new internationalist
issue 319 - December 1999

JULIO ETCHART / STILL PICTURES
Smokescreen
The World Bank claims to be concerned about the environment.
So what is it doing stoking the flames of global warming in China?
Kate Hampton smells a rat.

The name sounds promising – the Western Poverty Reduction Project. But behind it lurks a nefarious plan to resettle nearly 58,000 Chinese farmers on to fragile nomadic lands in Tibet and Inner Mongolia, posing a serious threat to indigenous cultures. It has naturally drawn sharp criticism from human-rights groups. But that hasn’t stopped the World Bank from financing it, despite objections from virtually every executive director on its board. Confident of its power, the Chinese Government has threatened economic reprisals against any country opposing the project. And the World Bank seems to be turning a blind eye to its own policies on social and environmental impacts. It would appear that the largest multilateral development bank in the world needs China more than China needs it.

Less-known is the World Bank’s multi-billion-dollar investment in the most polluting of fossil fuels – coal – in the most populous nation in the world.

This investment needs to be seen against a certain background. The US is the largest stakeholder in the World Bank, providing 18 per cent of its funds. In 1997 the US Senate passed the Byrd-Hagel resolution requiring the administration to take no action on climate change until key developing countries such as China also ‘participate meaningfully’ in taking steps to reduce their greenhouse-gas emissions. The US could, if it wanted to, redirect its investments to China away from coal to help make this happen.

The environmental stakes could not be higher. With a population of one billion and rapid economic growth, China represents the greatest emerging challenge in the fight for climate stability and the control of greenhouse-gas emissions. If China is not to supersede the United States as the world’s biggest climate wrecker within the next ten years, it will have to make a quick transition away from coal-fired industrialization to a sustainable energy regime.

Roughly 76 per cent of China’s energy needs are currently met by coal – a fuel which emits the highest proportion of the geenhouse gas carbon dioxide per unit of energy produced. The nation currently accounts for about 10 per cent of world energy consumption and over 13 per cent of the world’s carbon-dioxide emissions. By 2010, it is expected to reach 25 per cent of worldwide emissions.¹ In addition to being the biggest coal consumer, China also uses it more inefficiently than other major energy-consuming countries.¹ Yet the mistakes of the industrialized world are being repeated in China using public money with potentially devastating consequences for the world’s weather.

Between 1988 and 1997, OECD countries (members of the Organization of Economic Co-operation and Development, the rich democracies) spent $11.4 billion on coal projects in China, accounting for about a third of the finance for the 40 new coal-fired plants built over this period.² The result is regional surpluses of commercial power, increasing emissions and alarming levels of air and groundwater pollution. The World Bank estimates that air and water pollution already costs China about $54 billion every year.³ Meanwhile, poverty remains pervasive, especially in rural areas off the electricity grid where farmers and their families fail to benefit from the energy boom.

Propping pollution
The World Bank’s own research advocates renewable energy as the most efficient means of meeting the energy needs of the rural poor. So it is reasonable to expect that the Bank, whose raison d’être is poverty alleviation, would be spending most of its cash on renewables, even if other agencies do not. Instead, only ten per cent of the World Bank’s energy portfolio is spent on renewables;4 most of the rest goes to prop up oil, gas and coal developments around the world. China, the Bank’s biggest client over the last decade, is no exception. For the coming eight to ten years the Bank will be loaning between $50-$100 million to China for renewable energy purposes. In sharp contrast, in 1998 alone the Bank spent $1.35 billion in China on building coal-fired power plants.⁴

The rationale for using coal is its domestic abundance. But it is widely acknowledged that China will have to import increasingly significant amounts of raw materials and/or electricity in the future. Investing in renewable energy would help to reverse this trend and experts agree that the country’s potential wind-power resources are huge. There are pockets of successful investment in renewable energy – Inner Mongolia generates 40,000 kilowatts of windpower. The region has an estimated windpower potential of 100 million kilowatts. But by and large transaction costs remain prohibitively high as opposed to the generous foreign and domestic subsidies available for fossil fuels.

CHRIS STOWERS / PANOS

The Government acknowledges that dependency on coal is bringing economic growth into conflict with environmental objectives. However, current efforts to reduce this dependency are focused on developing the contributions of natural gas, nuclear and hydropower – none of which are desirable on environmental grounds – and on restricting the coal supply by closing the least efficient mines. So far, the Government is on target, but the target is only set at reducing coal dependency to 70 per cent.⁵ As part of the restructuring, Chinese authorities are allowing foreign investors to hold a majority share in coal projects and recently established a preferential loan and fee-exemption policy for coal gas development. In the long term, this policy will make the coal industry more profitable, drawing foreign investment to it.

Notwithstanding the fact that the international spending spree on Chinese power has somewhat slowed in the last two years, billions are still pouring in as multinational corporations and international financial institutions scramble for a share of expected future demand and the resulting profits.⁶ The World Bank still estimates that the country needs between $15 and $20 billion per year investment in energy.⁷But the Chinese Government actually wants less from foreign investors – under $2 billion annually. However, between 1992 and 1997, China received $5 billion per year for its power sector – more than any other developing country.⁸

As its recent forays into oil and gas development will testify, China is becoming a big player on the global energy scene in its own right, with sufficient funds to invest in large frontier projects with potentially significant climate impacts. In 1997, the China National Petroleum Corporation (CNPC) signed a $9.5 billion contract to develop Uzenskoye, the second-largest oil field in Kazakhstan. In Sudan, CNPC has finished the Muglad Oilfield project, a site that has an annual production capacity of 7.5 million tons, and has also been making deals in Iraq and Venezuela.⁹ CNPC has earned the dubious distinction of being identified as the world’s ninth-largest ‘Kingpin of Carbon’; will it be moving up the climate wreckers’ ranking?

Given that it can meet 80 per cent of its investment requirements by domestic means and that it is not short of foreign transnationals vying for a share of the projected market, the Chinese power sector is hardly out with a begging bowl, in desperate need of scarce development dollars. The Government has more leverage than other recipient countries given that it is both a political and an economic priority for the West to keep China on the path to a market economy.

Policy of appeasement
Yet, the World Bank, which is supposed to provide finance to projects that would otherwise not garner funds, is squeezing out the private sector in China in its haste to appease the country. Major projects worth billions of dollars have gone ahead recently despite foreign assistance being withdrawn. Nevertheless, the Government remains keen to attract foreign investment.

However, lenders and donors from the OECD countires could and should write environmental objectives into trade and aid policies with China. Co-ordination needs to occur within as well as between governments. For example, the US export credit agency Ex-Im has been one of the biggest fossil-fuel financiers in China since 1997; but OPIC, the other US export credit agency, has not been allowed to fund projects on human-rights grounds. Without international co-ordination any refusal by one country or institution to participate in a project on environmental grounds or due to human-rights concerns will be immediately undermined by another party.

In terms of its total dollar amount, World Bank funding has been exceeded in the last two years by the fossil-fuel investments of some Chinese banks and private lenders from overseas. Nevertheless, the World Bank still plays a dominant role as an ‘arranger’, bringing together foreign investors, export credit agencies and the Chinese Government to realize energy investments – it remains the most important multilateral institution. In this role, the World Bank could be instrumental in directing new investments away from fossil fuels and towards energy efficiency and renewable energy. Instead, it continues to pour billions into bringing about climate disaster while ignoring the plight of the majority of the Chinese population, still living below the poverty line.

Kate Hampton is a research intern at The Sustainable Energy and Economy Network (SEEN), a project of the Washington DC-based Institute for Policy Studies (IPS).

1 Robert Priddle, Director of the International Energy Agency, in a speech at Qinghua University, Beijing, in 1996. 
2 Cleaner Coal Combustion in China: the Role of International Aid and Export Credits for Energy Development and Environmental Protection, 1988-1997 (Evans, draft of January 1999). 
3 Blue Water, Clean Skies (IBRD, 1997). 
4 World Bank and the G-7: Still Changing the Earth’s Climate for Business (IPS, 1998). 
5 Restructure of China’s Energy Structure to Offer Huge Commercial Opportunities – available on the Chinese Government website: www.cei.gov.cn 
6 In 1999, the World Bank approved 19 projects across all sectors in China but total lending fell by $550 million. The reason given was that the inland provinces, long ignored but finally ‘benefiting’ from Bank investment, have more modest needs. 
7 Memorandum of the President (25 February 1997). 
8 FDI: International Capital Flows and Links to GHG Emissions in Developing Countries (Cadmus Group and Hagler Bailly for EPA, 1999). 
9 Pipeline Gas in North East Asia (Keun-Wook Paik and Jae-Yong Choi in RIIA Briefing Paper number 39, 1998).