Original illustration by Alice Tse.

06:35 am | 28. November 2019

China's Coal Conundrum

Even as China has pledged reduction of carbon emissions under the Paris Agreement, it has actively pursued coal projects in the Balkans in recent years that seem to go against those commitments.

By Echowall Staff

Europe is ready to go carbon neutral – almost. The majority of EU members support the goal of reaching net zero carbon emissions by 2050, part of the bloc's strategic long-term vision. But at an EU summit back in June this year, Poland, Hungary and the Czech Republic refused to sign up to language in the EU’s strategic program for 2019-24 that mentioned the goal.

Key Points:

* While many EU member states set a goal of carbon neutrality by 2050, in the Balkans, China is developing a cluster of coal-fired power stations that are either financed and under construction or are planned, mostly in EU accession countries.

* Chinese companies based in the region have not consulted with affected communities for projects that essentially would not have qualified for financing by other banks with energy and climate restrictions.

* Fairness in government procurement is a common issue. Just one of the 3 projects with financing or in operation had a tender procedure that appeared to be regular.

* China is strongly in favor of engaging at the national level, and regional compliance on issues such as state aid and environmental standards is a problem.

* China is promoting the “greening” of BRI and branding newly built coal-fired power plants as “green” or “clean” coal projects. This brings China’s preparedness for real leadership on the climate into question.

Instead, planned language about carbon neutrality was relegated to a footnote saying that “for a large majority of member states, climate neutrality must be achieved by 2050.”

As the EU plods ahead on the carbon agenda, however, there is another potentially complicating issue on the horizon in southeastern Europe, which includes a number of Balkans states, such as Serbia and Bosnia and Herzegovina, that are EU enlargement states. That complicating issue is China.

China won praise for pledging at the UN climate summit in Paris in 2015 to peak carbon emissions by 2030. Under the Paris Agreement, China committed to a reduction of its carbon dioxide emissions and pledged to obtain 20 percent of its energy from non-fossil fuels. But in the Balkans in recent years, China has been actively pursuing coal projects that appear to go against its commitments.

These projects, some experts say, could have serious environmental, economic and legal problems that would burden carbon goals – and possibly also taxpayers – for years to come. Are grand strategies like the Belt and Road Initiative are coming along with a highly polluting model of growth?

For deeper knowledge on this issue, Echowall reached out to Wawa Wang, a senior advisor for the Danish environmental NGO VedvarendeEnergi. Ms. Wang has worked since 2013 on monitoring infrastructure projects financed by Chinese banks and international financial institutions.

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Echowall: As you know, more and more EU countries are committing to phasing out coal plants in the coming years. But Chinese companies are pursuing a number of coal projects in the Western Balkans. This has raised concerns that China is undermining the goal of the Paris Agreement and the longer-term objectives of the EU. This even came up in a special section of the EU’s “strategic outlook” on China last March. Could you explain briefly what is happening in the Western Balkans?

Wawa Wang, senior advisor for the Danish environmental NGO VedvarendeEnergi.

Wang: We should welcome the European Commission’s acknowledgement of the role China plays in facilitating and enabling the construction of coal-fired power stations. However, this came on the heels of China already developing a cluster of coal-fired power stations that are either financed and under construction or are under negotiation in both EU member states and accession countries for some time.

These projects share some general characteristics in either having incomplete permits or faulty assessments. Basically, they don’t even meet the requirements of China’s own environmental standards as part of the due diligence check prior to Chinese ministries and banks green-lighting the financing and construction.

Echowall: Maybe you could highlight a few of the projects and related concerns?

Wang: Well, there are three Chinese financed coal plant deals right now in southeastern Europe. There is Stanari in Bosnia and Herzegovina, a project with a capacity of 300 megawatts. This project is financed with a loan of 350 million Euro from the China Development Bank, a deal signed back in June 2012. By the time it started operating in 2016 it was already behind in terms of compliance – meeting only large combustion standards set in the EU almost 20 years ago, rather than the 2011 Industrial Emissions Directive..

A few hundred kilometers to the east in Serbia, there is the Kostolac B3 coal power unit and the expansion of the Drmno coal mine, which has environmental and health implications that are of concern to local residents. The project is under construction but now facing delays. The mine expansion has gone ahead without the necessary permits. The financing in this case, amounting to 608 million US dollars, comes from the Export-Import Bank of China, a deal signed in 2014.

Echowall: What kind of response have these projects received from the EU?

Wang: There is also the Tuzla 7 lignite power plant, located in Bosnia, which like the Serbian project is financed through a loanby the China Exim Bank. That loan, signed in 2017, is for 614 million Euro. Earlier this year, Europe’s Energy Community disputed the Bosnian government’s approval of the loan on the grounds that it is a public guarantee granted in favor of China Eximbank, which violates rules on state aid considering that under the Energy Community Treaty Bosnia and Herzegovina must follow EU rules on subsidies in the energy sector. These concerns have stalled the project for now.

In most cases, among other things, state guarantees may only cover a maximum of 80 percent of the total loan amount. State aid is financial assistance given by the government to companies or other organizations that potentially distorts market competition. For those who don’t know, the Energy Community is an international organization established between the European Union and contracting parties, including EU accession countries like Serbia and Bosnia and Herzegovina, that stipulates the rules on state aid for EU accession countries.

Coal projects in the Balkans with Chinese involvement. Graphic by Alice Tse. Data source: Wawa Wang.

Echowall: Beyond broader concerns within the EU, how do we see local populations, and local politicians, responding to these projects? How much awareness do you think there is of China’s involvement?

Wang: Having met and gotten to know the locals who are faced with the imminent threat of illegal expansion of a coal mine in their backyard, as in the case of Kostolac B in Serbia, and having witnessed families struggling to survive the pollution and environmental problems caused by either existing coal projects or Chinese-built coal-fired power stations, it’s fair to say that these people feel strongly that their rights to well-being are being violated.

Just the simple fact that the Chinese authorities and companies based in the region have not once consulted or met with the affected communities in the range of thousands who raise questions about the feasibility of the projects speaks volumes to me.

Communities in these countries faced with Chinese sponsored coal-fired power stations and mining projects – basically projects that would not have qualified for financing by other banks citing restrictions in their energy and climate policies – often tell me how trapped they feel, knowing how Chinese companies and the country’s reputation for not having a track record of being open to engage locally. And in cases where they are directly presented with evidence of questionable compliance practices, the Chinese state actors and companies have typically brushed aside the rule of law question. They have not responded to concerns in a respectful manner, thus crushing the faith communities have for any future Chinese projects.

They have not responded to concerns in a respectful manner, thus crushing the faith communities have for any future Chinese projects.

Echowall: Aside from pollution and lack of consultation at the local level, what other problems or issues are associated with these projects? For example, have local or national governments been transparent about the investment? Have there been proper procedures in place to address social or environmental concerns?

Wang: There has been a range of compliance issues touching on national laws, the environmental laws harmonized under the EU enlargement process that includes environmental impact assessment and [restrictions on] state aid – or the 2001 international convention that governs transboundary environmental impact.

China is a strong proponent of the use of systems at the national level – meaning that it defers any due diligence responsibilities, either before or after project starts, to the host country. The political elites in these countries often have their own interest in projects running counter to the law or against the public will.

The Kostolac B2 project in Serbia. Photo by Wawa Wang.

There are many cases of Chinese financed coal-fired power stations with pending and ongoing legal challenges in the local courts. This is a strong indication itself of the questionable compliance and vetting of information the client provides. Ethically speaking, China is by no means free of responsibility in ensuring and verifying that the projects in which it is involved – either through its banks or its companies, private or state-owned – meet a range of environmental and social standards.

Only one of the three projects I just mentioned has been subject to a tender procedure which appeared to be regular. For Kostolac B3 in Serbia there was no tender procedure at all – with Serbia and China instead signing an inter-governmental agreement waiving this requirement.

Echowall: Having dealt with Chinese mega-projects in many regions, not just Europe, I wonder what general characteristics or trends you have noted — for example in terms of governance? Are there similarities between how China has pursued projects in Asia and Eastern Europe? What do you see as the major problems that need to be addressed?

Wang: Governance, in practice, requires diligent evaluation and management plans that are made public. One major distinction of Chinese mega-projects is how transparency both at the policy and project levels simply does not exist, regardless of the type and location of the projects.

Chinese banks to date do not have a disclosure system that makes public environmental and social information of the projects from appraisal to completion, along with the banks’ own assessments on how to monitor the implementation – unlike most other banks. It’s not even known to date if such assessments exist, or if the Chinese financiers have the capabilities of conducting such assessments.

Chinese banks to date do not have a disclosure system that makes public environmental and social information of the projects from appraisal to completion.

Echowall: Is it possible to directly request such information? I wonder if you have experience with that.

Wang: In terms of accessing information, there aren’t any known options for the public or an affected individual to file an access to information request with either the ministries or banks for China’s overseas projects that would yield in a satisfactory response. This is particularly concerning when you consider that we’re talking often about mega-projects having known and likely irreversible environmental and social impacts. If these impacts are not assessed and mitigated properly early on, during the project appraisal phase, they have the potential to escalate into conflicts.

Furthermore, large-scale infrastructure projects are of course known to result in land acquisition and resettlement of either homes or businesses. Without information about how those impacted can be handled and properly compensated, projects are bound to be subject to delays and other challenges.

In short, transparency and legal accountability are two pillars that are most overlooked by the decision makers behind Chinese mega-projects.

Echowall: One institution that has come under some scrutiny in the past few years is the Asian Infrastructure Investment Bank, or AIIB. Poland’s Coordinating Secretariat for Maritime Affairs, a coordinating center for the “17+1” grouping of CEE countries, has said: “The aim of the establishment of the AIIB bank was to support environment-friendly infrastructure, mainly in Asia. The bank expands its operations, and, in the future, it would also be glad to support projects carried out in Central and Eastern Europe.” How do you feel about this prospect?

Wang: I’d be curious to hear what Poland in this instance defines as “environment-friendly infrastructure” projects in Asia, when some of the bank’s projects are direct financing of fossil fuel projects – not to mention mega dams and tourism projects that displace people and their source of livelihood.

But circling back to the framing of the China-led AIIB as a regional bank, with its membership spanning from Asia to Latin America, Oceania, Africa, and the Balkans, it doesn’t seem to be a valid portrait anymore. The question few ask is why China, a country that still receives project financing and loans from the World Bank and the Asian Development Bank in overcoming its own infrastructure gaps, is interested in steering an international financial institution of its own.

On the “17+1” grouping of Central and Eastern European countries that comprises annual signing of bilateral trade agreements between China and the CEE countries, evidence has pointed to the lack of mechanisms that ensure Chinese investments in EU accession countries comply with EU standards, as in the case of the Budapest-Belgrade railroad without subjecting the tender to EU regulation, and the case of Serbia’s Kostolac B3 coal-fired power station project and coal mine expansion without a valid environmental impact assessment, failing to observe the EU EIA Directive.

The EU insisted that the tender be monitored and subject to controls and regulations imposed from Brussels and that these would override both the Budapest, and even more assertively, the Serbian Parliament regulations.

The now 17 CEE countries – with the addition of Greece – have by now a range of Chinese investments across the energy, transport, mining and telecom sectors, all opportunities that come often with known problems. If the AIIB does eventually decide to support projects in Central and Eastern Europe, we should expect and demand standards of this multilateral bank that are no less than the safeguards of multilateral banks, which are certainly higher than those of the Chinese banks.

The First Annual Meeting of the Board of Governors' of Asian Infrastructure Investment Bank (AIIB), in Beijing, China on June 25, 2016. Image available at Flickr.com under CC license.

Echowall: What are the real social and economic costs entailed by phasing out coal in the Western Balkans? Is there any validity to the argument you sometimes hear that phasing out coal could result in much higher energy prices for residents in this region? What is being done, or can be done, to address these concerns?

Wang: Even with state aid, most of the Chinese-involved projects are unlikely to be profitable. Their proponents are too optimistic about likely electricity sales prices and coal production prices, and hardly any of the projects have taken future carbon costs into account. Adding even low carbon costs for plants like Kostolac B3 and Gacko II – another project in Bosnia and Herzegovina – results in unprofitability for the plants.

One Bosnian coal plant that is Chinese-financed, Stanari, has already been constructed and started operating in 2016, although with long power outage days in 2017 and 2018 according to a report. EU pollution control legislation for new plants has been updated twice since the Large Combustion Plants Directive which Stanari was designed to comply with, rendering it out of date before it even started to operate.

Luis Alfonso de Alba. UN Photo by P-M. Virot available under CC license.

In May 2017 media reported that EFT, the energy group behind the project, may sell the Stanari plant outright, or at least a stake in it, to Croatia’s state-owned Hrvatska Elektroprivreda. This raised questions about its profitability.

Echowall: What do you think China’s motivations in pursuing projects like this? One the one hand, it has positioned itself as a global leader on climate action. On the other hand, it seems to be pushing wasteful and polluting projects that are well behind the curve.

Wang: Having interviewed a number of state-owned enterprises in power generation that are active in the region and in Asia, it’s become clear that overseas coal projects on EPC contracts – meaning engineering, procurement and construction – are a profit center for these companies. They have had to look outside China to sustain their businesses as China started to restrict, though not always consistently, the development of new coal units at home.

UN Special Climate Envoy Luis Alfonso de Alba recently said that the UN had positive responses from China and India on ending investment in coal at home and in the so-called Belt and Road region. That is an encouraging sign. But the same month, in August, China’s SASAC (State-owned Assets Supervision and Administration Commission), the body that is largely responsible for state-owned enterprises in power generation and their energy projects overseas, had a huge publicity push on how a “high-quality Chinese-built” coal-fired power station off the coast of Java in Indonesia was recently completed. That PR campaign made no reference to emissions and pollution controls.

We should note at the same time that none of the coal projects in the Balkans, Turkey and other places are getting shelved or cancelled.

Screenshot of August promotion by a Chinese government commission of a “high-quality” Chinese coal project in Indonesia.

Since the start of the Belt and Road Initiative, there have been lots of declarations from various authorities in China about plans for the “greening” of BRI. We’ve seen the branding of newly built coal-fired power plants as “green” or “clean” coal projects. This sends a really mixed message about priorities, and it does little to signal China’s preparedness for real leadership on the climate.

China has a lot to offer in terms of advancing both the interests of the country’s own renewables industry and those in recipient countries. Hopefully, China will leverage its economic maneuverability in that direction.

Echowall: How much do you think projects like these in the Balkans, and other perhaps wasteful projects sometimes grouped under the Belt and Road Initiative, are actually strategic on the part of the state, and how much might they be pursued by companies, individuals or other actors as part of a very disorganized program of foreign policy and development?

Wang: Indeed, the sloganeering can go over and over the apparently strategic points. But if we look specifically at the cluster of coal-fired power station projects in China’s global pipeline, there doesn’t seem to be an overarching strategic plan behind it all. We tend to read China as one monolithic actor, when its interests are multi-faceted and often represented by different entities.

The same goes for the export of China’s coal capacities, which was very evident when we saw the fierce competition of Chinese SOEs for a project in Bosnia and Herzegovina. Such examples are plentiful elsewhere too.

Every now and then, China comes out with declarations pointing in a specific direction, such as greening its finance and restricting public finance flowing into high carbon emitting projects. But there are few details on what exactly these plans are, or what governing or regulatory bodies will follow up. Will there be a time-bound phase-out of Chinese investments in coal internationally, or will state banks introduce binding and tangible screening policies and publicly accessible due diligence standards to appraise projects? These are questions that have gone unanswered for years, despite the best diplomatic efforts to achieve answers.

So summing up, yes, the case can certainly be made that rather than a strategic push we are seeing a cluster of projects pushed by a range of entities in a somewhat chaotic manner. That lack of coherence can itself undermine various other objectives, for example on emissions or climate change – whether EU objectives, or global.

The sloganeering can go over and over the apparently strategic points. But if we look specifically at the cluster of coal-fired power station projects in China’s global pipeline, there doesn’t seem to be an overarching strategic plan behind it all.

Echowall: What advice would you have for Europeans, and particularly European policymakers, in regards to Chinese projects? How can they prepare for China's continued engagement with infrastructure projects in Europe? How should they respond?

Wang: For some time the EU has seemed to overlook the development of Chinese investments, and especially projects that have questionable compliance with EU standards – until it was the eleventh hour, so to speak.

One issue is that the EU seems to have few tools at its disposal to ensure that accession countries in the Western Balkans are compliant with EU standards. Then consider the very vocal reaction back in March this year from EU Enlargement Commissioner Johannes Hahn, who criticized Bosnia’s approval of a public guarantee for a Chinese loan for the Tuzla 7 coal plant project. In a Twitter post, Hahn said he was “surprised” by the approval, and raised questions over state aid and environmental standards.

The 17+1 cooperation between China and Central and Eastern European countries has also shaken some things up, with questions of whether cooperation deals agreed under this arrangement are conducive to European integration.

Whatever the case, the key is for the European Union to ensure that Chinese investments and deals are treated no differently from other deals. They must be closely examined for compliance with national laws and EU standards by all available measures.

Gacko power plant, Bosnia and Herzegovina. Image by available at Wikimedia Commons under CC license.

Echowall: At the risk of sounding naïve, I take you to mean that this is not at the moment happening?

Wang: No, it is not. Take for example the ten or so new coal-fired power plants planned by Western Balkan countries. Of these, at least five – Kostolac B3 in Serbia, and Tuzla 7, Banovići, Gacko II and Kamengrad in Bosnia and Herzogovina – are expected to involve Chinese companies and receive financing from the China Exim Bank, the Industrial Commercial Bank of China and potentially other Chinese banks. Not one of them is guaranteed to be in line with the EU’s current pollution control standards. Furthermore, the Chinese loans under negotiation so far would be backed by state guarantees with unknown conditions, thus potentially clashing with the countries’ state aid commitments agreed under the Energy Community Treaty.

At the same time, just as a caveat, I would be hesitant to call these projects exclusively Chinese projects. The Chinese financing – facilitated by heavy-handed political interests from China – has definitely enabled projects that might otherwise be deemed unprofitable and would not have qualified for loans international financial institutions. However, there is evidence that other export credit agencies and multilaterals have provided loans and guarantees for mining equipment used in the expansion of coal mines and to, for example, the coal-heavy Serbian utilities company EPS. So others, clearly, are finding ways to benefit from Chinese projects.