South Africa faces a “transition risk” of $124 billion between now and 2035 if it carries on with business as usual while the rest of the world cuts greenhouse gas emissions in line with the Paris Agreement.
More than half of this would be borne by the government.
This is one of the findings in a major report by the London-based Climate Policy Initiative (CPI) that calculated the risk to South Africa, in the value of assets and income, as a result of the global switch away from coal both because of climate policies, and because of technological developments that had brought down the cost of more flexible renewable energy.
What would determine the full impact of this transition risk to South Africa was how it was managed.
The report recommends that government scrap – or at least delay – any new investments that would add to the $124bn risk. These include a new oil refinery, the two proposed coal power stations Thabametsi and Khanyisa, plans to expand coal export railway lines in Mpumalanga, the Waterberg and a international link to Swaziland and Botswana, and new coal mines in Limpopo. These planned investments could add another $25.8bn to the transition risk.
The report, “Understanding the Impact of a Low Carbon Transition on South Africa”, released on Tuesday, looked at both the risks and opportunities for the country from the global economic transition to a low carbon economy.
David Nelson, one of the authors, said globally the shift was already happening. The demand for South Africa’s coal was likely to peak and then fall in the next few years as countries like China and India – currently the biggest importer of South African coal – tried to meet their carbon reduction targets and prioritised their domestic coal supplies.
This would mean the volume of coal exported would drop and its price would fall, which would directly affect coal miners and communities, as well as infrastructure associated with coal exports, such as railways and ports.
Other factors unrelated to climate policies also had an effect on the coal demand. These included the big drop in the cost of wind and solar power generation and lithium ion batteries, and changes in energy systems that favoured flexibility and renewables.
These global changes meant that by 2017, as much as $60bn that South Africa could have expected to earn from its coal resources – based on 2013 business-as-usual forecasts – had already been lost.
Almost a third of the risks could end up with parties that could not manage them, such as workers, municipalities and smaller companies, and their financial problems would spill over to be borne by government.
The report said although the largest share of risks would come from factors beyond the control of South Africa, such as changes to the global coal and oil markets driven by changes in global demand, if the government responded to these global changes in a proactive way, it could help to lessen these impacts.
“The timing of government action to mitigate transition risk will be critical, especially given the country’s limited fiscal space after recent downgrades left the country close to losing its investment grade sovereign credit rating, the fast-deteriorating financial position of Eskom and resulting deterioration in the reliability of the electricity supply,” the report said.
It was a balancing act. If the coal power plants and fuel production assets were closed too fast, this would limit government’s ability to spend on social programmes, while also having a significant negative impact on coal workers and communities.
“Act too slowly, and continue to provide finance to new infrastructure predicated on a rise in future coal exports, and the country could suffer a rise in debt downgrades and defaults when the expected export demand does not materialise.”
On the up side the report said changes in the global market would lead to lower oil prices, which could lessen the effect of falling coal exports on the balance of payments. Changes in policy, such as increases taxes on oil products, would reduce government’s risk. Money from fuel tax could be redistributed to parties struggling to bear the negative costs of the transition, and could offset pressure on the sovereign credit rating.
Another plus was that South Africa was well placed to benefit from new markets for minerals used in emerging low-carbon technologies, such as manganese and vanadium used in energy storage technologies. There was also a significant new market for platinum metals for fuel cell technologies.
The report recommends that government prioritises incentives for investment in sectors that are resilient to the global transition, such as renewable energy, electric vehicles, batteries, fuel cell and minerals such as platinum and manganese.
It also recommends that government establish a transparent planning process for those sectors at risk in the move to a low carbon economy, with “earmarked transition funds”. All interest groups should be involved in the planning, including companies, trade unions, local government and the financial sector.
Some of the risks should be shifted from government’s purse to spread the risk load, possibly to other levels of government. This would include restructuring Eskom to put it on a more sustainable footing and reduce liability to government.
Managing the transition comes with a price tag. South Africa should work with international and development financiers to help address some of these issues.
Patrick Dlamini, CEO of the Development Bank of Southern Africa said the report was “very timely”.
“The transition in upon us and will cost us dearly. We need therefore to engage in the proactive pursuit of a path that seeks to contain the costs of the transition.”
South Africa was not alone in facing these global pressures.
“But for as long as South Africa depends on coal and other commodities for a large part of its exports, the impact of climate change-driven transition on the country’s economy may be more dependent on the actions of our international partners than our domestic policy,” Dlamini said.
He said as one of the major funders of municipalities and state-owned enterprises, DBSA would work with government to assess the report’s findings.