Making economies more sustainable: what role for industrial hubs?

Most countries face enormous environmental challenges, from global warming and overexploitation of water resources and fertile soil, to air pollution. Environmental degradation has become a global issue, with a majority of countries demonstrating their commitment to ambitious climate targets and climate change adaptation policies by joining the Paris Agreement and pledging to fulfil the Sustainable Development Goals.

Such policies may have large-scale economic repercussions, including a shift by industry to renewable energy sources, the implementation of innovative agricultural practices, and material reuse and recycling. Many of these changes are already being observed empirically: investments in renewable energy are exceeding investments in non-renewable infrastructure1, and plastic products are increasingly being banned or are heavily taxed2.

In this context, how can developing countries reduce their ecological footprint but at the same time also benefit from climate policies? In a recent article3, we examine to what extent spatial policies can be useful in addressing environmental challenges while also providing opportunities for structural transformation and competitiveness. Three types of agglomerations are identified: 1) green cities; 2) green clusters, and 3) eco-industrial parks.

Building green cities to reduce their environmental footprint

Firms and people tend to cluster in agglomerations for good reason: the localized supply of and demand for labour, goods and services; and the intensified circulation of knowledge and ideas. Moreover, cities are also characterized by higher transport efficiency, comparatively lower residential energy consumption and lower GHG emissions because of the density between individuals and between businesses.

Due to increasing urbanization and the fact that urban areas account for 75 per cent of GHG emissions4, cities must become more sustainable. Making them more sustainable also entails economic co-benefits, since the costs related to congestion and pollution decrease. For example, congestion, air pollution and climate change in Beijing were estimated to cost between 7.5 per cent and 15 per cent of the city’s GDP.5

One particularly important benefit of greening cities is the improvement in living conditions. In Kigali, a one-off investment of US$10 for an improved cook stove was estimated to reduce 90 per cent of air pollution, 1.6 tonnes of CO₂ and US$181 in fuel costs over a four-year period.6

There are plenty of opportunities to make cities in developing countries more sustainable and efficient. In Mumbai, for example, solar cells could meet between 20 per cent and 31 per cent of daily electricity demand7, while in China, ground-source heat pumps could reduce energy consumption in public buildings by 25 per cent to 30 per cent8. Rolling out such green innovations in cities implies lower costs per household than in rural areas.

Cities in developing countries have a unique opportunity to incorporate ‘green’ principles; much of the urban infrastructure in developing countries is only just being built. Many parts of Asia and Africa have not yet fully urbanized – e.g. only 40 per cent of sub-Saharan Africa’s population resides in urban areas compared to 80 per cent in Latin America.9 It is much easier and less expensive to design a new sustainable city than trying to retrofit an existing one.

Although green cities provide many benefits, they are not automatically successful. Existing evidence points to a trade-off: large, ambitious green city projects such as Saudi Arabia’s “The Line” project, Masdar City in the United Arab Emirates and Dangton in China may have a huge impact in terms of reducing the environmental footprint, but the cities’ top-down design has given rise to problems related to societal acceptance and technical implementation; on the other hand, incremental improvements to existing cities, exemplified by Vauban Freiberg (Germany) and Hammarby Sjöstad (Sweden), are easier to implement with the support of local citizens, but are less likely to achieve radical decarbonization and resource savings. The challenge thus is to combine ambitious city reengineering with citizen involvement and societal acceptance.

Creating linkages in green clusters

Green industries have often emerged in locations characterized by high demand and widespread availability of resources and/or capabilities. In Germany, for example, which is one of the frontrunners in environmental agglomerations, several renewable energy clusters have emerged characterized by different dynamics: the City of Freiburg evolved as a hotspot of innovative solar start-ups in the 1970s, which subsequently led to the foundation of a world renowned research centre, the Fraunhofer Institute for Solar Energy Systems (ISE). Solar Valley Mitteldeutschland became a manufacturing hub based on government subsidies to prompt greenfield investments. Finally, along the North Sea Coast, a wind technology cluster emerged, producing heavy equipment and offering a variety of technologies and services to the offshore wind parks located nearby. The success of all these clusters hinged on localized collaboration efforts between highly specialized firms.

Cluster policies have been pursued in developing countries with similar zeal. In Morocco, the government envisioned the creation of solar clusters to turn the country’s highly favourable solar irradiation potential into a source of industrial development. In support of this policy, the government established the Moroccan Agency for Solar Energy (MASEN) in 2010, among others, to devise integrated solar projects, carry out technical studies and promote the inflow of foreign investment. This project has so far, however, not fully materialized due to lack of technological capabilities. Moreover, the level of complementary specialization and inter-firm cooperation remains low. Investments in large-scale renewable energy are dominated by foreign investors, while local firm involvement has largely been limited to public works and maintenance.10 This may change in the future, however, as a growing number of renewable energy projects are developed, and local engineering capabilities and demand for green hydrogen industries associated with renewable energy investments increase. Morocco has successfully established industry clusters in automotive and aeronautics; the challenge now is to apply the accumulated experiences to renewable energy industries. 

Eco-industrial parks as a means to foster sustainable industries

Another option is for governments to develop industrial parks to foster cooperation and competition, and to enhance firm innovation and productivity. Governments often attract firms to parks that have ready-made infrastructure, with localized regulations and incentives or with ancillary services, such as power supply and housing. Eco-parks, which differ from normal industrial parks, provide additional services to firms to reduce their ecological footprint while simultaneously curbing their production costs.

There are different types of eco-industrial parks: one fairly standard service offered by such industrial parks are common facilities to treat effluents, to reduce waste and share renewable energy. In Ethiopia, the Hawassa Industrial Park, e.g. was built by the China Civil Engineering Corporation (CCECC) in 2016, bringing together 18 foreign and five domestic firms, to construct a zero-liquid-discharge common effluent treatment plant.11 Much more ambitious industrial parks can be designed by establishing a closed loop industrial system whereby outputs from one line of production are used as inputs in other industrial processes (“industrial symbiosis”12). China has been particularly successful in developing such eco-parks, proving that the environmental footprint can be reduced even though productivity is increased.13 For example, one of its heavy-metal industrial parks achieved a water reuse rate of 97 per cent through industrial symbiosis.14 A study involving 34 Chinese eco-parks found that their ecological performance increased through industrial symbiosis by nearly 90 per cent between 2007 and 2010, while their industrial value added grew by more than 60 per cent.15

Spatial policies can reconcile sustainability with competitiveness

Developing countries have a unique opportunity to use spatial policies to reduce their ecological footprint while at the same time increasing their competitiveness. Specifically, there are distinct cost advantages in incorporating green incentives and technologies in new cities, clusters and parks rather than retrofitting them ex-post.

We identify three advantageous spatial approaches: green cities, green clusters and eco-industrial parks. The most rewarding spatial approach is the focus on green cities, and changing incentives and introducing environmental technologies across diverse segments synchronously (e.g. in energy, housing and transportation). Such an approach can render numerous complementary benefits across economic, ecological and social dimensions.