Decarbonizing China’s Overseas Investment Parks

On the heels of the COP27 climate summit, tackling climate change is once again an important topic of conversation among international stakeholders. Under bilateral and multilateral climate change cooperation mechanisms, China’s overseas industrial parks (IPs) are poised to play a larger role in outbound direct investment in and international development cooperation with the rest of the world.

According to statistics from the Ministry of Commerce, as of 2019 there were 113 Overseas Economic and Trade Zones (OETZs), spread across 46 countries, bringing in US $41.9 billion cumulatively in investments. Apart from facilitating the development of China’s overseas markets and the construction of global value chains, China’s overseas IPs also reflect its enterprises’ carbon footprint abroad, considering they tend to be in energy-intensive areas. In this regard, their impact on the global low-carbon transition needs to be better taken into account.

For now, the unique and key function of China’s overseas IPs is underscored in the country’s official documents and policies. In July 2021, the Ministry of Commerce and the Ministry of Ecology and Environment jointly issued the Guidelines for Green Development of Foreign Investment Cooperation, encouraging enterprises to build, construct and improve the development of green OETZs. The 14th Five-Year Plan for the Development of Commerce, issued by the Ministry of Commerce, also emphasizes the need to enhance the sustainable development of outward investment and cooperation projects and takes the green development of OETZs as a key initiative and important step towards high-level outward investment and cooperation.

Despite a growing consensus among stakeholders regarding these IPs’ substantial potential and visible contributions to the energy transition, there remains a gap in how national policies can be translated into actions of various players on the ground. According to new research from WRI, Evaluating Chinese Overseas Industrial Parks By Applying a Low-carbon Development Indicator System, these industrial parks need to overcome several challenges during the low-carbon transition, including (i) lack of awareness of the necessity and urgency of low-carbon development; (ii) lack of capacity building; (iii) absence of low-carbon planning and management; (iv) innovation and standards bottlenecks; (v) few synergies between energy infrastructure progression and sustainable development; and (vi) limited low-carbon investment.

Based on the evaluation of the low-carbon performance of 60 of China’s overseas IPs through the Low-carbon Development Indicator System (LCDIS), we summarize the following five best practices and lessons-based recommendations to promote decarbonization of China’s overseas IPs:

1) Establish a well-recognized low-carbon development index system.

From the perspective of policymakers, it is imperative to systematically and comprehensively direct IPs towards low-carbon development, which can be accomplished by offering guidelines, promoting energy-saving and green infrastructure standards, facilitating international, mutual recognition of green certification and labeling, and encouraging relevant industry associations to publish standards, norms and guidelines that are in line with international best practices. Since 2013, a solid policy framework has been set up to support IPs’ low-carbon development; however, compared with the “carbon peak & neutrality” practice of domestic IPs in China, the low-carbon development of OETZs is just starting. The establishment of a unified low-carbon evaluation index system with accessible tools for assessing, evaluating and guiding IPs’ low-carbon and sustainable development should quickly follow as an essential foundation for various stakeholders to develop and strengthen further actions.

China’s outbound investment cooperation policy documents that highlight green development

2) Showcase best practices in low-carbon pilot IPs for large-scale adoption.

According to LCDIS, in general, national-level IPs outperformed provincial-level and other unrated projects (during the research period). Showcasing how these national-level IPs achieved sound low-carbon performance allows a replicable model to be established, which has positive implications for setting benchmarks, creating model IPs and driving the low-carbon development of others which lay behind in low-carbon performance.

As a first step towards upscaling in a much broader region, we recommend promoting early adopters with obvious ecological, low-carbon and environmental benefits to become demonstration parks.

3) Enhance low-carbon development planning capacity through the life cycle of IP investment, construction, management and operation.

The low-carbon development plan should be at the core of IPs’ future marketing scoping, environmental, social and governance (ESG) strategies, investment plans, etc. It is recommended to upgrade IPs’ low-carbon development planning capabilities by leveraging existing domestic and global climate change and low-carbon cooperation platforms and mechanisms. For example, consider the Vientiane Saysettha Low-Carbon Demonstration Zone; its low-carbon performance stands out among most of the IPs we evaluated. It has a two-stage, low-carbon development plan covering 11.5 square kilometers of the developed and proposed development area in the zone over a short (2020–30) and a long (2030–60) period. The comprehensive plan is built on seven pillars — Industrial Development, Transportation, Spatial Layout, Building System, Infrastructure, Social and Livelihood and Integrated Management — that cover forefront investments, construction and management of daily operations. Technical assistance and financial support from the “Ten-Hundred-Thousand” Projects from the South-South Climate Fund provide substantial motivation and confidence for pioneers and could demonstrate the effectiveness of best practices in this regard for other IPs.

4) Promote universal applications of clean energy based on low-carbon energy systems.

For most IPs, the lack of stable energy supplies and the high-carbon energy consumption structures are the two major obstacles to low-carbon development. Many IPs are in regions with inadequate power infrastructure, and frequently experience issues including unexpected power outages and serious electric overload. In addition, these IPs still rely on high-carbon energy, and a few are taking action to put forth low-carbon energy supplies and infrastructure. On the other side, there is growing understanding among IPs of the strategic benefit of owning and operating renewable energy generation assets as part of sustainable and low-carbon IP development. In this regard, we first suggest that at the early stages of IP planning, renewable energy should be integrated into the power grid and energy storage system based on local conditions. IPs should map and increase the use of renewable energy (including solar, wind, geothermal and biomass) in various application scenarios such as powering buildings, industrial equipment and transportation vehicles, as well as develop a comprehensive energy system that combines distributed and centralized energy supplies. For example, the Vientiane Saysettha Low-Carbon Demonstration Zone is currently planning the first phase of a 15 MW photovoltaic power plant project, which will further improve the stability of the zone’s power supply. Second, IPs should incorporate energy-saving, water-saving and comprehensive resource utilization technologies in the production process to fully exploit the energy-saving potential. Third, improve the overall efficiency of energy resource utilization by facilitating energy laddering, waste and material recycling, as well as matching upstream and downstream products among enterprises in IPs.

5) Accelerate green finance to support on-the-ground low-carbon projects’ inception and incubation.

There are relatively limited financing channels for IPs in the capital market, and it is difficult for investors and operators to raise funds through overseas direct financing, green bonds or other international financial instruments. IPs rely heavily on mortgage loans and self-funded models. There are several reasons for this, including the fact that enterprises lack adequate knowledge about low-carbon funding channels and do not fully utilize low-cost funds from international financial institutions; also, there is no sound information disclosure mechanism (e.g., information on GHG emissions, sewage discharge and energy consumption data), making it difficult for financial institutions and private investors to assess the environmental and social risks/benefits of low-carbon projects and IPs’ performance. Such information asymmetry exacerbates the mismatch of on-the-ground low-carbon projects of IPs and relevant financial institutions. Therefore, it is recommended to have green finance more accessible and have it play more of a role in supporting IPs’ inception, and to incubate those projects by emphasizing the guiding role of multilateral developmental financial institutions, identifying high-potential projects, both in terms of the technological and financial feasibility, guiding private capital to develop low-carbon investment screening framework, and connecting those projects with more financing channels in a market-oriented manner.