Working Together Towards a Green Transition

Abstract

China’s outward investments have faced a global tightening of environmental constraints. Many BRI countries remain in the early stages of development, but they already face tighter ecological limitations. That is, BRI countries have to develop amid environmental restrictions, and this has brought many new changes to the BRI.

How will green constraints influence the development of BRI countries? Environmental economics uses an inverted U-shaped Environmental Kuznets Curve (EKC) to reflect the traditional development path of “polluting first and cleaning up later”. However, as the international community intensifies measures to address global environmental issues and as public awareness of environmental protection increases, we note that the EKC is flattening. This means that many developing BRI countries produce less pollution and emissions than developed countries did at the same level of development. Nowadays, developing countries need to follow a new path of green development that encompasses “cleaning up while developing”.

What are the challenges and opportunities facing BRI countries in taking the new development path? The key challenge is that tackling environmental issues at an early stage of development would raise costs of technology, energy, capital, and land. This in turn would constrain the development of energy, capital, and land-intensive industries, resulting in slow economic development and industrialization. However, the green transition also highlights the comparative advantages that many BRI countries have in resources such as new energy metals and clean energy. Developing countries also have labor cost advantages for developing mature green industries. While environmental constraints lead to higher green costs for BRI countries, the green transition process also empowers BRI countries to more actively engage their resources and labor forces in global industries. Green industries have the potential to become new economic growth drivers in BRI countries.

What can China do to help BRI countries develop under green constraints? The key is to help BRI countries seize green opportunities and reduce green costs. China has technological and financial advantages in the green transition. It can strengthen collaboration with BRI countries in green infrastructure and manufacturing, incorporating their resources in new energy metals, wind and solar resources, and low-cost labor into the global green economy. This would enable BRI countries to benefit from the development of green industries. At the same time, China can help BRI countries cut green costs, encourage firms to apply higher emission standards, strengthen construction of social development projects, and promote establishing a cross-border environmental compensation mechanism. China can also share its own experience with BRI countries to help them break through green constraints in development.

Author: CHEN Ji, WANG Shuai, JIANG Shurui, ZHAO Yang.

3.1 A New Development Path for BRI Countries

Global environmental policies are becoming increasingly stringent as environmental awareness increases. We note that not only developed countries, but also many developing BRI countries, are tightening their environmental policies. According to the OECD, the Environmental Policy Stringency (EPS) of BRI countries such as Türkiye, Indonesia, and South Africa rose rapidly after the 1990s.¹ Many BRI countries already face tightening environmental constraints in the early stages of development. How will this affect the development of BRI countries? How can China better build a green BRI together with other countries?

To analyze the path of economic development for BRI countries under tightening green constraints, we begin with the relationship between the environment and development.² Environmental economics describes an inverted U-shaped relationship between a country’s economic development and green environmental indicators—i.e., the Environmental Kuznets Curve (EKC). According to the EKC, as a country’s GDP per capita grows, the level of environmental pollution first rises and then falls,³ a phenomenon described as “polluting first and cleaning up later”. Reducing carbon emissions, treating pollutants, and protecting the environment cannot be easily or quickly accomplished. The R&D of green technologies and purchase and operation of pollution control equipment will increase costs of companies, pushing up the green costs of economic development. In the early stages of economic development, the traditional path of polluting first and cleaning up later prioritizes economic growth at the expense of the environment.

However, as environmental constraints tighten, economists have observed a flattening of the EKC in developing countries.⁴ This suggests that developing countries produce less pollution and emissions than developed countries did at the same level of development. For industrial SO₂ emissions, South America and Asia, where developing countries are concentrated, have flatter EKCs than Europe and North America (Fig. 3.1). At GDP per capita of Intl$5000, SO₂ emissions per capita in North America (1890s) and Europe (1930s) were 90 kg and 40 kg, while emissions in South America (1950s) and Asia (1990s) were only 20 kg and 10 kg. For carbon emissions per capita, developing countries like China, Malaysia, and Thailand also have much lower EKCs than developed countries such as the US, Germany, and the UK (Fig. 3.2). At GDP per capita of Intl$10,000, carbon emissions per capita in the three developing countries (1990s–2010s) were around 5 t, while emissions in the three developed countries (1930s–1960s) exceeded 10 t.

Fig. 3.1

Source Our World in Data, Maddison Project Database, CICC Global Institute

EKC of SO₂ emissions per capita in select regions.

Fig. 3.2

Source Our World in Data, Maddison Project Database, CICC Global Institute

EKC of CO₂ emissions per capita in select countries. Note The data range of some countries is from the eighteenth century to the present, and the data of each country is fitted with a quadratic function.

The flattening of the EKC implies a change in the relationship between the environment and development. Given the green constraints, it seems that BRI countries can no longer follow the path of polluting first and cleaning up later as developed countries did. Instead, developing countries must follow a new path of green development that encompasses “cleaning up while developing”.

We believe that many BRI countries already face tightened green constraints while in the early stages of development and have to follow a new development path due to two main forces behind the tightening of green constraints. The first is the escalating international initiatives to address global environmental issues such as climate change and loss of biodiversity. The second is increasing public awareness of environmental protection in BRI countries. Such factors have resulted in tightening constraints on environmental damage such as pollutant emissions and loss of biodiversity.

3.1.1 Navigating Global Constraints: Intensifying Efforts to Tackle Environmental Challenges

With the release of a series of international conventions on environmental protection, BRI countries are facing tightening environmental constraints. The United Nations Conference on Environment and Development held in Rio de Janeiro in 1992 adopted the United Nations Framework Convention on Climate Change and the Convention on Biological Diversity, which aimed at promoting global initiatives that addressed two major global environmental issues—climate change and the loss of biodiversity. Subsequently, several agreements on environmental protection were adopted at international conventions (e.g., the Paris Agreement and the Kunming-Montreal Global Biodiversity Framework). The Net-Zero Banking Alliance and the Joint Declaration of the Banking Sector to Support Biodiversity Conservation restrict international financial institutions from financing projects that have high environmental risks. Such limitations have imposed environmental constraints on BRI countries.

A study led by Tsinghua University and Vivid Economics team found that if BRI countries continued on the path of polluting first and cleaning up later, the world would be unlikely to achieve its goal of limiting the rise in global temperature to less than 2 °C above preindustrial levels. To meet this target, BRI countries would need to reduce their emissions by almost 70%, imposing a significant carbon constraint on their economic development.⁵ Furthermore, developed countries have either introduced or are contemplating unilateral trade policies to enforce more substantial carbon constraints on all countries. This approach is driven by concerns about carbon leakage given the negative externalities associated with carbon emissions. A typical example is carbon tariffs. The EU has enacted the Carbon Border Adjustment Mechanism (CBAM), and the US has instituted the Clean Competition Act. The G7 is working toward establishing a “climate club” and forming a carbon tariff alliance. We believe that unilateral trade policies such as carbon tariffs will exert more significant international carbon constraints on BRI countries’ exports, thus forcing them to expedite measures to cut carbon emissions.

3.1.2 Domestic Constraints: Increasing Public Awareness of Environmental Protection

Domestically, BRI countries also face public demand for environmental protection. The global environmental movements that began in the 1960s, coupled with numerous environmental incidents, have been heightening public awareness of environmental protection. Particularly, the rapid dissemination of information on the internet has quickly unified and raised public awareness of environmental protection. In many BRI countries, individuals, non-governmental organizations, and media already exhibit a robust awareness of environmental protection. Of particular concern are two issues—pollution and biodiversity loss. The direct impact of air and water pollution on human health drives much of this concern. Moreover, many local residents rely on ecologically related industries such as agriculture and tourism, which are highly susceptible to changes in biodiversity. In some countries, local culture is deeply entwined with biodiversity.⁶

For example, projects such as the Lamu Coal Power Station in Kenya and the Kaliwa Dam in the Philippines faced environmental risks.⁷ Despite the significant disparities in economic development in different countries, there is rapid convergence in global public awareness of environmental protection. This is the reason that some BRI countries have suspended power projects that may cause environmental problems even in the face of severe power shortages. Behind what may appear to be an irrational decision is the commitment to green governance supported and driven by heightened public awareness of environmental protection.⁸ Environmental constraints shaped by public awareness (often termed informal environmental regulations⁹) have become a significant force behind the tightening of formal environmental regulations in BRI countries.¹⁰

3.2 New Challenges from Rising Costs

While the new path of green development encompassing cleaning up while developing is desirable, trade-offs between environment conservation and development do exist. Most BRI countries are developing economies, and industrialization is likely to be a necessary step for them to attain economic development, while it also inherently leads to pollutant emissions and environmental damage. BRI countries will face challenges in adopting the new path of green development of cleaning up while developing, compared with the traditional path of polluting first and cleaning up later, in our view.

To explore these challenges, we need to revisit economic growth theory. According to the production function, an economy has the capability to convert factors of production such as capital, labor, land, and energy into output given specific technological conditions. This implies that economic growth is linked to technology and factor costs.¹¹ Other things being equal, the lower the factor costs and the higher the productivity, the lower the production costs for companies. This in turn improves investment return, encourages corporate investment, and promotes economic growth. We think that the main challenge for the new path of green development compared to the traditional development path lies in rising green costs, which could slow down economic development (Fig. 3.3).

Fig. 3.3

Source CICC Global Institute

Rising technology and factor costs under green constraints. Note ↑ indicates an increase, and ↑↑↑ indicates a significant increase.

3.2.1 Technology: Costs of Some Green Technologies Remain High

The cost of some green technologies remains high, especially for carbon emissions reduction technologies. Currently, countries primarily reduce carbon emissions by adopting low-carbon or zero-carbon production solutions emphasizing clean power and electrification.¹² However, the costs associated with clean power and electrification remain high in most BRI countries. While the levelized cost of energy (LCOE) of renewable power generation has declined significantly globally, making it competitive with coal-fired power,¹³ the weak manufacturing capabilities and high interest rates in most BRI countries contribute to the continued high cost of renewable power generation.¹⁴ For example, in Indonesia, the LCOE of solar power and onshore wind power are around 20% and more than 80% higher than LCOE coal-fired power by 2022, respectively.¹⁵

Similarly, in terms of electrification, the application of various low-carbon and clean production technologies translates to higher costs. Taking Türkiye’s steel industry for example, transitioning from blast furnaces to electric furnaces cuts carbon emissions per tonne of steel, but it simultaneously increases steel production costs by around 10%.¹⁶ Given that the cost of low-carbon and clean production technologies in high-carbon industries is generally high, a rapid reduction in carbon emission would lead to a sharp increase in green costs.

Moreover, many carbon emission reduction technologies—even in developed economies—have not reached full-scale commercialization. Especially for BRI countries with weak innovation capabilities, it is difficult to leverage late-mover advantages in adopting such technologies. For example, many industrial processes can only reduce carbon emissions through carbon capture, utilization, and storage (CCUS) technologies. However, these technologies are still in the early stages of commercialization,¹⁷ and their costs are still high. Currently, the cost of carbon capture technology exceeds US $100 per tonne of CO_2, and energy consultancy firm Wood Mackenzie forecasts that the cost of CCUS projects will remain above US $70 per tonne of CO₂ even by 2050.¹⁸ For instance, Vietnam is set to continue to rely on coal-fired power for many years to come.¹⁹ A study indicates that applying carbon capture to reduce emissions in Vietnam’s coal-fired power plants would result in a substantial increase in electricity generation costs.²⁰

3.2.2 Energy: Carbon Emissions Reduction Policies Increase Cost of Energy Use

Green policies, especially those related to carbon emission reduction, will increase the cost of fossil energy use in BRI countries. We divide carbon emissions reduction policies into command-and-control or non-pricing policies (e.g., energy efficiency standards, carbon emission intensity or total control, and renewable energy standards) and pricing policies (e.g., carbon taxes and carbon markets). Both types of policies increase the cost of fossil energy use for energy-using companies. Non-pricing policies bring implicit carbon emission reduction costs, and pricing policies bring explicit residual carbon emission costs.²¹

BRI countries have widely adopted non-pricing carbon emissions reduction policies. BRI countries adopting non-pricing policies far outnumber those adopting pricing policies.²² While most BRI countries have introduced emissions reduction policies such as industrial energy efficiency and vehicle emission standards, measures in Africa are comparatively less robust.²³ Recently, many BRI countries have started to explore carbon pricing policies. For example, Vietnam outlined its development path for the carbon market in 2022, with plans to initiate pilot carbon trading in 2025. In February 2023, Indonesia inaugurated the first phase of mandatory carbon trading for coal-fired power plants and plans to introduce subsequent phases in 2025 and 2028. As a result, industrial enterprises must purchase energy-efficient and eco-friendly production equipment and invest more in the R&D of environmental protection technologies to comply with government-mandated carbon emissions reduction requirements. This will lead to higher costs associated with emissions reduction and fossil energy use.

3.2.3 Capital: Demand for Green Funds Pushes up Cost of Capital

BRI countries generally face challenges related to insufficient capital stock and higher capital costs (interest rates) compared to China and developed countries. These disparities stem from their limited capital formation capacity and lower levels of economic development.²⁴ However, the green transition is expensive. A recent study estimates that the climate finance demand of emerging markets and developing countries (excl. China) will reach US $1 trn (4.1% of GDP) by 2025 and US $2.4 trn (6.5% of GDP) by 2030. Notably, about half of these needs are expected to be met by domestic sources.²⁵ This suggests that BRI countries’ investment in green transition would expand their domestic funding needs and push up their funding costs. Moreover, with a given capital stock, green investment and financing could crowd out other capex, leading to higher capital costs and slower development in capital-intensive industries.²⁶

A consequence of the high cost of capital for the green transition is that renewable power generation projects in BRI countries may not be economically viable. As renewable power generation projects are characterized by substantial initial capex and comparatively lower opex, their project economics (as measured by the LCOE) exhibit a heightened sensitivity to interest rates.²⁷ The United Nations Development Programme (UNDP) estimates that other things being equal, the LCOE of gas-fired power and wind power in developing countries with elevated capital costs are 6% and 40% higher than such costs in developed countries.²⁸

The limited appeal to private sector funds means that renewable power generation projects in BRI countries must depend on more affordable public funds, including domestic fiscal funds and international development assistance. In terms of fiscal funds, BRI countries have generally grappled with escalating expenditures on public health, energy, and foreign debt interest, coupled with declining fiscal revenue in recent years. Fiscal expenditures on environmental improvement have a lower multiplier effect on economic growth compared to expenditures on transportation infrastructure and R&D.²⁹ According to the International Monetary Fund (IMF), developed countries generally allocate more than 0.6% of GDP to fiscal spending on environmental protection, while BRI countries typically allocate 0.3–0.4%.³⁰ In contrast to fiscal funds, international public funds contribute more actively to environmental improvement and can play a significant role in supporting green development of BRI countries. However, the current flow of international funds into BRI countries remains insufficient for meeting their substantial external financing needs.³¹

3.2.4 Land: Changes in Use Patterns Increase Cost of Land Use

Land use patterns are evolving under green constraints, highlighting the growing significance of land as a crucial factor of production. Beyond providing space for construction of renewable energy projects (such as wind power, solar power, and hydropower), land also absorbs carbon dioxide in the form of carbon sinks such as forests. Addressing climate change may necessitate changes in land use and landforms. Land occupation during economic development is a key cause of biodiversity loss,³² especially through habitat loss or fragmentation resulting from economic activities such as arable land reclamation, industrialization, urbanization, and road infrastructure construction. Achieving biodiversity conservation requires significant adjustments to land use patterns.

Adopting the cleaning up while developing path aimed at addressing climate change and conserving biodiversity could reduce available land and raise land use costs. This dynamic could have adverse effects on economic development, particularly in BRI countries that boast rich biodiversity resources but have limited land area.

This conflict between land use and economic development is more evident in BRI countries in which infrastructure investment projects that cover expansive land areas—such as water conservancy, hydropower, and road transport—might not be built due to potential harm to biodiversity. Consequently, this hampers power and infrastructure development in BRI countries. Despite significant untapped hydropower development potential in Southeast Asian countries such as Indonesia, Myanmar, and Malaysia, as well as Russia and Türkiye, concerns related to biodiversity may impede the construction of necessary hydropower projects. Similarly, while some countries in Southeast Asia and South Asia still have substantial demand and room for improvement in road network connectivity and infrastructure quality, the rich biodiversity in these regions may pose obstacles to the construction of hydropower and road infrastructure. This scenario may lead to underutilization of hydropower resources and gaps in road infrastructure.

3.3 New Opportunities from Green Industries

Historical evidence suggests that developing countries can achieve economic development by capitalizing on opportunities arising from global development trends. This involves allocating a country’s factors of production on a broader scale and participating in global production and the global division of labor. The green transition is one of the most prominent development trends globally, and we attribute this acceleration in recent years to the growth of new energy industries and the implementation of national policies. Although BRI countries face rising green costs under environmental constraints, the green transition also presents new comparative advantages. Many BRI countries endowed with resources such as new energy metals, wind energy, and solar energy can find opportunities in global green industries. Moreover, the sizeable labor forces in these countries can participate in global production within the context of the green transition. In addition, an economy’s development hinges on its factor endowments to cultivate industries where it has comparative advantages and can participate in global production.³³ In this context, we believe that the green transition will allow BRI countries to use their resources and labor forces to further participate in global industries. Green industries have the potential to become new economic growth drivers for BRI countries.

3.3.1 New Resources Offer Comparative Advantages

The global green and low-carbon transition essentially replaces traditional energy sources with new energy sources. Amid the green transition, the increasing importance of new energy metals such as lithium, cobalt, nickel, platinum, copper, and manganese gives new comparative advantages to BRI countries that have such new energy metal resources. The US Geological Survey (USGS) notes that the BRI countries that hold new energy metal resources include Chile and Argentina (rich in lithium resources); the Democratic Republic of the Congo, Russia, the Philippines, and Cuba (rich in cobalt); Indonesia, the Philippines, and Russia (nickel resources); and South Africa and Russia (platinum resources). As demand for new energy metals increased against the backdrop of the global green transition and the energy supply shock in 2022, the export revenue from new energy metals increased.³⁴

More importantly, many BRI countries rely on their new energy metal resources to diversify into downstream industries that have higher added value such as new energy metal smelting and electric vehicles. This allows them to achieve development catch-up. For example, Chile is developing its smelting industry and increasing its smelting capacity to reach carbon neutrality and promote sustainable industrialization.³⁵ In 2020, Indonesia banned nickel ore exports. Consequently, its domestic investment in metal processing industries such as nickel smelting rapidly grew, leading to an increase in both output and export value of nickel products with higher added value.³⁶ Moreover, as nickel is an essential raw material for electric vehicle batteries, Indonesia is also supporting the development of its electric vehicle and parts industries. The country aims at establishing a complete new energy vehicle value chain encompassing mining, smelting, battery production, and vehicle manufacturing. To achieve this, Indonesia is seeking foreign investment by offering preferential tax policies. This serves as a prime example of seizing the opportunity presented by the green transition to seek development. As Indonesia’s then-president Joko Widodo emphasized, the path to the country’s development lies in developing downstream industries.³⁷

BRI countries in North Africa, West Asia, and South America are rich in wind and solar resources, giving them comparative advantages in green transition. If wind and solar resources are combined with little-utilized, low-cost land such as deserts, this could allow countries to better leverage their comparative advantages in resource endowments. For example, the EU and North Africa plan to cooperate on renewable power generation and green hydrogen in the Sahara Desert. This initiative aims at making full use of North Africa’s solar and wind resources coupled with low-cost land. The cooperation can help the EU reach its carbon emissions reduction target and promote power supply and economic development in the BRI countries in North Africa.³⁸ Kazakhstan also has rich solar and wind resources, and proposes building 10 GW of new energy projects by 2035.³⁹

3.3.2 Labor Force Participation to Rise

Many BRI countries have large labor forces. Traditional energy-intensive and high-polluting manufacturing industries are primarily characterized by their reliance on technology and capital, and feature relatively short value chains. It is difficult for BRI countries to participate in these industries and leverage their comparative advantages in labor resources. In contrast, new energy industries such as solar and wind power have lower technological barriers to entry and long value chains. Significant labor is required in these industries, from the manufacturing of solar cells and modules to the construction, operation, and maintenance of power plants. A study found that the number of jobs created by renewable power generation per kWh exceeds three times that of fossil power generation.⁴⁰

This suggests that BRI countries are more likely to participate in new energy industries,⁴¹ making it easier for them to leverage their comparative advantages particularly in low-cost labor. This in turn potentially boosts their labor force participation rates and fosters the growth of green employment. According to the IEA’s World Energy Employment 2022 report, clean energy industries now surpass fossil energy industries in terms of employment in most BRI countries or regions except the Middle East and Russia. The IEA anticipates that the global energy transition will create at least 13 mn new jobs by 2030.⁴² In Morocco, where the unemployment rate is high, the Noor I solar project created about 1800 construction jobs and 250 operation jobs. Moreover, Siemens’ wind turbine rotor blade plant created another 700 jobs. The energy transition is expected to create more than 480,000 jobs in Morocco over the next 20 years.⁴³ New energy industries are inclusive, and present opportunities to increase BRI countries’ participation in global green industries and raise their domestic labor income.

BRI countries such as Türkiye and Vietnam have already established robust international competitiveness in certain new energy projects thanks to their advantages in low-cost labor and low technological barriers to entry within new energy industries. This is particularly evident in engineering, procurement and construction (EPC) projects in which labor costs play a more significant role. Many companies from BRI countries are experiencing substantial growth in solar EPC projects. Companies such as Eko Renewable Energy in Türkiye and RumtechS in Vietnam have demonstrated considerable strength to compete with their counterparts in China and developed countries.⁴⁴ Some BRI countries are also competitive in solar cell and module production thanks to their advantageous factor prices. CICC Research estimates that the production costs of solar cells and modules in Southeast Asian countries are only about 5% higher than in China in early 2020s. Moreover, these countries benefit from low tariffs on their exports.

3.4 Reflections and Insights

China’s proposal that the BRI should be green aligns with the above analysis of opportunities and challenges facing BRI countries in green development. We believe that the key to establishing a green BRI lies in helping these countries maximize green benefits while minimizing associated costs. On the one hand, we believe that China can leverage its expertise in green industries to help BRI countries capitalize on opportunities within the green value chain, enabling them to share the economic benefits of green development. At the same time, we believe that China can actively address the environmental costs of BRI countries by drawing upon its technological, financial, and management strengths. China can also call for the international community to contribute more to compensating developing countries for the global environmental costs they bear.

3.4.1 Harnessing Green Opportunities by Leveraging Complementary Strengths

We believe that China can integrate its competitive advantages in green industries with the resources and labor forces of BRI countries so as to assist them in capitalizing on green development opportunities.

For BRI countries abundant in new energy metal resources, we believe that China could make distinctive contributions to help them break the so-called “resource curse”.⁴⁵ In contrast to many developed countries that primary focus on adopting “soft infrastructure” measures such as reinforcing resource revenue management and enhancing the transparency of information disclosure, China can provide “hard infrastructure” solutions for resource-rich countries to help them diversify their economies and break the “resource curse”.⁴⁶ Many resource-rich countries face the challenges of inadequate infrastructure and high transportation costs, impeding the sustainable development of their economies. Addressing this, we see a pressing need to develop and enhance infrastructure in these countries. In cooperating with these countries on resource projects, China can play a pivotal role in improving their infrastructure by leveraging its strengths in “hard infrastructure” construction (i.e., low construction costs, short construction periods, high construction quality, and low financing cost).

Moreover, China possesses substantial potential to aid countries abundant in new energy metal resources in expanding into midstream and downstream manufacturing industries. Several Chinese new energy vehicle manufacturers such as BYD and SAIC have established electric vehicle manufacturing plants in Indonesia. Moreover, Chinese firms such as Huayou Cobalt and Lygend Resources & Technology have ventured abroad to build cobalt and nickel smelting capacity.

For BRI countries with abundant wind and solar resources, we believe that China has the potential to assist in the development of local industries and unlock labor dividends by enhancing cooperation in green power infrastructure construction. China’s cost advantages and economies of scale contribute to the global competitiveness of its solar products and electrical equipment. In light of BRI countries’ demand for construction of wind and solar power plants, as well as their imports of related equipment and parts, China can engage in mutually beneficial cooperation with these countries in green power construction and new energy equipment trade.

South Africa aims at 20.4GW of new installed capacity of wind and solar power by 2030.⁴⁷ In pursuit of this goal, several Chinese firms such as Goldwind Science & Technology and Longyuan Power have collaborated with South Africa on wind and solar power plants.⁴⁸ Such cooperation also boosted China’s equipment exports to South Africa. At the same time, some BRI countries are grappling with the challenge of inadequate power grid infrastructure as they strive to develop clean power industries. Leveraging its leading power grid technology, China can help BRI countries enhance their green infrastructure necessary for development of green industries. For example, Power Construction Corporation of China’s EETC 500 kV power transmission project in Egypt has played a significant role in the upgrading of the country’s national power grid.⁴⁹

3.4.2 Supporting the Cost Reduction for Green Development

A crucial question for BRI countries involves finding a better balance between environmental preservation and development and paving the way for a new era of sustainable development at lower environmental costs. Addressing this question requires examining the externalities associated with environmental issues. In economic terms, externality theory holds that in the absence of effective environmental policy mechanisms, externalities can result in the divergence between private cost–benefit and social cost–benefit related to environmental public goods.⁵⁰ This discrepancy hinders the market from achieving optimal resource allocation. Theoretically, two approaches can be employed to solve this cost–benefit inconsistency: (1) Imposing costs on environmental polluters for negative externalities; and (2) compensating environmental protectors for positive externalities.

• (1) Assuming the cost of environmental damage

First, we believe that China can raise companies’ consciousness of environmental responsibility and guide them in bolstering environmental assessments and public participation. This can be achieved by establishing environmental industry norms for overseas investment, fostering industry self-discipline, and guiding firms to embrace environmental responsibly. Meanwhile, China needs to enhance companies’ proficiency in conducting environmental due diligence for overseas projects and improve the recognition of environmental impact assessment information in BRI countries.⁵¹

Additionally, China can also promote transparency in project information and encourage companies to publish environmental reports regularly. Stakeholder participation in environmental decision-making processes can be promoted to mitigate the impact of informal regulations on project implementation. In particular, China’s decision to halt new overseas coal-fired power projects,⁵² announced in September 2021, reflects its commitment to avoiding environmental damage and assuming associated costs. Following the announcement, at least 15 coal-fired power projects totaling 13 GW in which China participated were cancelled within six months, and a potential total of 32 coal-fired power projects (37 GW) may eventually be cancelled.⁵³ Such initiatives, in our view, will contribute to supporting green and low-carbon energy development in developing countries.

Second, we believe that China can motivate companies to bear environmental costs and reduce emissions by raising emission standards to mitigate environmental damage. In line with the Environmental Protection Guidelines for Outward Investment and Cooperation Construction Projects jointly issued by China’s Ministry of Ecology and Environment and Ministry of Commerce in 2022, companies are encouraged to adopt international standards or China’s more stringent standards when host countries lack relevant environmental policies or have low standards. We see this approach as better equipping companies to address the risks and challenges in the BRI’s green development.

A typical example of adopting high environmental standards to assume costs is PetroChina’s oil and gas project in Chad. The project adhered to international environmental standards regarding atmosphere, soil, groundwater, and waste treatment. The firm also fulfilled its social responsibility by organizing employees to participate in afforestation activities. Recognizing these efforts, the project received a certificate of outstanding contribution to environmental protection from the government of Chad.⁵⁴ From a cost–benefit analysis perspective, environmental risks associated with projects are increasing due to stricter green constraints, while the cost of pollution control is falling thanks to technological advancements. Adopting high environmental standards may increasingly emerge as a rational choice for Chinese firms.

Third, we believe that China can direct companies to assume environmental costs even after projects are completed. This can be achieved by establishing a follow-up project tracking and assessment mechanism, as well as stipulating requirements for environmental information disclosure and the handling of potential environmental risk events during project operation. Such measures would encourage and guide companies to fortify environmental impact management throughout the life cycle of projects. In the future, accountability measures may be enforced for violations of environmental regulations and standards in BRI investment to ensure that firms fulfill their environmental responsibilities. For projects that prioritize environment considerations and demonstrate successful outcomes, China can compile them as exemplary environmental practices to provide references and incentives for companies.

• (2) Compensating for the benefits of environmental protection

On the one hand, we believe that China can call for global collaboration in compensating for environmental protection measures. This would involve participating in and leading international environmental protection and sustainable development initiatives. Moreover, it would be valuable to explore establishing a BRI cross-border environmental compensation mechanism and encourage developed countries to participate. It is reasonable to assert that developed countries should shoulder a greater responsibility for compensating BRI countries for their environmental protection. This stems from the fact that developed countries are actually beneficiaries of the environmental protection efforts made by BRI countries. Historically, developed countries have contributed significantly more to cumulative emissions and environmental damage compared to developing countries. The environmental protection measures taken by developing countries, such as the protection of the Amazon rainforest, play a crucial role in the global climate and ecological environment. However, developed countries have not adequately compensated for these environmental benefits. Aligning environmental responsibility with the level of economic development and requiring developed countries to compensate for global environmental benefits aligns with the principle of “common but differentiated responsibilities”.⁵⁵

On the other hand, we believe that China can extend various forms of compensation to BRI countries, including financial assistance. Given that risks are manageable, China can provide aid funds and technological support to BRI countries as compensation for their environmental protection efforts. A viable approach is to offer Payment in Kind to BRI countries.⁵⁶

3.4.3 Sharing China’s Experience: Overcoming Green Development Constraints

China has navigated a stage marked by growing conflict between economic development and environmental protection, and the lessons learned from this experience are valuable as China advocates for a green BRI.

Lesson No. 1: Addressing environmental issues in development. During its initial stages of economic development, China mainly adopted a reactive approach to environmental protection. The emphasis was on addressing environmental issues in specific locations or factories to resolve immediate concerns.⁵⁷ As China’s economic development gained momentum, the rapid expansion of energy-intensive and highly polluting industries exacerbated environmental problems, creating a systematic conflict between the environment and development. Recognizing this, China emphasized the importance of coordinating environmental protection and development, and made “sustainable development” a national strategy.

After 2012, China’s economic development entered a new normal, and the country stepped up efforts to address environmental issues such as air pollution. Concurrently, green industries such as the lithium-ion battery, photovoltaic, and new energy vehicle industries emerged as new drivers of economic growth.⁵⁸ China took the initiative to promote green development. We note that with economic growth and industrial restructuring, green constraints on the economy are diminishing, while the contribution of green industries to economic growth is gaining strength. The higher the level of economic development, the stronger the ability to tackle environmental issues. We think that an essential lesson from China’s experience for BRI countries is that overcoming green constraints in development is key to solving environmental issues.

Lesson No. 2: Nurturing green and environmental protection industries. Traditional environmental management typically occupies the tail end of economic activity and industrial production, and thus they may not become a pillar industry. However, the current global green transition—which encompasses shifts in energy supply, production methods, and lifestyles—presents opportunities for developing countries to form pillar industries. China’s development of green industries initially stemmed from the international market and was subsequently bolstered by domestic industrial policy. Its success underscores the importance for BRI countries to leverage their resources and labor forces to participate in global green industries.

As a new product standardizes, its mature production process and production capacity often relocate to regions with lower production and transaction costs. As new energy industries mature and enter the commercialization stage, conditions become conducive for their expansion into developing countries. In pursuit of low labor and tariff costs, substantial production capacity in new energy industries have already shifted to BRI countries in Southeast Asia. This trend is likely to persist, contributing to local employment and economic development. We believe that BRI countries are well positioned to embark on a new path of green development by attracting and nurturing new energy industries by favorable industrial policies.

Lesson No. 3: Maximizing the impact of international aid and support. China emphasizes the efficient use of international aid funds, prioritizing the resolution of urgent and large-scale environmental challenges to mitigate the economic costs of environmental pollution. For example, China used World Bank loans to support air pollution control in the Beijing–Tianjin–Hebei region.⁵⁹ Simultaneously, China directs aid funds toward the acquisition of advanced environmental protection technologies, and enhances its capabilities through international exchanges and training initiatives. More importantly, recognizing the escalating severity of climate change and biodiversity loss, China has been intensifying its collaborative efforts on global environmental issues. Initiatives like the EU-China Energy Cooperation Platform, focusing on energy conservation and efficiency, can contribute to reducing pollution and carbon emissions. Additionally, projects such as the integrated solid waste management cooperation project between China and United Nations Environment Programme (UNEP) demonstrate China’s commitment to promoting waste management and recycling, thereby reducing solid waste pollution and preserving biodiversity.