Unveiling the mixed impacts of Chinese overseas development finance on the low-carbon transitions

Abstract

China’s role in the Belt and Road Initiative (BRI) as a major provider of development finance (DF), surpassing G7 countries in total global contributions positions it as a pivotal player in influencing the low-carbon trajectories of BRI developing countries. This study first adopts the index decomposition analysis to examine how the scale, technique, and composition effects contribute to changes in CO₂ emissions across a sample of 102 BRI developing countries from 2000 to 2020. Then this study empirically investigates how Chinese DF and its subcomponents Official Development Assistance (ODA) and Other Official Flows (OOF) influence these three effects. Results show that scale effects are consistent drivers of CO₂ emissions while the other two present mixed impacts. While Chinese DF successfully brings positive contributions to industrialization in recipient countries, it inevitably brings adverse impacts on CO₂ emission intensities and fossil fuel consumption. Finally, results obtained for Chinese DF present different patterns compared to OECD-DAC donors’ DF. This study sets the foundation for future inquiries into the effectiveness of Chinese DF in promoting urgently needed low-carbon trajectories in recipient countries.

Keywords

Development finance / Low-carbon transition / Belt and road initiative / Sustainable development / South-South cooperation

References

[1] AdekoyaOB, OliyideJA, KenkuOT, AjayiOF. China’s technological spillover effect on the energy efficiency of the BRI countries. Energy Policy, 2023, 182: 113740.

[2] American Enterprise Institute (AEI) (2023) China global investment tracker (CGIT). Retrieved 29 Feb, 2024 from https://www.aei.org/china-global-investment-tracker/

[3] Anaxagorou C, Efthyvoulou G, Sarantides V (2020) Electoral motives and the subnational allocation of foreign aid in sub-Saharan Africa. Eur Econ Rev 127:103430. https://doi.org/10.1016/j.euroecorev.2020.103430

[4] AngBW. LMDI decomposition approach: a guide for implementation. Energy Policy, 2015, 86: 233-233.

[5] AngBW, GohT. Index decomposition analysis for comparing emission scenarios: applications and challenges. Energy Econ, 2019, 83: 74-87.

[6] AntweilerW, CopelandBR, TaylorMS. Is Free Trade Good for the Environment?. Am Econ Rev, 2001, 914877-908.

[7] Ayhan KM, Ohnsorge F (2019) A decade after the global recession. Retrieved 18 March, 2024 from https://thedocs.worldbank.org/en/doc/b9e2c532907731fc33861df9d018b2eb-0350012021/original/Decade-after-global-recession.pdf

[8] Banuri S, Dercon S, Gauri V (2019) Biased policy professionals. World Bank Econ Rev 33(2):310–327. https://doi.org/10.1093/wber/lhy033

[9] BekunFV, AlolaAA. Determinants of renewable energy consumption in agrarian Sub-sahara African economies. Energy Ecol Environ, 2022, 73227-235.

[10] BertheauP, LindnerR. Financing sustainable development? The role of foreign aid in Southeast Asia’s energy transition. Sustainable Dev (Bradford West Yorks England), 2022, 30196-109.

[11] BhattacharyyaS, IntartagliaM, McKayA. Does energy-related aid affect emissions? Evidence from a global dataset. Rev Dev Econ, 2018, 2231166-1194.

[12] BirdsallN, WheelerD. Trade Policy and Industrial Pollution in Latin America: where are the Pollution havens?. J Environ Dev, 1993, 21137-149.

[13] Brautigam D (2011) The dragon’s gift: the real story of China in Africa. Oxford University Press

[14] Brazys S, Elkink JA, Kelly G (2017) Bad neighbors? How co-located Chinese and World Bank development projects impact local corruption in Tanzania. Rev Int Organ 12(2):227–253. https://doi.org/10.1007/s11558-017-9273-4

[15] BRI International Green Development Coalition (BRIGC) (n.d.) Retrieved 18 March, 2024 from http://en.brigc.net/

[16] CabréMM, GallagherKP, LiZ. Renewable energy: the Trillion Dollar Opportunity for Chinese Overseas Investment. China World Econ, 2018, 26627-49.

[17] CaetanoRV, MarquesAC, AfonsoTL, VieiraI. A sectoral analysis of the role of Foreign Direct Investment in pollution and energy transition in OECD countries. J Environ Manage, 2022, 302Pt A114018-114018.

[18] CAITEC (2022) Multiple paths of China’s energy foreign aid to empower Africa: a summary of viewpoints. Retrieved 1 Nov, 2024 from https://res.caidev.org.cn/rc-upload-1653377664853-9-1653379977604.pdf

[19] CantareroV, MercedesM. Of renewable energy, energy democracy, and sustainable development: a roadmap to accelerate the energy transition in developing countries. Energy Res Social Sci, 2020, 70: 101716.

[20] CaoX, TengC, ZhangJ. Impact of the Belt and Road Initiative on environmental quality in countries along the routes. Chin J Popul Resour Environ (Online), 2021, 194344-351.

[21] CCICED (2023) Promoting sustainable development- the role of innovative financing mechanism (CCICED Special Policy Study Report, Retrieved 29 March, 2024 from https://cciced.eco/wp-content/uploads/2023/05/Promoting-Sustainable-Development-the-role-of-innovative-financing-mechanism-1.pdf

[22] ChenL, XieM. How do hard regimes absorb, overlap, and squeeze out soft regimes? Insights from global carbon markets. Global Public Policy Gov, 2023, 3160-85.

[23] ChengS, WangB. Impact of the Belt and Road Initiative on China’s overseas renewable energy development finance: effects and features. Renewable Energy, 2023, 206: 1036-1048.

[24] CopelandBR, TaylorMS. North-South Trade and the Environment. Q J Econ, 1994, 1093755-787.

[25] CopelandBR, ShapiroJS, TaylorMSGlobalization and the Environment, 2021In. CambridgeNational Bureau of Economic Research, Inc.

[26] Custer S, Dreher A, Elston TB, Escobar B, Fedorochko R, Fuchs A, Zhang S (2023) Tracking Chinese Development Finance: An Application of AidData’s TUFF 3.0 Methodology.

[27] DengF, WangY, LiZ, LiangX. China’s Technology Spillover effects in the countries along the Belt and Road - evidence from 49 BRI countries. Appl Econ, 2020, ahead–of–printahead–of–print1-16.

[28] Downs E (2019) China-Pakistan economic corridor power projects: Insights into environmental and social impacts. Columbia University Center on Global Energy Policy. Retrieved 1 Nov, 2024 from https://www.energypolicy.columbia.edu/sites/default/files/pictures/China-Pakistan_CGEP_Report_100219-2.pdf

[29] Dreher A, Fuchs A (2015) Rogue aid? An empirical analysis of China’s aid allocation. Can J Econ 48(3):988–1023. https://doi.org/10.1111/caje.12166

[30] Dreher A, Fuchs A, Parks B, Strange A, Tierney MJ (2021) Aid, China, and growth: evidence from a new global development finance dataset. Am Econ J Econ Policy 13(2):135–174. https://doi.org/10.1257/pol.20180631

[31] Dreher A, Fuchs A, Parks B, Strange A, Tierney M (2022) Banking on Beijing: the aims and impacts of China’s overseas development program. Cambridge University Press, Cambridge

[32] ElliottRJR, ZhouY. Environmental Regulation Induced Foreign Direct Investment. Environ Resour Econ, 2013, 551141-158.

[33] FeenyS, de SilvaA. Measuring absorptive capacity constraints to foreign aid. Econ Model, 2012, 293725-733.

[34] FeenyS, McGillivrayM. Scaling-up Foreign Aid: will the ‘Big push’ work?. World Econ, 2011, 34154-73.

[35] Ferchen M (2017) Where is the Development in China’s Global Development Finance? Carnegie Endowment for International Peace. Retrieved 22 March, 2024 from https://carnegieendowment.org/2017/12/08/where-is-development-in-china-s-global-development-finance-pub-75013

[36] Gehring KS, Wong MG, Kaplan L (2019) Aid and conflict at the subnational level: Evidence from World Bank and Chinese development projects in Africa (AidData Working Paper Series #70). Retrieved December 11, 2023 from https://www.aiddata.org/publications/aid-and-conflict-at-the-sub-national-level-evidence-from-world-bank-and-chinese-development-projects-in-africa

[37] GoodmanS, ZhangS, MalikAA, ParksBC, HallJ. AidData’s Geospatial Global Chinese Development Finance dataset. Sci Data, 2024, 11: 529.

[38] Grossman GM, Krueger AB (1993) The Mexico-U.S. Free Trade Agreement. In. M.I.T. Press

[39] GualbertiG, SingerCE, BazilianM. The capacity to spend development funds in the energy sector. Utilities Policy, 2013, 26: 36-44.

[40] HanX, ChatterjeeL. Impacts of growth and structural change on CO2 emissions of developing countries. World Dev, 1997, 253395-407.

[41] HaqueN, RashidS. Effects of cumulative energy aid projects on renewable energy generation capacity. Environ Dev, 2022, 42: 100692.

[42] HendersonKE. Contradictory governance norms within world society: energy development strategies, environmental protection, and carbon dioxide emissions. Environ Sociol, 2019, 54393-404.

[43] HernandezD. Are New Donors Challenging World Bank Conditionality?. World Dev, 2017, 96: 529-549.

[44] HoefflerA, SterckO. Is Chinese aid different?. World Dev, 2022, 156: 105908.

[45] HüblerM, KellerA. Energy savings via FDI? Empirical evidence from developing countries. Environ Dev Econ, 2010, 15159-80.

[46] IkegamiM, WangZ. Does energy aid reduce CO2 emission intensities in developing countries?. J Environ Econ Policy, 2021, 104343-358.

[47] ImaiK, KimIS. On the Use of two-way fixed effects Regression models for causal inference with Panel Data. Political Anal, 2021, 293405-415.

[48] International Energy Agency (IEA) (2023) World energy balances

[49] Isaksson AS, Kotsadam A (2018) Chinese aid and local corruption. J Public Econ 159:46–159. https://doi.org/10.1016/j.jpubeco.2018.01.002

[50] Jing Y, Mendez A, Zheng Y (2019) New development assistance in the making: an introduction. In: New development assistance. Springer Singapore Pte. Limited, pp 1–18. https://doi.org/10.1007/978-981-13-7232-2_1

[51] Kaya Y, Yokobori K (1993) Environment, Energy, and Economy: Strategies for Sustainability

[52] KilamaEG. The influence of China and emerging donors aid allocation: a recipient perspective. China Econ Rev, 2016, 38: 76-91.

[53] KimJE. Technological capacity building through energy aid: empirical evidence from renewable energy sector. Energy Policy, 2018, 122: 449-458.

[54] KlasenS, NestmannT. Population, Population Density and Technological Change. J Popul Econ, 2006, 193611-626.

[55] Knutsen T, Kotsadam A (2020) The political economy of aid allocation: Aid and incumbency at the local level in Sub Saharan Africa. World Dev 127:104729. https://doi.org/10.1016/j.worlddev.2019.104729

[56] Kong B, Gallagher K (2020) Chinese development finance for solar and wind power abroad (CGI Working Paper 009)

[57] Kretschmer B, Hübler M, Nunnenkamp P (2013) Does foreign aid reduce energy and carbon intensities of developing economies? J Int Dev 25(1):67–91. https://doi.org/10.1002/jid.1788

[58] LiP, QianH, ZhouW. Finding harmony between the environment and humanity: an introduction to the thematic issue of the Silk Road. Environ Earth Sci, 2017, 7631.

[59] LiC, ChenJ, GrydehojA. Island climate change adaptation and global public goods within the Belt and Road Initiative. Island Stud J, 2020, 152173-192.

[60] LiZ, GallagherK, ChenX, YuanJ, MauzerallDL. Pushing out or pulling in? The determinants of Chinese energy finance in developing countries. Energy Res Social Sci, 2022, 86: 102441.

[61] LiaoH, ChiY, ZhangJ. Impact of international development aid on FDI along the Belt and Road. China Econ Rev, 2020, 61: 101448.

[62] LiuH, WangY, JiangJ, WuP. How green is the Belt and Road Initiative? – evidence from Chinese OFDI in the energy sector. Energy Policy, 2020, 145: 111709.

[63] LuQ, FangK, HeijungsR, FengK, LiJ, WenQ, HuangX. Imbalance and drivers of carbon emissions embodied in trade along the Belt and Road Initiative. Appl Energy, 2020, 280: 115934.

[64] Manigiri B (2023) Lake Turkana wind power project in Kenya: all you need to know. Retrieved 1 Nov, 2024 from https://constructionreviewonline.com/construction-projects/__trashed-37/

[65] MandonP, WoldemichaelMT. Has Chinese aid benefited recipient countries? Evidence from a Meta-regression analysis. IMF Working Paper, 2022, 202246: 1.

[66] MarutaAA, BanerjeeR. Does energy aid improve energy efficiency in developing countries?. Empirical Economics, 2021, 611355-388.

[67] MorganP, ZhengY. Tracing the legacy: China’s historical aid and contemporary investment in Africa. Int Stud Quart, 2019, 633558-573.

[68] NugentJB, LuJ. China’s outward foreign direct investment in the Belt and Road Initiative: what are the motives for Chinese firms to invest?. China Econ Rev, 2021, 68: 101628.

[69] OECD (n.d.-a) Official development assistance - definition and coverage. Retrieved December 11, 2023 from https://www.oecd.org/dac/financing-sustainable-development/development-finance-standards/officialdevelopmentassistancedefinitionandcoverage.htm

[70] OECD (n.d.-b) Development co-operation of the People’s Republic of China. Retrieved 19 March, 2024 from https://www.oecd.org/dac/dac-global-relations/chinas-development-co-operation.htm

[71] OECD (n.d.-c) Other official flows. Retrieved December 11, 2023 from https://data.oecd.org/drf/other-official-flows-oof.htm#:~:text=official%20flows%20(OOF)-,Other%20official%20flows%20(OOF)%20are%20defined%20as%20official%20sector%20transactions,development%20assistance%20(ODA)%20criteria

[72] OECD (n.d.-d) Private finance mobilised by official development finance interventions. Retrieved November 6, 2024, from https://www.oecd.org/en/publications/private-finance-mobilised-by-official-development-finance-interventions_c5fb4a6c-en.html

[73] Omolore MP (2023) China’s renewable energy empire in Africa: Lifeline or debt trap? Earth.Org. Retrieved 1 Nov, 2024 from https://earth.org/chinas-renewable-energy-empire-in-africa-lifeline-or-debt-trap/

[74] PengH-R, TanX, ManagiS, Taghizadeh-HesaryF. Club convergence in energy efficiency of Belt and Road Initiative countries: the role of China’s outward foreign direct investment. Energy Policy, 2022, 168: 113139.

[75] PfeifferB, MulderP. Explaining the diffusion of renewable energy technology in developing countries. Energy Econ, 2013, 40: 285-296.

[76] Puppim de OliveiraJA, QianH. Perspectives in global environmental governance. Global Public Policy Gov, 2023, 315-11.

[77] Qi J, Qian H (2023) Climate finance at a crossroads: it is high time to use the global solution for global problems. Carbon Neutrality 2(1). https://doi.org/10.1007/s43979-023-00071-7

[78] QianH, QiJ, GaoX. What determines international climate finance? Payment capability, self-interests and political commitment. Global Public Policy Gov, 2023, 3141-59.

[79] RuiH, ZhangM, ShipmanA. Relevant knowledge and recipient ownership: Chinese MNCS’ knowledge transfer in Africa. J World Business: JWB, 2016, 515713-728.

[80] Sardoschau S, Jarotschkin A (2024) Chinese aid in Africa: attitudes and conflict. Eur J Political Econ 81:102500. https://doi.org/10.1016/j.ejpoleco.2024.102500

[81] SeldenTM, Holtz-EakinD. Stoking the fires? CO2 emissions and economic growth. J Public Econ, 1995, 57185-101.

[82] Shen W (2020) China’s role in Africa’s energy transition: a critical review of its intensity, institutions, and impacts. Energy Res Soc Sci 68:101578. https://doi.org/10.1016/j.erss.2020.101578

[83] State Council Information Office (SCIO) (2021) White Paper on China’s International Development Cooperation in the New Era. In

[84] State Council Information Office (SCIO) (2011) China’s Foreign Aid. Retrieved 19 March, 2024 from http://en.cidca.gov.cn/2018-08/09/c_261159.htm

[85] StrangeAM, DreherA, FuchsA, ParksB, TierneyMJ. Tracking Underreported Financial flows: China’s Development Finance and the aid–conflict Nexus revisited. J Confl Resolut, 2017, 615935-963.

[86] UNCTAD (2023) World investment report 2023. Retrieved March 3, 2024 from https://unctad.org/publication/world-investment-report-2023

[87] United Nations Development Program (UNDP) (2023) Human Development Index (HDI). Retrieved 3 March, 2024 from https://hdr.undp.org/data-center/human-development-index#/indicies/HDI

[88] Vadlamannati KC, Li Y, Brazys S, Dukalskis A (2019) Building bridges or breaking bonds? The belt and road initiative and foreign aid competition (AidData Working Paper #72). Retrieved 19 March, 2024 from https://www.aiddata.org/publications/building-bridges-or-breaking-bonds-the-belt-and-road-initiative-and-foreign-aid-competition

[89] VakulchukR, OverlandI, SuryadiB. ASEAN’s energy transition: how to attract more investment in renewable energy. Energy Ecol Environ, 2022, 811-16.

[90] WangH, YangY. Decomposition analysis applied to energy and emissions: a literature review. Front Eng Manage, 2023, 104625-639.

[91] WangQ, GuoJ, DongZ. The positive impact of official development assistance (ODA) on renewable energy development: evidence from 34 Sub-saharan Africa Countries. Sustainable Prod Consum, 2021, 28: 532-542.

[92] World Bank. (n.d.). World development indicators. Retrieved 29 March, 2024 from https://databank.worldbank.org/source/world-development-indicators?l=en#

[93] WuX, PanA, SheQ. Direct and indirect effects of climate aid on carbon emissions in recipient countries. J Clean Prod, 2021, 290: 125204.

[94] YangS, ParkS. The effects of renewable energy financial incentive policy and democratic governance on renewable energy aid effectiveness. Energy Policy, 2020, 145: 111682.

[95] ZengA, ShengY, GuB, WangZ, WangM. The impact of climate aid on carbon emissions reduction and the role of renewable energy: evidence from the Belt and Road countries. Environ Sci Pollut Res Int, 2022, 295177401-77417.

Funding

National Natural Science Foundation of China(72322013, 72234001, 72234002, 42341205)

Shanghai Philosophy and Social Sciences Project(2022EGL006)

RIGHTS & PERMISSIONS

The Joint Center on Global Change and Earth System Science of the University of Maryland and Beijing Normal University