By Cecilia Springer and Rishikesh Ram Bhandary
At the end of May, Group of Seven (G7) countries committed to end public finance for overseas fossil fuel activities, going beyond their earlier commitment from last year to end such finance for overseas coal development.
The G7’s recent commitment restricts public finance for coal, as well as oil and gas, the last of which is less polluting than coal but still a significant source of carbon dioxide emissions, particularly when used in power generation. Methane, a key component of natural gas, is itself a highly potent greenhouse gas. Given the warming profile of natural gas, experts and advocates have sought to limit financing of gas infrastructure projects.
As G7 finance for fossil fuels curtails, there are concerns China might move to fill a gas finance gap, and thus offset the environmental benefits of the G7 announcement. Around a decade ago, many Western countries and development finance institutions began restricting public finance for coal, whereupon China quickly stepped onto the scene and became the world’s largest public financier of coal-fired power plants overseas. While China announced last year that it would end finance for overseas coal, gas was not explicitly mentioned. Is history set to repeat itself?
In a new policy brief published by the Boston University Global Development Policy Center, we explore the policy commitments and financing activities for natural gas of eight major multilateral development banks (MDBs) and two Chinese policy banks to determine the likely future of overseas gas finance.
Overall, our research found $112 billion – a substantial investment – was made in natural gas by the MDBs and the Chinese policy banks between 2008-2021. Lending rose to an all-time high of $16.2 billion in 2016, though there has been a steady downturn since then. We also found that unlike coal, development financiers do not have a common position on natural gas, even after this G7 commitment – especially the MDBs, who are some of the largest public financiers of energy infrastructure around the world.
As MDB fossil fuel financing decreases, however, we argue it is unlikely China will move to fill the gas finance gap.
First, MDBs have been more vested in gas than China’s policy banks. During 2008-2021, MDBs provided more overall gas financing than Chinese policy banks, contributing $63.7 billion to gas projects while Chinese policy banks provided $47.8 billion. Among the MDBs, the European Investment Bank was the largest gas lender, financing a total of $37.5 billion. Chinese financing fluctuated more on a year-to-year basis.
Second, domestic drivers are likely to limit China’s support for overseas gas. The structure of China’s own energy resources and industry has led to a strategy of China pursuing gas imports rather than developing a globally dominant domestic natural gas industry. This means China’s overseas policy bank engagement in the natural gas sector is not driven to relieve domestic overcapacity and find new outlets for specialized Chinese companies, as is the case for coal.
Finally, China’s policies and frameworks governing overseas activity do not provide strong support for future overseas natural gas development; in fact, recent green BRI guidelines are explicitly supportive of other energy technologies, including wind, solar, nuclear, hydrogen and storage.
As global energy financiers phase out fossil fuels, there remains a pressing demand for new energy infrastructure in the Global South, especially renewable energy. Given this, policies of the MDBs and Chinese policy banks will be critical in shaping the trajectory of energy financing for years to come, and the place of natural gas within the energy sector.
To manage the coming energy transition, the MDBs and Chinese policy banks should focus on three key policy areas.
First, the MDBs should lead China on developing natural gas policies. China has not historically led on fossil fuel transition policies, but as in the case of coal, it will follow strides made by other entities. By articulating a common policy and framework rooted in science-based climate targets, the MDBs can remove ambiguity around aligning natural gas financing with Paris Agreement goals.
Second, a focus on the private sector in natural gas financing will be crucial, as foreign direct investment and contracting arrangements are also major channels for China’s and other countries’ involvement with overseas gas. Policies that govern the private sector will be critical to creating and adjusting financing policies.
Third, natural gas policies must be complemented by support for alternatives. If development finance institutions steer away from natural gas, they must also simultaneously increase support for cleaner alternatives. This shift should include a focus on communities that are affected by the transition, as well as helping diversify revenue bases in countries, many of them in the Global South, that heavily rely on natural gas revenue.
Development finance institutions face a critical inflection point to signal stronger support for renewable energy. By explicitly stating policies on natural gas and supporting communities and governments through the spillover economic stress of green energy transitions, they can help shape equitable and low-carbon growth in the world economy.
Cecilia Springer, PhD, is the Assistant Director of the Global China Initiative at the Boston University Global Development Policy Center. Rishikesh Ram Bhandary, PhD, is the Assistant Director of the Global Economic Governance Initiative at the Boston University Global Development Policy Center.