China's green investment benefits countries and regions along Belt & Road

Against the backdrop of shrinking global investment market, China beefs up green investment in the Belt & Road countries and regions, and China’s ODI under the carbon neutrality target has a positive effect for them, according to an article recently published on Bulletin of Chinese Academy of Sciences.

With the title of “Belt and Road Initiative promotes green development of countries and regions along Belt & Road,” the article was written by Xia Yan, associate researcher of Institutes of Science and Development, Chinese Academy of Sciences (CAS), and Yang Cuihong, professor of Academy of Mathematics and Systems Science, CAS.

The article shows us that many countries have put forward their net zero carbon emission targets, but no large economy has ever achieved carbon neutrality so far. As a result, all countries need to put in great efforts to achieve carbon neutrality. Economies along the Belt and Road (Belt & Road countries and regions) are facing the common challenges of eco-environment and climate change. While introducing capital for faster development, they are undergoing the largest transformation toward green and low-carbon transformation in history. “Whether developing countries can achieve low-carbon development will play a decisive role in global climate change. Their efforts to implement green and low-carbon development in the global production network will have a great impact on global carbon emissions and carbon neutrality,” it writes.

Despite the shrinking global investment market, the scale of green financing continues to grow, and ODI between China and the Belt & Road countries and regions becomes increasingly active. China has played a positive role in the green investment in Belt & Road countries and regions. “According to calculations based on the transnational investment positions published by the Coordinated Direct Investment Survey (CDIS) of the International Monetary Fund (IMF), China’s ODI to Belt & Road countries and regions accounted for 12.46%, 7.82%, and 8.41% in the total foreign investment absorbed by these countries from 2016 to 2018, which is higher than that of other developed countries such as Singapore, the United States, and South Korea,” the article points out. In the post-pandemic era, China is also actively adjusting its energy investment deployment in Belt & Road countries and regions and guiding funds to the renewable energy sector.

Based on the two-way fixed effect panel model and interregional input-output model, this article puts forward a measurement model of the impact of China’s ODI on carbon emissions of Belt & Road countries and regions. The model calculations show that China’s ODI has a positive effect on the low-carbon development in these areas. From 2009 to 2018, China’s ODI to 25 Belt & Road countries and regions with more active ODI activities increased by 786%, and it is estimated that this reduced local carbon emissions by roughly 44.78 million tons. “It can be concluded that China’s ODI has cut down the carbon dioxide emission in most Belt & Road countries and regions, especially in Russia, Mongolia, and the five Central Asian countries. However, the comparative advantage of central and Eastern European and Southern European countries in green production leads to a weaker carbon emission reduction effect brought by China’s ODI,” it indicates.

 “One of the key measures to achieve the win-win situation of Belt & Road countries and regions is to strengthen economic connections to stimulate investment deployment and economic growth. Good economic and investment deployment will effectively connect these countries with each other, reduce the cost of economic transactions, and realize the complementary advantages of a large economic zone. The Belt & Road countries and regions that rely heavily on energy (especially petroleum resources) for development should integrate themselves into the global value chain to accelerate the green transformation and upgrading of their economy through cooperation with large economic zones,” the article mentions.

Based on the results and the current situation of China’s ODI, four pieces of policy suggestions are proposed. First, China should cooperate with Belt & Road countries and regions to explore technology-driven sustainable development systems and promote low-carbon technology transformation in key industries. This means to actively participate in the clean energy construction to jointly explore a technology-driven low-carbon development path for the Belt & Road countries and regions, and promote the transformation and upgrading of economic development mode in the countries relying on energy.

Second, a coherent green development policy for Belt & Road countries and regions should be established, “encouraging the Belt & Road countries and regions to propose or update their Nationally Determined Contribution (NDC) plans and announce their own carbon neutrality goals in the reconstruction of greening global value chain,” and “encouraging Belt & Road countries and regions to come up with their carbon neutrality goals, while guarding against the risks associated with previous energy-intensive projects due to changes in energy investment policy.”

Third, China should develop multilateral green cooperation, with special focus on the layout of green production network with the Central and Eastern European countries in economy, trade and finance. 

Fourth, China should optimize green investment entity structure to reduce climate financing risks, “reducing climate finance risks and putting climate finance in a strategic position”, and “optimizing the capital structure and debt structure of green investment entities in Belt & Road countries and regions.”