Financing Carbon Lock-In in Developing Countries: Bilateral Financing for Power Generation Technologies from China, Japan and the United States

Decarbonizing the power sector will require a fundamental redirection of global finance from fossil fuel infrastructure towards low carbon technologies. Bilateral finance will play an important role in the global energy transition to non-fossil energy, but an understanding of its impact has so far been limited.

In a new Science Direct article, Kevin P. Gallagher, alongside Xu Chen, Zhongshu Li and Denise Mauzerall of Princeton University, compare the influence of overseas finance from the three largest economies – United States, China and Japan – on power generation development beyond their borders and evaluate the associated long-term CO2 emissions. By constructing a new dataset of Japanese and US overseas power generation finance between 2000 and 2018, the research team was able to analyze the reports of national development finance institutions and track their foreign direct investment (FDI) at the power plant level.

Synthesizing this new data with previously developed datasets for China, Gallagher and colleagues found that the three countries’ overseas financing was concentrated in fossil fuel power technologies over the period studied. The majority of facilitated added capacity were in fossil fuel plants, with 64 percent of additional capacity in fossil fuels from China, 87 percent from Japan and 66 percent from the United States).

Each of the countries’ contributions to non-hydro renewable generation was less than 15 percent of their facilitated added capacity. Together, the authors estimate overseas fossil fuel power financing through 2018 from these three countries will lock in 24 Gt CO2 emissions by 2060. If climate targets are to be met, replacing bilateral fossil fuel financing with financing of renewable technologies will be crucial.

Main Findings and Policy Solutions

• China, Japan and the US are the major financiers of overseas power plants.
• Most of their financed power capacity additions are from coal and gas plants.
• Bilateral financing of fossil fuel plants locks in carbon emissions for decades.
• It is urgent to align bilateral power sector financing with the Paris commitments.

By tracking overseas finance from China, Japan and the US to the global power generation sector between 2000 and 2018, the study illuminates the key role of bilateral financing in filling the infrastructure financing gap and supporting power capacity expansions in developing countries.

While multilateral financing has shown signs of moving towards supporting renewable technologies in line with the 2030 Sustainable Development Goals and the Paris Agreement, bilateral finance has lagged in this transition. Chinese, Japanese and US overseas finance between 2000 and 2018, through their development financing and greenfield FDI, mostly contributed to fossil fuel power generation, including coal and gas plants. To decarbonize the power generation sector and meet Paris climate targets, the authors argue it will be essential to steer bilateral financing away from fossil fuel technologies and move towards renewable forms of energy.