If South Africa does not begin to shift away from its reliance on coal for its power and export value, the country risks as much as 2 trillion Rand ($124 billion) as the rest of the world begins to shift away and reduces their need for South Africa’s coal.
This is the conclusion from a report published Tuesday by London-based global think-tank Climate Policy Initiative (CPI) entitled Understanding the impact of a low carbon transition on South Africa, which seeks to evaluate the risks to South Africa from a global economic transition to a low-carbon economy between 2013 and 2035. Specifically, CPI’s Energy Finance team has been working with a range of partners to design a methodology and the supporting models to evaluate the risk that countries, companies, and the financial sector is likely to face from a global economic transition to a low-carbon economy.
The new report focuses on the impact to South Africa’s economy, including government, municipalities, companies, and financial institutions and the risk caused through the country’s exposure to a transition to a global low-carbon economy, specifically as it pertains to the country’s exports. CPI examined thermal coal and related infrastructure — including ports and freight rail — and 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.
According to the findings of CPI’s report, the cumulative impact on South Africa of a global transition to a low-carbon economy between 2013 and 2035 could exceed US$120 billion, or around 2 trillion Rand. Further, these risks will accumulate slowly in the coming years before accelerating in the mid-2020s. Unless the country’s government begins to take action to mitigate these risks, South Africa’s investment grade sovereign rating could be jeopardized, leading to further financial losses.
It’s also important to note that the majority of risks facing South Africa come from factors that are beyond the country’s control, such as changes to global coal and oil markets that will be driven by changes to global demand. As more and more countries look to minimize their own reliance on coal and oil for energy generation, South Africa’s export market will be hit hard, which will in turn affect not just the mining sectors, but all the tangential sectors which rely on the mining sector for their own continued success.
CPI also expects that much of the risk to South Africa’s export sector could “crystallise quickly in the mid-2020s” causing a subsequent shock to the system with repercussions across the wider economy if companies and government have not prepared for it.
The flip side, however, is that CPI’s report also found a “significant upside” from such a global transition, with a potential R730 billion ($45.5 billion) windfall from what is anticipated to be a reduction in the global oil price.
“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,” said David Nelson, executive director of CPI’s Energy Finance team. “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.”
“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,” added Patrick Dlamini, the chief executive and managing director of the Development Bank of Southern Africa. “We believe that as a country, stakeholders across all sectors must work together to ensure a just transition.”
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