Aside from cutting emissions, China and US must be climate-friendly lenders

A recent report by the Rhodium Group showing that China’s greenhouse gas (GHG) emissions exceeded total emissions produced by all the developed world in 2019 raised concern for the world’s ability to reduce global temperature rise. While the focus on national climate emissions of China vis á vis those of other top polluters is important, unfortunately, this issue only represents part of the climate crisis facing the international community. We need to think not only about national emissions and targets, but also about how both China and other nation’s development policies are affecting global emissions.

On its face, China’s growing domestic emissions are extremely worrisome, given the short timeframe that the world has to reduce climate pollutants to a level that keeps global temperature warming below 1.5 degrees Celsius.

Yet, there are reasons to have cautious optimism. In late 2020, the Chinese government pledged to bring its emissions in line with developed nations. President Xi Jinping has committed to aggressive national climate targets that would make China carbon neutral by 2060, peaking by 2030. While there are some troubling signs that recent activities within China — such as the construction of new coal plants — will make these commitments difficult to achieve, the country has a solid recent record of achieving the domestic environmental targets that it sets for itself.

Thus, the finding that China’s GHG emissions had surpassed those of the developed world is dramatic but not surprising; these emission increases have already been baked into global climate models.

This obsession with the horserace of country GHG emissions, however, has overshadowed another critical, though more nuanced, point: Countries can also have a big impact on emissions outside of their own borders through development finance policy.

For example, foreign investments can have a powerful influence on the ability of developing countries to meet their own domestic climate targets. Yet, because the international standards only track emission within a country’s territory, these policies and investments receive little attention. If emissions from developing nations explode, because of these policies, global temperature cannot be met, regardless of how much other countries restrain their own emissions.

Consider the example of China. Even as China is making aggressive commitments to curb its GHG emissions at home, it continues to promote dirty industries and practices abroad through government lending. China is now the only national government continuing to promote loans to build coal power plants in developing countries. Every other lending nation has limited financial backing for coal plant, with the recent declarations of the other two holdouts, Korea and Japan. All the major multilateral development banks have done the same.

Whether China continues to make carbon-intensive loans or pivots to renewable energy loans will have an enormous impact on the path taken by less wealthy countries. A study by Tsinghua University, Vivid Economics and the Climate Works Foundation found that countries that China targets for infrastructure investments through its Belt and Road Initiative already contribute more than one-quarter of GHG emissions globally. The authors found that failure to rein in the growth of carbon emissions by these countries could result in nearly 3 degrees Celsius of warming by 2050, even if all other countries including China and the U.S. were to meet their emissions commitments. Under a business-as-usual modelling scenario, just 17 countries receiving infrastructure loans from China could account for almost half of GHG emissions by 2050.

Meanwhile China’s lending to forestry and agriculture projects threatens tropical forests and also contributes to increasing net climate emissions in developing countries. A recent study by the Forests & Finance Initiative documented that Chinese financial institutions were the leading foreign contributors to deforestation of the world’s most biologically diverse and carbon-rich forests. Chinese investments in palm oil, pulp and paper, soy and timber projects, if poorly planned and executed, can destroy the ability of tropical forests to absorb and store carbon while also damaging other critical environmental services the support water, food and economic livelihoods.

The U.S. situation in many ways mirrors that of China. While there is a focus on the horserace of national emissions because the U.S. leads the world in per capita GHG emissions, this emphasis also overlooks the influence of the U.S. abroad. For example, in 2020 the U.S. became a net annual petroleum exporter for the first time since at least 1949, thus contributing to other countries’ GHG emissions. On the positive side, President Biden has proposed doubling US public climate finance for developing countries to help mitigate their GHG emissions.

Though the spotlight continues to focus on Chinese and U.S. emissions at home, the irony is that whether the world takes a cleaner or dirtier path could be determined by their actions outside of their borders. Both countries wield tremendous influence over developing country climate emissions. To truly achieve the world’s climate change goals, the U.S. and China need to start competing over climate-friendly development finance policies and investments.

Elizabeth Losos is a senior fellow at Duke University’s Nicholas Institute for Environmental Policy Solutions and leads a research program on sustainable infrastructure.