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Will Asia’s new ‘clean, green’ infrastructure bank live up to its early promises?

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Coal plant

The newly established Asian Infrastructure Investment Bank (AIIB) is the world’s newest development bank. With a total capital of $100 billion, it has the potential to be a game changer. Launched with the mission of being “lean, green and clean”, the China-led bank is emerging as a potential competitor to the World Bank and Asian Development Bank.

Over the next few weeks, the AIIB plans to formalise its first Energy Sector Strategy before its Annual General Meeting in South Korea on June 16-18th. The new giant bank faces a decisive moment, as these plans will define the Bank’s strategy on energy - including its approach to coal.

The eyes of policymakers, scientists and citizens are now firmly on the new bank and the path it chooses to take, because phasing out coal power stations will be crucial for the world to deliver on the Paris Climate Agreement. Early drafts of the Energy Sector Strategy included wording to limit coal funding but left broad and worrying loopholes which could be exploited. There have been alarming reports in recent weeks that major coal exporters such as Australia are lobbying for the language on coal to be further watered down.

Will the Bank live up to its early promises and integrate robust wording to restrict coal? Or will it give into lobbying by coal exporters and endanger the global climate targets?

Time is running out on climate change

The science is clear on climate change.  More than 80% of the world’s known coal reserves will need to stay in the ground to avoid dangerous climate change.  At the 2015 Paris Climate Conference, 195 nations agreed to cut emissions and limit global warming to no more than 2 degrees.

Coal investment is totally incompatible with the global 2 degree pathway.  Since coal power plants have long economic lifetimes of over forty years, building any new coal power plant would mean locking-in emissions over the whole lifetime of the plant.  

The Asia region is pivotal to the achievement of the Paris Climate Agreement and to leaving a safe planet for future generations. Analysis has shown that Asia is home to over 90% of coal plants currently under construction. As the World Bank President Jim Yong Kim noted last year: “if the entire region implements the coal-based plans right now, I think we are finished”.

At a time when the US has taken a step back on climate change, there is even more need for China and others to show leadership. The AIIB is headquartered in China, and its shareholders include the UK, France, Germany, Canada, South Korea, Brazil, Bangladesh, Nepal and the Philippines, amongst others. The US is not a shareholder.  Many of these governments will now be looking towards the AIIB and watching its early progress with interest.

So far, the Bank has not approved any investment in coal power – early investments by the Bank include hydropower in Pakistan, a gas plant in Myanmar, and electricity grid upgrading in Bangladesh.  There are some much dirtier and riskier projects in the potential pipeline. The India Infrastructure Fund (IIF) proposal under consideration, for example, would be an alarming choice for the Bank, since the current portfolio includes massive coal investments, contrary to AIIB’s stated intention for the Energy Sector Strategy to embrace and be informed by the principles underpinning the Paris Agreement.  The AIIB must follow the International Finance Corporation (IFC) in reducing exposure to high risk lending.

As Joachim von Amsberg, the Bank’s vice-president of strategy and policy, said earlier this year: “the portfolio has to show that it’s a green bank and if the portfolio is full of coal projects you won’t look like a green bank.”

Learning from the other development banks

AIIB President Jin Liqun has expressed the view that the Bank wants to learn from the other development banks and adopt best practices.  However, AIIB should not just follow suit by adopting the minimum standards, but should also show leadership, coordinate its activities and adopt best practices to avoid becoming a ‘laggard’.

In this regard, the world’s newest development bank should look towards the examples the other banks have set on coal finance. For example, the World Bank will only provide financing for coal projects in rare circumstances, including when there is a lack of feasible alternatives to coal. The European Bank for Reconstruction and Development’s energy strategy states the bank will not finance coal except in rare and exceptional circumstances where there are no feasible alternative energy sources.

Meanwhile, using a different approach, the European Investment Bank has put in place restrictions on coal using an emissions performance standard set at 550 gCO2/kWh, which should be the very bare minimum required by the AIIB.

If the AIIB does not put these standards in place, it risks quickly becoming the worst of the bunch of development banks.  This will risk not only its global reputation, but its future relationships with major shareholder countries, many of whom are now phasing out coal.

Coal is a risky, dirty investment: Clean energy is the future

Coal is not only dangerous for the climate, it is a dirty fuel with high costs for public health. Moreover, these costs are rarely accounted for when planning projects. Instead, it is left to governments and individuals to clean up the mess and pay for the long-lasting health and air quality problems.

For example, in the US, accounting for the cost of externalities caused by coal power (including health costs) triples the price of electricity from coal, making it one of the most expensive forms of energy.

China announced earlier this year that it would be cancelling more than 100 coal power plants that were planned or under construction. The UK, France and several other nations are phasing out coal power completely.  India has also just announced plans to cancel nearly 14 gigawatts of coal power stations.

There are also financial risks in coal financing.  According to data by Bloomberg, more than half the assets in the global coal industry are now held by companies that are either in bankruptcy proceedings or don't earn enough money to pay their interest bills.

There is a risk that the poorest countries will be saddled with the dangerous legacy of coal plants in the future, including wasted capital and stranded assets.  Exporters like Australia are trying to keep developing countries shackled to dirty and outdated coal technology.

At the same time, clean energy costs are falling dramatically and trends on renewable energy growth in Asia and the Pacific have been striking. Record-breaking investments in renewable energy have been taking place in China and India

In India, solar power prices hit a record low this month, undercutting the price of fossil fuel-generated power in the country – and making it easier for India to meet its climate goals.  The AIIB should be taking up clean energy opportunities in its project pipeline, making the most of its regional focus and the growing demand for clean energy in Asia. There is a strong case for China to support such an emphasis given its leadership in clean energy industries.

The AIIB is at a pivotal moment in its history. The Bank has the opportunity to show leadership as well as to learn from other international financial institutions. By closing coal loopholes and setting standards restricting funding for new coal generation, the AIIB can do just that.