CAPE TOWN — If the economic debate around transitioning to low carbon emissions and completely recalibrating decades old infrastructure, versus continuing with a tried and tested coal/oil-driven economy confuses you, this hard-hitting analysis provides helpful context. Complying with agreed global climate-change-mitigating protocols until 2035 would cost South Africa $124bn. To mitigate a significant amount of this, the ruling party needs to urgently develop the fiscal, financial and policy tools to shift the transition risk away from parties that don’t have the capacity to bear it. That one line hit me between the eyes. It also needs (dare we use the word in a positive context) to “capture” the transition-related upsides. An obvious upside will be a lower oil demand that will help offset the massive cost cited above – by $45,5bn. Others includes the global shift to emerging low-carbon technologies that use minerals we have in abundance – manganese, vanadium and platinum. The report is by Climate Policy Initiative Energy Finance – an independent think-tank based in London funded mostly by foundations hosting a multidisciplinary team of economists, analysts and financial and energy industry professionals. They develop innovative finance and market solutions to accelerate the energy transition. We should take full note. – Chris Bateman
From Climate Policy Initiative Energy Finance:
South Africa’s exposure to high carbon commodities could result in an aggregate R2trn ($124bn) worth of risk associated with the transition to a low carbon economy, according to analysis published by Climate Policy Initiative (CPI), a global think-tank based in London.
Understanding the impact of a low carbon transition on South Africa launched today examines the risks to South Africa from a global economic transition to a low-carbon economy2 between 2013 and 2035.
CPI’s Energy Finance team has been working with a range of partners to develop a methodology and supporting models to evaluate the risk that countries, companies and the financial sector would face from a global economic transition to a low carbon economy. The results highlight measures and policies that sovereign governments, investors and the international community should take to prepare themselves for this global transformation.
This most recent work from CPI focused on the impact to the economy, including government, municipalities, companies and financial institutions, because of South Africa’s exposure to a global low-carbon transition. In respect of South African exports, CPI examined thermal coal and related infrastructure, including ports and freight rail. CPI also looked at domestic coal mining, power generation, the oil value chain and synthetic fuel production from coal and gas, including how they might be affected by domestic climate policy.
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The report found that even though only 16% of that R2trn of risk “explicitly” flows to government via lower taxes and reduced royalties, this proportion could rise to more than half, once “implicit” transfers and contingent liabilities are taken into account, eg via potential company and municipality bailouts, guarantees, and worker transition assistance. The report also identified a further $25bn in potential infrastructure investments currently being contemplated, that may not be economically viable in a low-carbon transition, even though they may appear financially feasible today.
Much of the risk to exports could crystallise quickly in the mid-2020s, which could cause a financial shock with repercussions across the wider economy, if companies and government have not planned for it.
However, the analysis also identifies significant upside from the transition, with a potential R730bn ($45.5bn) windfall from an anticipated reduction in the global oil price. Such cost reductions could offset in part at least, the expected cost of the transition.
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David Nelson, executive director of CPI’s Energy Finance team said: “Concentration of transition risk is significant in South Africa but could be managed through diversification and reallocation to those better placed to manage it and by avoiding new investments that increase the risk concentration.
“Increasingly, analysis suggests that a low carbon economy need not be materially more expensive or less economically productive than the current fossil fuel-based, economy. However, careful planning is required to avoid the financial instability that could arise from a poorly managed transition.”
Patrick Dlamini, the chief executive and managing director of the Development Bank of Southern Africa, said: “With our globally recognised Renewable Energy Independent Power Producer Programme and our National Determined Commitments (NDC) emanating from the Paris Agreement, South Africa has taken steps to managing the climate transition, which is essentially an economic transition that has already started around the world and which, as the CPI report suggests, has already incurred substantial cost. We believe that as a country, stakeholders across all sectors must work together to ensure a just transition.”
