What COP26 means for South Africa
The 26th session of the Conference of Parties (COP) of the United Nations Framework Convention on Climate Change (UNFCCC), referred to as COP26, is scheduled to take place in Glasgow from 1 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 1850-1900 (1). Furthermore, the modelling scenarios suggest that by 2040, the average global temperature could rise by a further 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 the country’s national circumstances. While the country is committed to collaborating with the global community to reduce global temperatures in line with the objectives of the Paris Agreement, the report underscores the developmental challenges in the country, such as low economic growth, high levels of unemployment, and the persistent challenges of poverty and inequality.
There has been 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 entails that the “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). While 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 be making a comeback and could feature in more responsible energy generation.
The SARB’s Financial Stability Review notes that given the country’s high level of carbon intensity in the production of many of its products, the economy can be meaningfully impacted by the transition (4). It further reports that the government is subject to significant transition risk given that various SOEs have invested heavily in infrastructure that is geared towards carbon-intensive activities.
Figure 1: Financial Stability Review risk assessment matrix
It’s all about Eskom
The South African 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 2). 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 (5). It further acknowledges that there is currently no commercially feasible end-of-pipe technology (6) 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 2: Emissions per country in the G20 as at 2019
Source: Global Carbon Project
In an effort to move away from fossil-fuel electricity production towards cleaner power generation, Eskom has adopted the Just Energy Transition (JET) strategy. Under this strategy, it outlines a phased transition towards a cleaner and greener energy future, while also creating sustainable job opportunities for those who are displaced by the transition. The power utility aims to achieve net zero carbon emissions by 2050. Some of the main strategic objectives Eskom outlines are to (7):
- 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.
Eskom CEO, Andre de Ruyter, has elaborated that the JET strategy will require the power utility to access further funding to support the gradual shift towards cleaner power generation. He further adds that to make the current ageing power stations compliant with emission standards without adding further generation capacity, Eskom would need to spend over R300 billion. An important element towards the successful implementation of JET will be the ability to optimise green and climate funding opportunities towards both the decommissioning and repurposing of existing power stations as well as the establishment of new renewable energy plants.
COP 26 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 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 greenhouse gas emissions and assist communities to adapt to climate change risks forms part of the goals of the upcoming 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.
Opportunities that lie ahead for the country from the upcoming convention 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 much needed 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 3: 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 (8). 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.
(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) SARB. (2021). Financial Stability Review. First Edition.
(5) Eskom. (2021). Sustainability Report
(6) Technologies that are used at exit pipes that reduce emissions of pollutants, for example scrubbers on smokestacks or catalytic convertors on motor vehicle tailpipes
(7) Eskom. (2021). Integrated Report
(8) For more on the implications of a basic income grant, see our Matrix Insights: The Basic Income Grant – Adding a BIG enough tool to the arsenal?, 12 August 2021