coal-fired power plant in the Anhui provincial city of Huaibei. Photo: seetao alt=An undated photo of workers at work at Phase Two of Shenergy Group's Pingshan coal-fired power plant in the Anhui provincial city of Huaibei. Photo: seetao>

China's banking regulator has, for more than a decade, been directing banks to cut loans to energy and emissions-intensive industries. Some foreign banks, especially European institutions pressured by investors-backed climate risks lobbyists, have led an international movement to cut coal financing.

HSBC, the global bank that traces its roots to Hong Kong and Shanghai, pledged last month that it would stop financing coal mines and power plants in the European Union and OECD member states by 2030, extending the ban everywhere else a decade later.

That followed the move by the Milan-based UniCredit, which made a commitment in September to phase out its coal exposure by 2028, and asked all its customers to publish credible plans by the end of 2021 to end their businesses in that industry by the deadline.

An undated photo of Phase Two of Shenergy Group's Pingshan coal-fired power plant in the Anhui provincial city of Huaibei. Photo: seetao alt=An undated photo of Phase Two of Shenergy Group's Pingshan coal-fired power plant in the Anhui provincial city of Huaibei. Photo: seetao>

To meet Xi's 2030 and 2060 carbon goals, China's coal power capacity must be slashed by 40 per cent by 2030, according to CREA in Helsinki.

That is a tall order, since China's coal power plants have yet to show signs of shrinking. China Energy Investment Corporation, the nation's largest coal miner and one of the largest power generators, said in December it would start devising strategies to meet China's carbon reduction goals.

Its listed unit China Shenhua Energy said in its annual report published on March 28 that it will strive for its carbon dioxide emissions to peak by 2025, and become carbon neutral by 2060. Still, it plans to spend 13.19 billion yuan this year on building new power projects, including 6GW of coal-fired plants.

Chinese coal power plants may not be shut down en masse any time soon but will play the increasing role of meeting peak power demand, said Credit Suisse's utilities and solar equities analyst Gary Zhou.

"This is not the ideal way to run a coal-fired plant as it means lower efficiency and possibly also lower profitability," he said at the sidelines of the bank's annual Asian investment conference on March 24.

Smoke billows from a large steel plant in China's Inner Mongolia region on November 4, 2016. Photo: Getty Images alt=Smoke billows from a large steel plant in China's Inner Mongolia region on November 4, 2016. Photo: Getty Images>

The utilisation hours of China's coal power plants have already fallen 16 per cent last year from 2013, industry figures showed, reflecting their eroding competitiveness. Carbon emission quotas trading will further hit operators from next year, analysts said.

"Utilisation hours may continue to decline, and we may be forced to shut down some small units as results of policy requirements," Huaneng Power said of operating risks it faces in its annual results filing on March 23.

Even so, China's coal power plants will still be needed for many years, given periodic seasonal power demand shortages, grid capacity limitations and the intermittency of renewable power, said Lin Boqiang, dean of Xiamen University's China Institute for Studies in Energy Policy.

In this photo taken on November 20, 2015, a worker clears a conveyor belt used to transport coal, near a coal mine at Datong, in China's northern Shanxi province. Photo: AFP alt=In this photo taken on November 20, 2015, a worker clears a conveyor belt used to transport coal, near a coal mine at Datong, in China's northern Shanxi province. Photo: AFP>

There are signs that a crackdown on coal plants expansion may be afoot. The Ministry of Ecology and Environment's Central Environment Inspection Group unleashed a rare public rebuke in January, criticising the National Energy Administration (NEA) for not doing enough to stem coal power and coal mining capacity's expansion.

There is still "a gap" between the energy regulator's work and Xi's orders to instil "ecological civilisation thinking," as well as the implementation of the central government's decisions and plans, the inspection group said, before instructing the NEA to submit a rectification plan to China's cabinet within 30 days. The administration has not responded to a request for comment.

"Reducing carbon emission is now the priority," said Guang Zhixue, head of the environment protection department at a Jiangsu-based subsidiary of China Coal Energy, which is building solar farms on top of former coal mines. "To adjust our business structure, we have already started to develop solar energy to cut reliance on coal. A transition will be a huge task, and we are meeting the goal step by step."

Another sign that Beijing is aware of the pressure to deliver on its carbon goal is a planned policy shift on green financing.

The People's Bank of China and NDRC took a significant step last May, yielding to years of campaigning by NGOs, by proposing to exclude "cleaner" coal projects - such as coal washing facilities and higher efficiency power plants - from the list of projects allowed to be funded by green bonds.

"Net zero ambitions by top fossil fuel financiers are simply not credible if they fail to be backed by fossil fuel phase out plans," said Jeanne Martin, senior campaigner manager at ShareAction, part of the coalition that pressured HSBC to make its pledge.

Additional reporting by Georgina Lee and Daniel Ren in Shanghai

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.