Growing Momentum for Coal Phase-Down in the Global South: Lessons from Pakistan

By Rishikesh Ram Bhandary and Cecilia Han Springer

Although Chinese leader Xi Jinping announced last year that China will no longer build new coal-fired power plants overseas, the Boston University Global Development Policy (GDP) Center’s China’s Global Power (CGP) Database shows 60 coal plants around the world that have received Chinese development finance or foreign direct investment are currently operational, representing 41 gigawatts (GW) of generating capacity. The countries with the most Chinese-funded operational coal capacity are Vietnam, Indonesia, India, Pakistan and South Africa.

Pakistan has received the second-greatest amount of China’s overseas development finance of any country since 2008, at nearly $40 billion, 30 percent of which has gone into the electric power sector. The China-Pakistan Economic Corridor (CPEC), jointly established in 2015, is also a strategic pillar of China’s Belt and Road Initiative (BRI). There are several currently operating Chinese-funded coal plants in Pakistan, including the Port Qasim Power Plant, which was the subject of previous GDP Center research evaluating the local health costs of air pollution.

To mitigate local air pollution, as well as the global climate impacts of operating coal plants, several proposals for early retirement of such plants have been recently issued. The Just Energy Transition Partnership with South Africa was announced at the 2021 United Nations Climate Change Conference known as COP26 last year, wherein the UK and other developed countries will help South Africa phase out coal. The Asia Development Bank also announced at COP26 a new program to buy and retire coal plants in Southeast Asia. Finally, Germany has indicated that it may focus on a similar coal phase-down mechanism during its 2022 Group of 7 (G7) presidency.

Could these proposals be expanded to other countries, like Pakistan? In a recent World Development Perspectives special issue, titled “The Future of Coal in the Global South”, we focus on the issue of coal phase-down in BRI host countries. In one piece, Cecilia Han Springer argues that in the wake of China’s announcement to not build new coal plants overseas, policy attention should now shift to early retirement. Coal plants typically have 30-to-40-year lifetimes, and nearly all the Chinese-funded coal plants tracked in the CGP Database are less than a decade old.

Understanding why and how policymakers incentivized coal-fired power generation is vital to identify the policy options available to phase down coal and increase the uptake of renewable energy. In another piece, Rishikesh Ram Bhandary and his co-author Kelly Sims Gallagher focus on Pakistan in examining how and why the Pakistani government put in place a set of incentives to attract finance for coal plants. They find the Pakistani government was strongly motivated to address the energy crisis the country faced in the early part of the 2010s. With domestically available coal lying unutilized, the Pakistani government sought to meet its energy needs by tapping into this local resource. Concomitantly, China’s growing international presence via the BRI opened up a major opportunity for Pakistan to obtain finance to support coal plants. With most multilateral development banks already limiting support for coal, it is no surprise that China emerged as the primary backer for coal-fired power plants in Pakistan.

Cooperation on energy was a key focus area of the CPEC. As data from the International Energy Agency (IEA) shows, the Pakistani government was able to increase coal-fired power generation with the help of Chinese financing from 148 GWh in 2015 to 15,930 GWh in 2018. Policymakers also viewed coal as a means to produce energy at the desired scale while renewables were not seen as offering significant sources of energy. This perception was compound by concerns around the ability of the electric grid to handle large quantities of variable renewable energy.

The accelerated power plant construction has come at a steep cost. The Pakistani government guaranteed very high rates of return to both independent power producers, as well as the coal projects under the CPEC. As these high rates added to the strain the Pakistani energy sector was already experiencing, the government re-negotiated its contracts with a consortium of 47 independent power producers. The government is also seeking to re-negotiate contracts with Chinese counterparts for CPEC projects.

The Pakistani government faces a major cash crunch and has been negotiating a rescue package with the International Monetary Fund (IMF). The Imran Khan government passed an IMF-mandated supplementary budget in December 2021 that imposes taxes on items that had long enjoyed exemptions, such as renewable energy equipment imports.

Once Pakistan can address these immediate, financial challenges, it must directly tackle the factors that created and sustained interest in having coal-based power.

China and Pakistan can build on existing efforts such as the Quaid-e-Azam Solar Power Park, but the Pakistani government will need supportive policies in place to significantly expand clean energy. One potential solution is for the Pakistani government to encourage investment in clean energy within industrial zones, which are clusters of heavy industry that are becoming a focus of CPEC. Another idea is for Pakistan to participate in debt-for-climate swaps with China, in which debt forgiveness would be exchanged for climate change mitigation efforts – such as clean energy generation.

While it could take many forms, a clean energy mobilization plan will require three essential ingredients:

• Level the playing field: Coal-fired power plants received preferential rates when compared to renewable energy projects. The decision to tax renewable energy imports further disadvantages renewables.
• Energy generation must lead to economically meaningful activities: The CPEC is headed in the right direction with a focus on industrial parks. Restoring the financial health of the energy sector will be vital to switch the focus to renewables.
• Electric grid improvement and extension: One of the primary hesitations of policymakers in scaling up renewable energy was the uncertainty around how well the grid could handle large quantities of variable renewable energy. Similarly, the grid will also have to be extended to improve coverage.

The history of coal is short in Pakistan. Unlike economies that are intricately tied to coal, Pakistan’s just transition needs are significantly less daunting, making it an important area to explore the potential of early retirement and transition to renewable energy.

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