The two sides of China's energy policy

Column by Sébastien Lechevalier, Professor at Ecole des Hautes Etudes en Sciences Sociales (EHESS, Paris) and International Senior Fellow at the Canon Institute for Global Studies (CIGS, Tokyo).

While China is investing massively in renewable energies on its own territory, it is the champion of investment in fossil fuels outside its borders, observes Sébastien Lechevalier in his column.

Column. While Chinese investment in renewable energies is the world's largest, Chinese overseas investment in the energy sector is mainly in fossil fuels. Since 2006, China, the world's biggest carbon emitter across all sectors (26.8% of the total), has become the world's biggest investor in the energy sector.

In 2017, China alone accounted for almost half of the world's investment in renewable energies (particularly solar and wind power), but the characteristics of these investments are very different at domestic and international level. Is this a form of duplicity in decarbonization, or are there deeper, structural reasons? ("Clean at home, polluting abroad: the role of the Chinese financial system's differential treatment of state-owned and private enterprises", Mathias Lund Larsen and Lars Oehler, Climate Policy n 23/1, 2023).

Major structural disadvantages

According to the two Danish researchers, the share of renewable energies in China's power generation investments is 77% domestically (excluding large and medium-sized hydroelectric capacities), while it is only 22% abroad, for example, in the context of the Belt and Road Initiative. The second major contribution of this article is to study the institutional complementarities between the energy sector and its financial environment.

The authors show that, in addition to general obstacles to the development of renewable energies, such as higher initial costs and different revenue cycles, Chinese renewable energy companies face significant structural disadvantages compared to conventional energy companies in accessing financing for their overseas investments.

The underlying reason is that the latter are largely state-owned, whereas the former are mainly privately-owned. This disadvantage is reflected in the Chinese financial system's preference for state-owned companies. Admittedly, some state-owned companies are diversifying into renewables, but this is still relatively minor.

No energy transition without financial sector reform

What lessons can be drawn? In the case of China, there are several possible avenues for reform of the main financial players to restore a balance in favor of renewable energies, through greater (rather than less) state intervention. Among the various policy options, two in particular stand out.

The first is to change the behavior of the two largest sources of financing for overseas energy investments, the China Development Bank and the Eximbank of China (specialized in import-export), over which the Chinese government has complete authority since they are state-owned banks. It can also influence the decisions of the four largest commercial banks - Industrial and Commercial Bank of China, Bank of China and China Construction Bank - because the State is their main shareholder.

Beyond the case of China and its specific institutional features, this study confirms that there can be no energy transition without reform of the financial sector, and no carbon neutrality without reorienting the financial system towards this objective. The market alone will not be able to deliver the right signals; the role of public authorities, at both national and international level, is absolutely essential.