$420 Million in Green Bonds Goes to Coal-to-Chemical Plant
In the first half of 2019, 13.7% of China’s green bonds funded projects that fail to comply with international green finance standards, as defined in the the Climate Bonds Initiative (CBI) green bond database methodology, totaling $2.99 billion USD to substandard projects.
Much of those funds went to coal, a Reuters report shows. Bond documents show that a number of “clean coal” projects were approved. Bonds were also issued for large coal power plants that would replace several smaller plants and at least one $420 million USD green bond issued by a Shanxi Lu’an Mining Company to a coal-to-chemical operation in Shanxi province on June 28.
China’s national green bonds standards include certain coal projects that are banned under international finance standards. The National Reform and Development Commission and People’s Bank of China define China’s national green bond standards. Green bonds are a type of green financing mechanism that enables financial institutions to more readily fund projects or assets that meet certain “green” standards (they’re also known as climate bonds). Bonds are issued by project operators and bought by financial institutions.
Coal-to-chemical is a high-polluting process that uses coal to produce oil, gas, or other chemicals normally produced from oil. The process of producing synthetic oil, gas, or petrochemicals from coal is heavily water intensive and produces heavily-contaminated wastewater, volatile organic compounds (VOCs), sulfur oxides (SOx), and PM2.5. Though, when burned, synthetic oil’s PM2.5 emissions are lower when compared to traditional oil.
The Shanxi Lu’an project will produce 6,860,000 tons of carbon dioxide per year and consume about 7,375,400 tons of water per year. This type of project has an average life cycle of 25 years.
Only a handful of countries have employed coal-to-chemical technology, and China is the only to have industrialized the process with around a dozen coal-to-chemical plants in operation and at least 100 in planning stages. South Africa, Australia, USA, and North Korea have also had coal-to-chemical plants, with at least South Africa and Australia still running leftover projects. The single American coal-to-chemical plant went online in July 1984, with government financing. In August 1985, the project filed for bankruptcy and defaulted on the government loan.
In 2018, Shanxi province approved 10 new coal-to-chemical projects.
Trucost (S&P Global) and the Energy Foundation China, conducted an environmental stress test of China’s coal-to-chemical industry in 2017. They found a series of environmental, business, and investment risks. Ultimately, they concluded the relevant risks lead to a cost increase of 35–64% for coal-to-chemical products on average, as compared to conventional petrochemical products.
Environmental risks include water pollution, air pollution, and high rates of water use in the coal-to-chemical, which is a water-intensive process. Shanxi province, where the bond-issued project is located, was defined as a high-risk region in the Trucost-Energy Foundation China report because of high stress to regional water resources. Inner Mongolia, Shaanxi, Henan, and Hebei provinces were also listed.
Because of the joint-liability clauses in these bonds, any impact on coal-to-chemical enterprises’ cash flow, assets, and liabilities are assumed by commercial banks that provide loans for or finance these projects.
On top of the 13.7% in green bonds that have been awarded to substandard projects, another 34.3% of green bonds did not meet industry best practices, as more than 5% of proceeds were went to general corporate capital without any explicit link to green assets or projects. One HBIS Group Co. Ltd. project allocated half of a $1.43 billion USD corporate bond to “general corporate operating capital.”
In 2016, 34% of China’s green bonds failed to meet CBI’s international standards. (28% of the total figure went to substandard projects, and 6% failed to meet industry best practices.) That combined figure increased to 38% in 2017 and then decreased to 26% in 2018. In the first half of 2019, 49% of green bonds did not meet international standards, as 13.7% of the total figure went to substandard projects and 35.3% violated industry best practices.
On August 5, in a speech at a State Council policy briefing in Beijing, PBoC deputy governor Chen Yulu said:
“This year China launched the Green Industry Guidance Catalogue, and the European Union also drew up the EU Taxonomy for Sustainable Finance and has sought opinions globally. We must see this as an opportunity, take the lead in researching and promoting a convergence of green finance standards between China and Europe.”
