From export processing zones to low carbon development zones

1 May 2008

Twenty years ago, China successfully created a number of ‘Special Economic Zones,’ which helped jump-start its high-growth, export-oriented economy. Today, the world has changed and climate change is one of our most pressing challenges. While China has outgrown the need for Special Economic Zones to fuel its economy, this innovative concept can be tweaked and put to new uses. Together, China and the EU are spear-heading the concept of ‘Low Carbon Development Zones,’ which will be used to test and scale up the building blocks of the new, efficient low-carbon economy.

China and the European Union (EU) together account for 30 percent of global energy consumption and 30 percent of global greenhouse gas emissions. Their common interests provide a foundation for deepening collaborative efforts on energy and climate security over the next quarter-century. The combined might of the EU, the world’s largest single market, and China, the fastest-growing major economy, can generate benefits of scale that will lower the costs of climate friendly goods and services globally. By working together, China and Europe could become the de facto engine of global low carbon transformation.

While the imperative for a sustainable energy future is clear, the transition is unlikely to be linear. Many policymakers and businesses remain thwarted by the immediate costs of economic adjustment, despite the potential of lucrative new opportunities powered by this transition. At a technical level, innovative products and services need time to be developed and refined prior to adoption and diffusion. Key technologies and practices may come to commercial maturation at different times, making it difficult for policymakers and businesses to commit to long term investments. Even though there are already pilot projects and facilities — and even cities to demonstrate specific or sets of technologies across the world — the scale effects of large-scale adoption of these new methods of production and consumption remain unknown.

In the early 1980s, the Chinese government embarked on an extraordinary journey towards greater economic openness. Special Economic Zones (SEZ) – geographical regions with more liberal economic laws than the rest of the country – were first established in Guangdong, Fujian, and Hainan provinces, most famously in Shenzhen. These were later expanded to larger geographical areas, paving the way for the two decades of spectacular economic growth. In general, ‘SEZ’ covers a broad range of more specific zone types, including Free Trade Zones, Export Processing Zones, Free Zones, Industrial Estates, Free Ports, Urban Enterprise Zones and others.

Following the successes of the SEZs, policymakers may wish to consider establishing ‘low carbon development zones’ (LCZ) in China. Just as the SEZs functioned as laboratories for liberal economic practices, these LCZs could become testing grounds for the large scale economic transformation required for a low carbon future.

Low Carbon Development Zones (LCZs) at the provincial or prefecture level could pioneer at scale the demonstration of the transition to efficient, low carbon economies at different level of economic well-being. The key to the zones’ success would be clear and active regional political leadership, endorsed at the national level, to set the regulatory and public investment framework to facilitate, support and accelerate transformative private investment.

Initially two zones could be established, one in rapidly growing Eastern China and one in developing Western China to test the different environmental and industrial conditions and requirements. These zones could become the seeding ground for mainstreaming energy and carbon accountancy into all aspects of economic life within the zones, facilitating cross fertilisation of ideas and practices. They could also demonstrate to other regions and countries the viability of the low carbon economy.

The benefits of establishing LCZs are foreseen to be manifold. First, like the SEZs, they would provide a focus for attracting qualitatively different foreign investments away from low value addition and simple processing and assembly of manufacturing goods towards research and development, high-end design, modern logistics and other new areas. This is consistent with the vision of sciencebased development set out by the Chinese leaders in the 17th Party Congress held in October 2007. This could apply to light or heavy industries as well as small and larger scale energy production.

Second, in addition to acting as testing grounds for new products, services and infrastructure, LCZs could become areas in which low carbon technologies would thrive.

The scale impact could enable previously small scale deployment to be scaled up, demonstrating their economic and environmental viability. This could also strengthen exports of key technologies and practices.

Third, these LCZs could become focal points for international cooperation, for example through carbon finance (emission trading and the Clean Development Mechanism), concessionary loans or aid efforts from public entities like regional development banks or critical international partners such as the EU. Today, member states of the European Union have diverse cooperation programmes with China, which are often ill-coordinated. These investments often fail to have a transformative impact on the necessary scale to influence the pathway of China’s development. To improve the impact of bilateral cooperation, European countries could agree to focus their assistance and cooperation on energy and climate change issues in these zones, so as to provide scale impacts and reduce transaction costs, and in particular to promote exchange of know-how and professional services in critical areas. Fourth, these LCZs could enable experimentation for creating an enabling regulatory environment and progressive governance framework towards the development of low carbon economies.

Fifth, these LCZs could serve as centres of excellence on climate change impacts and adaptation, where expertise on climate change impacts and understanding of the necessary technologies needed to adapt could be brought together and translated into joint ventures and policy solutions in order to boost China’s adaptive capacity.

More specific undertakings within these LCZs could include:

• The large scale development, demonstration and manufacturing of state of the art energy efficient and low carbon goods and services;

• Widespread construction of new low or zero carbon towns and infrastructure;

• Application of alternative transport modes over large areas and encompassing urban and rural requirements;

• Energy efficient production methods for heavy industries;

• Testing of the necessary adaptation to climatic changes; and

• Serving the role of incubator for new technology companies, joint ventures and innovative practices.

Some preliminary policy options for these low carbon economic zones could include:

• A clear regulatory structure aligned with the best international standards and regulations for driving the transition to efficient, low carbon economies for regions at different levels of development.

• Incentives to encourage the right kind of foreign investment through financing incentives, including those that will enable the ‘bundling’ of financing for SMEs from larger financial institutions.

• Incentives to promote and support inward investment in low carbon products and services, including research and development.

• Facilitating higher value-added trade through removing barriers to trade in low carbon goods and services such as zero tariffs for low carbon goods and/or low carbon services trade liberalisation.

• Joint research and development programmes based on centres of excellence on low carbon technologies, supported by public and private investment.

• Public investments in large scale demonstration of commercial technologies in return for licensing of key technologies for diffusion.

Bernice Lee is Head of the Energy, Environment and Development Programme at Chatham House, a London-based independent think tank. Nick Mabey is a Founding Director and the Chief Executive of E3G, an independent not-for-profit organisation that works to accelerate the global transition to sustainable development.

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