What COP26 means for South Africa

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Thato Kola, economics and fixed income analyst, Matrix Fund Managers

The 26th session of the Conference of Parties (COP) of the United Nations Framework Convention on Climate Change (UNFCCC), referred to as COP26, is taking place in Glasgow from 31 October to 12 November 2021.

Earlier this year, the 6th assessment report by the Intergovernmental Panel on Climate Change (IPCC) revealed that because of human-related activities, global surface temperatures were approximately 1.09 ⁰C higher during 2011-2020 than they were during 1850-19001. Furthermore, the modelling scenarios suggest that by 2040, the average global temperature could rise by an additional 1.5 ⁰C. For regions such as Africa and Asia, warmer temperatures will intensify global water cycles, bringing heavy precipitation and associated floods on the one end and an increase in aridity, agricultural and ecological droughts on the other.

South Africa’s response to climate change

As a signatory to the Paris Agreement, South Africa recently published the update to its first National Determined Contribution (NDC) report in the lead-up to COP26. The report outlines the country’s climate change ambitions, which are based not only on science but also on equity, in light of our national circumstances. While we are committed to collaborating with the global community to reduce global temperatures in line with the Paris Agreement objectives, the report also underscores SA’s developmental challenges, such as low economic growth, high levels of unemployment, and the persistent challenges of poverty and inequality.

We have seen modest progress, with the promulgation of a set of policies to address climate change, including the Carbon Tax Act, the Green Transport Strategy, and plans to finalise the Climate Change Bill. The overarching objective in government’s climate change strategy is that “long-term decarbonization of the South African economy will in the 2020s focus primarily on the electricity sector; in the 2030s, a deeper transition will take place in the electricity sector, coupled with a transition in the transport sector towards low emission vehicles; while the 2040s and beyond will be characterized by the decarbonization of the hard-to-mitigate sectors.”2

The intended plan to transition from fossil-fuel powered plants to renewable sources in the production of electricity presents significant transition risk and challenges. This is due to the heavy reliance on coal in the production of electricity. By 2020, 90.4% of electricity generated was from coal power, while nuclear power contributed about 6.2%3. Although nuclear power generation has fallen out of favour globally following the Fukushima disaster in 2011, as well as locally, largely due to the corruption associated with the electricity sector over the past 15 years, recent global power shortages have highlighted the need for diversified and reliable energy supply. Hence, nuclear may very well make a comeback and could feature in more responsible energy generation.

It’s all about Eskom

SA’s power utility, Eskom, emits about 44% of the country’s total carbon emissions, making the country the largest polluter on the continent and the 12th largest globally (Figure 1). In generating electricity from coal-powered stations, about one tonne of CO₂ is emitted for every MWh produced, as outlined in Eskom’s 2021 Annual Sustainability Report. Worse, there is currently no commercially feasible end-of-pipe technology4 to reduce CO₂ emissions from the large coal-power stations. Additionally, it points out “the reduction of carbon dioxide emissions in South Africa’s electricity sector is therefore projected to come from the gradual de-loading and closure of existing coal-fired power stations as they reach the end of their operational lives. We anticipate the replacement of our coal fleet with lower carbon electricity generation facilities such as wind and solar plants in combination with gas and battery storage”.

Figure 1: Emissions per country in the G20 as at 2019

Source: Global Carbon Project

In an effort to move from fossil-fuel electricity production towards cleaner power generation, Eskom has adopted the Just Energy Transition (JET) strategy which outlines a phased transition to a cleaner and greener energy future, while also creating sustainable job opportunities for those displaced by the transition. This will require access to further funding although just to become compliant with emission standards without adding further generation capacity, Eskom would need to spend over R300 billion.

The power utility aims to achieve net zero carbon emissions by 2050. Some of the main strategic objectives Eskom outlines in its 2021 Integrated Report are to:

·       Accelerate the repowering and repurposing of power stations;

·       Fast-track execution of renewable energy through partnership funding models, as well as through own build and power purchase agreements;

·       Leverage national and global climate and green financing opportunities, and pursue agreements for repurposing, greenfield renewables, small-scale embedded generation, and grid strengthening – important elements for the successful implementation of JET.

COP26 and beyond

A significant emphasis of the Paris Agreement relates to the provision and direction of financial flows to be aligned with pathways towards lower greenhouse gas (GHG) emissions and climate resilient development. This means that all financial actors, including financial institutions, corporates and governments, must align their decision-making frameworks, practices, and investments towards managing and adapting to climate change risks.

In this light, the mobilisation of financial resources to reduce GHG emissions and assist communities to adapt to climate change risks forms part of the goals of COP26. Similarly, South Africa’s NDC emphasises that for itself and other developing countries to be able to implement their adoption and mitigation targets effectively, multilateral co-operation and financial support is required from developed economies.


In just the third day since the commencement of the conference, President Ramaphosa announced a landmark financing partnership with the governments of France, Germany, the United Kingdom, the United States, as well as the European Union. An initial $8.5 billion (R131 billion) will be mobilised over the next three to five years through a variety of instruments to support South Africa’s move to embrace climate resilience. This highly concessional financing partnership reaffirms the commitment of the global community to collaborate together to reduce GHG emissions, accelerate investment in renewable energy in a manner that creates new jobs opportunities and advances the sustainable growth of developing countries.

Opportunities that lie ahead for the country from the conference and the renewable energy transition include:

·       In the short term, the country may be able to access much-needed climate financing to drive low carbon projects;

·       In the medium term, investment in renewable energy sources can provide a necessary boost to the economy via infrastructure spending;

·       In the longer term, the country can be able to fast-track the decommissioning of existing coal power stations; and

·       Through this process, the country can potentially have a diversified energy mix that is more reliable and cost effective.

Figure 2: Current energy mix versus IRP proposed energy mix by 2030

Source: 2019 Integrated Resource Plan

Yet, there are numerous risks, including:

·       Failure to curb GHG emission may result in carbon taxes imposed on locally produced exports;

·       It will become increasingly challenging to fund carbon intensive projects from financial markets; and

·       The displacement of jobs in the coal sector and its associated value chain, and the potential loss of economic activity in coal mining communities present significant socio-economic challenges as the transition to clean energy ramps up.

Policy makers face numerous trade-offs, as always

The outcomes of COP26 will drive the pace of climate policy actions across the world for the coming decade and beyond. The transition to renewable sources of energy is a certainty, with the responsibility now bestowed on national governments. Developing economies must introduce adaption and mitigation plans to ensure that the transition is just and equitable and aligns with the developmental objectives of their respective countries.

This balance will not be easy to achieve. Many of South Africa’s labour-intensive sectors are also carbon heavy. The transition could mean large-scale job losses and, with this, increasing pressure on the fiscus to roll out more support, such as a basic income grant.

For investors there is the potential for diversification, as governments and parastatals become more reliant on alternative instruments, such as green and sustainability bonds. Even here there are trade-offs, as the domestic savings pool, while deep, has not grown dramatically in the last decade. This means that for large-scale green investment, some other asset classes may have to forego funds. Alternatively, a credible climate change strategy with attractive yields could entice foreign savings into the greening of the economy.


Notes

1. IPCC. (2021). Climate Change 2021, The Physical Science Basis: Summary for Policy Makers.

2. Department of Forestry, Fisheries & the Environment. (2021). First Nationally Determined Contribution Under the Paris Agreement Update

3. CRA. (2021). Business, Infrastructure and Communications. Socio-Economic Survey of South Africa

4. Technologies that are used at exit pipes that reduce emissions of pollutants, for example scrubbers on smokestacks or catalytic convertors on motor vehicle tailpipes