The case for green industrial parks

CAMBRIDGE — Throughout history, the evolution of energy technologies has influenced the location of production. At the onset of the Industrial Revolution in the eighteenth century, factories were typically located near fast-moving rivers or under windmills because they needed to be near their energy source. The steam engine’s introduction enabled firms to establish their bases anywhere coal could be economically shipped.

Oil, which was even cheaper to transport, further loosened the ties between a firm’s location and its energy source. With the development of electricity, power could be easily distributed across vast areas and used wherever there was an electrical outlet, transforming the structure and layout of manufacturing plants.

So, how will the clean-energy transition affect the location and design of future manufacturing? A key feature of most renewable sources is that the energy they produce is very costly to transport beyond the local electricity grid. At present, sunny regions can generate electricity for under $20 per megawatt hour, which is equivalent to oil priced at $34 per barrel, less than half the current market price of crude.

By contrast, the (misnamed) Inflation Reduction Act, US President Joe Biden’s signature climate-change bill, provides subsidies for companies converting renewable energy into green hydrogen at $3 per kilogramme of hydrogenme, which is equivalent to $142.2 per barrel of oil, double the current oil price. In other words, storing solar energy in transportable molecules is very expensive. Consequently, it is more efficient to use it where it is produced.

Given these high transportation costs, an effective global decarbonisation process would position energy-intensive industries near cheap sources of green energy. Installing solar panels in sunny areas, and windmills in places with strong and consistent winds, could significantly reduce global demand for land and materials. A recent paper, for example, finds that the steel industry’s future may lie in sunny tropical locations with strong onshore winds and near iron ore deposits.

But energy-intensive industries are currently located far from these ideal spots. To facilitate efficient decarbonisation, it is essential to relocate them. But where? It would take countries several decades to decarbonise their electrical grids and even countries with abundant renewable resources would find it very costly to decommission their existing fossil-fuel capacity because that investment must be paid for, whether or not the facilities remain operational.

These costs will likely slow down the energy transition in the manufacturing sector. But the process could be accelerated if countries with abundant, cheap clean-energy sources develop green industrial parks. This would offer a viable alternative for industries seeking to reduce their emissions through relocation. These parks would complement measures designed to discourage emissions, such as cap and trade schemes, carbon pricing, and the European Union’s Carbon Border Adjustment Mechanism. While these policy interventions aim to lower emissions by increasing costs, green industrial parks would provide a more affordable path.

To be sure, as with all regulations, countries and companies might try to game the system by reallocating their existing clean energies to green industrial parks while increasing the share of non-renewable energy elsewhere in the economy, resulting in no net emissions reductions. Given this risk, green industrial parks must meet certain criteria.

First, their establishment must be based on new sources of clean energy, not merely repurposing existing capacity. Second, to prevent non-emission-reducing reallocations, every country must still abide by its previously announced nationally determined contributions under the 2015 Paris climate agreement.

Third, for the sake of efficiency and stability, it would be useful to connect the new green zones to national electricity grids. But this should be conditional on the zones becoming significant net exporters of clean energy to the grid, to ensure that any grey energy they might occasionally use for stability purposes would be offset by the export of clean energy.

Establishing green industrial parks and their clean-energy resources would not necessarily require government funding. Such real estate and energy investments should be profitable and thus privately financed.

But this does not mean that governments should play no role in their establishment. On the contrary, to become competitive, these zones must also strive to compete on the availability of other production inputs, such as human resources, local supply chains, research and development capabilities, logistics, and more. Governments could accelerate the process by introducing effective green-energy regulations, facilitating right-of-way provisions for transmission lines, adjusting zoning regulations, building arterial infrastructure and investing in urban development and human resources.

Green industrial parks would facilitate the global relocation of energy-intensive industries, hasten the development of renewable energy in resource-rich regions and encourage governments to go beyond their individual decarbonisation targets. They would also expedite the global reduction of emissions in manufacturing by making it financially viable to relocate early to regions that can produce cheap green energy. Lastly, they could spare the world millions of tonnes of solar panels, wind turbines, cables, and batteries by placing these capital goods in locations where, thanks to natural conditions, they can be most productive.

A net-zero world cannot be achieved by relying on efforts by industries in each country to reduce emissions on their own. Current industrial locations reflect our carbon-based energy system and its low transportation costs. Relocating those activities is crucial to completing the energy transition, and green industrial zones could serve as a practical way of getting it done.

Ricardo Hausmann, a former minister of planning of Venezuela and former chief economist at the Inter-American Development Bank, is a professor at Harvard University’s John F. Kennedy School of Government and director of the Harvard Growth Lab. Copyright: Project Syndicate, 2023. 

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