China-Pakistan Economic Corridor Power Projects: Insights into Environmental and Debt Sustainability

DESCRIPTION: As part of its series on the Belt and Road Initiative, Columbia University’s Center on Global Energy Policy initiated research into the CPEC power sector projects, which account for the majority of the cost of CPEC projects. This paper examines two of the key concerns critics have about the BRI: environmental sustainability and debt sustainability. Concerns about environmental sustainability center on the ways in which an expansion of the amount of electricity generated globally by fossil fuels, especially coal, will increase greenhouse gas emissions, making it more difficult if not impossible to meet the emissions targets in the Paris Agreement. Concerns about debt sustainability focus on whether China’s lending in support of infrastructure projects will lead to problematic increases in debt, with some analysts maintaining that Beijing is intentionally seeking to push countries into debt distress in an attempt to gain control over strategic assets or decision-making in borrowing countries.

OUTCOMES: The main findings of this study are threefold.

• First, the heavy focus on coal in the new generation capacity added by the CPEC power projects stems from both “pull” factors from Pakistan and “push” factors from China.

• Second, there is a mismatch between the dominance of coal in the CPEC power generation mix and Beijing’s recent emphasis on green development as an important feature of the BRI. This gap between Beijing’s rhetoric and the reality on the ground can be explained in large part by Pakistan’s preference for building coal-fired generation capacity.

• Third, there is a risk that the CPEC power projects will add to Pakistan’s sovereign debt burden, but multiple factors indicate that any increase in sovereign debt from these projects is unlikely to be the result of a deliberate strategy on the part of China. Although the debt financing arrangements for CPEC power sector projects primarily involve loans from Chinese banks to project companies wholly or partly owned by Chinese firms, these projects may increase Pakistan’s debt because of sovereign guarantees issued by Islamabad to support CPEC power projects and the liquidity crisis in Pakistan’s power sector known as circular debt.