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Over the past three months, South Korea and Japan, the second- and third-largest financiers of overseas coal power have announced plans to end this practice in principle.

In April, South Korea said it would stop funding new overseas coal projects. In May, Japan signed on to a statement stating that Group of Seven members will phase out direct government support for unabated overseas coal by the end of 2021, with the exception of “limited circumstances at the discretion of each country.”

As Japan and South Korea formulate concrete steps to implement these policies, they must work to limit exceptions to their bans on overseas coal finance. Failing to close major loopholes would not only diminish the decarbonization impact of these commitments, it would also weaken multilateral efforts to persuade the world’s largest financier of overseas coal, China, to reduce its coal exports and damage the credibility of similar multilateral efforts to champion the adoption of cleaner energy.

Japan and South Korea’s official retreats from overseas coal financing build on earlier steps towards an exit.

In July 2020, the Japanese government announced it would not fund new overseas coal projects, but left room to fund high-efficiency coal plants in limited circumstances. Private banks such as Mizuho, Sumitomo Mitsui and Mitsubishi UFG — three of the world’s largest private lenders — have also been moving away from certain types of overseas coal financing.

In South Korea, state utility company KEPCO announced in October 2020 it would no longer fund overseas coal power and that it would cancel or convert to liquid natural gas two of the four overseas coal projects in its pipeline. Like in Japan, banks and insurance groups in South Korea have also been exiting or restricting coal financing. International pressure had also been growing towards both governments and their private sectors over overseas coal finance.

Moving forward, both Japan and South Korea will need to develop plans for implementing their coal pledges. The language of the G7 statement was an important step forward that few would have predicted as recently as a year ago. Even so, the statement’s allowance for exceptions means that it is up to member countries to determine its significance.

Japan appears to be considering exceptions to a blanket ban on overseas coal finance. Likewise, the South Korean government is working through questions of policies that were not explicitly addressed in the April statement, including whether new transactions towards existing projects be allowed, including new financing for repairs or retrofitting to coal facilities that would extend their lifespans. Similarly, it is unclear whether there will be exceptions for plants using carbon capture, utilization and storage technologies.

These exceptions are not rounding errors. In fact, at the end of 2020, the public Japan Bank for International Cooperation (JBIC) agreed to loan up to approximately $636 million for the 1.2 gigawatt Vung Ang 2 coal plant in Vietnam. Three months later, JBIC announced that Vung Ang 2 was likely its last overseas coal project, but it did not cancel the financing — once complete, Vung Ang 2 is expected to emit approximately 6.6 million tons of carbon dioxide per year over its 25- to 30-year lifespan.

Other projects in the pipeline will similarly lock in decades of emissions. Keeping these high-emitting assets operational through public financing would constitute a serious obstacle to the midcentury carbon neutrality goals set out in the Paris Agreement — not just because of the emissions they generate, but also because of the fiscal space that financing these projects creates for other coal projects. The availability of Japanese and South Korean financing lowers the risk to third-party countries when they decide to pursue coal plants for their energy needs.

Allowing room for loopholes in overseas coal finance is not just about emissions themselves. Such exceptions also create strategic weakness in the international campaign to pressure the largest financier of overseas coal: China. According to EndCoal.org, China has plans to finance 56.1 GW of overseas coal plants, compared to Japan and Korea’s combined 13.0 GW. The Chinese government has no stated plans to stop funding coal abroad.

Projects that Chinese policy banks have agreed to finance, but have no set commission dates alone, are expected to generate 73.7 million tons of carbon dioxide annually. A successful campaign to persuade China to end overseas coal finance or to restrict its ability to meet the world’s energy needs through coal would constitute a major victory in efforts to realize midcentury decarbonization goals.

Viewed in this context, the G7 statement calling for an end to overseas coal finance can be seen as a consolidation of an international pressure campaign to get China to change its practices. In its public messaging to developed countries, the Chinese government has positioned itself as a responsible global citizen committed to cooperating to address pressing global challenges, including the climate crisis.

Such a posture is harder to maintain when Beijing is actively financing carbon-intensive projects abroad. China’s position stands in stark contrast to the two other largest economies in East Asia, as well as the United States and Europe. The recently announced Build Back Better World (B3W) partnership, through which the G7 will finance climate-friendly infrastructure in emerging economies, similarly seeks to emphasize a G7 commitment to green investment, in contrast to China’s Belt and Road Initiative, which has entailed substantial fossil fuel projects.

An airtight commitment to ban overseas coal finance from G7 members and South Korea will strengthen public messaging around these efforts and increase the credibility of their commitment to clean energy.

Reducing the number of exceptions Japan and South Korea take in their overseas finance projects are, of course, just one piece of this strategy. Countries dedicated to reducing carbon emissions must provide affordable access to sustainable alternatives, as the B3W partnership seeks to do.

The provision of overseas coal finance is also not just a supply-side issue; some recipient countries have policies (and energy needs) that create demand for coal power. Any coordinated effort to end Chinese financing of overseas coal will need to address both supply- and demand-side factors, as well as develop trust between recipient and funding countries.

Ultimately, efforts that lower the cost of renewables and availability of coal contribute to an environment that changes the market forces around overseas coal finance. Similarly, countries contributing to this strategy — like Japan, South Korea and the United States — must also increase their credibility and reduce their carbon footprints by lessening their use of coal at home.

As Japan and South Korea work through policy implementation, their decisions will have implications that reverberate beyond their borders. While canceling existing projects and eliminating exceptions may incur costs in the short-term, these decisions, in concert with other efforts, could have long-term implications both for China’s policies and climate change.

Although reputational pressures by themselves are unlikely to persuade Beijing to stop international coal financing, Japan and South Korea can nonetheless contribute to creating conditions in the international environment that might push the world’s largest emitter towards a more climate-friendly overseas investment outlook — or at the very least, make it clear the extent to which China is working against global climate goals.

Trevor Sutton is a senior fellow at the Center for American Progress. Abby Bard is the Asia policy analyst at the Center.

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