How 1.5°C degrees will impact inclusive growth

*How 1.5°C degrees will impact inclusive growth*
SPONSORED CONTENTHow 1.5°C degrees will impact inclusive growth By Old Mutual Investment Group• 9 March 2020 In 2019, some 11 000 scientists from around the world clearly and unequivocally stated that the Earth is facing a climate emergency. The Paris Agreement, therefore, set the twin goal of limiting global average temperature increase above pre-industrial levels to well below 2°C, and to pursue strong efforts to limit the increase to 1.5°C. To fulfil their obligations under the Paris agreement, signatories including South Africa, are required to communicate their Nationally Determined Contributions (NDCs) every five years. They have to outline country-specific climate change goals, taking notice of national circumstances and capabilities. Now, as the world works towards solving for an economic growth path that is aligned with a well below two-degree future, we can anticipate increasing social and political pressure for our country.
A CONUNDRUM
South Africa is a highly carbon-intensive economy; we’re one of the top 20 largest emitters of greenhouse gases (GHG) and, on a per unit of GDP basis, we rank well above the global average. In the context of the global effort to decouple economic growth from fossil fuel use, these statistics have material bearing on South Africa’s long-term economic competitiveness. In the long run, winners will be those countries, and companies, that can decarbonise their growth. Conversely, the low-carbon transition would reduce the demand and price for assets, including carbon-intensive fossil fuels such as coal and oil. Similarly, the infrastructure that supports these assets is also at risk – this includes rail, port and energy infrastructure which may see declined use or early retirement.
The trade-off for a country like South Africa is particularly acute given the triple challenges of poverty, unemployment and inequality. As a country, we are materially exposed to coal, which is used to generate about 90% of our energy requirements and some 20% of all our liquid fuel requirements. Sasol and Eskom collectively account for 50% of our annual GHG. Simply turning these two entities off to address climate concerns is however not a solution, certainly not in the short term when you consider how important these companies are to the running of our economy as well as a source of employment.
AT THE COAL FACE
According to the Mineral Council South Africa, the coal industry employs some 82 000 people (down from a historical high of 120 000 jobs in the 1980s). Eskom provides work for over 50 000 people in its primary coal fleet and Sasol, while being a global company, provides the bulk of its 31 000 jobs in South Africa. With unemployment levels sitting at just below 30%, any effort to decarbonise our economy needs to carefully consider potential jobs losses, as well as long-term national socio-economic development more broadly.
Purely from a financial perspective, Sasol is one the largest taxpayers in South Africa, contributing R39.5bn in taxes to Government in 2018. Coal miners contribute not only tax and mining royalties but are also an important source of foreign revenue. Mining, in general, is the largest contributor to South Africa’s foreign exchange earnings, with a 40% share. And the coal sector is the largest revenue generator within mining, outweighing the gold and platinum sectors. Notwithstanding this, the coal sector faces headwinds, both globally and locally. Already coal demand has peaked globally and the decline of coal-fired power generation is projected to be steeper than previously estimated. Aside from mounting public pressure against coal, a large part of the shift is being driven by pure economics and steeply falling price of alternative energy. The implications of these global dynamics are material for South Africa, especially if a phase-out of coal is not well planned.
A Climate Policy Initiative report on SA’s low Carbon transition indicated that SA could have lost as much as US$60bn in revenue from seaborne coal exports against a 2013 business as usual scenario for the period 2013 to 2017. The report projects that going forward a further US$29.4bn is at risk if the coal exports further adapt to the two-degree scenario. Declining revenues in the coal sector could wipe out mining profits and government tax royalties but could also leave borrowers out of pocket, resulting in debt defaults cascading through the markets. These risks will ultimately be borne by consumer and workers – with the net result being a reduction in economic activity in mine communities and a decline in investment in social infrastructure.
The challenge with this situation is that much of this risk sits outside of the control of the South African government. Changes in global climate policy, shifts in global energy geopolitics, step changes in cost and availability of technology and new energy market regulations are all continuing apace and there is little SA can do to change this. What we can do is plan to manage the transition and use fiscal and policy intervention to shift the risk away from those with little capacity to bear it while best capture transition related upside.
AN ORDERLY RETREAT
In the context of South Africa’s transition to a low-carbon economy, the implications of an orderly retreat are material not only for those directly employed in the coal value chain, but also for the economy and the returns prospects for South African savers.
On the plus side, an increased role for renewables in the South African energy mix (up to 60%) is technically viable. Due to South Africa’s location, geography and size, multiple renewable energy resources are available; its long coastline provides favourable conditions for wind power while the semi-arid climate and flat terrain receives high irradiation, making it ideal for solar power. With this comes benefits of net new job creation and the potential for local supply chain development. So, while South Africa has the challenge of fossil fuel dependency, we also have been blessed with leading global solar and wind resources. Capturing these benefits while managing the socio-economic transition risks will require a coherent plan from Government, with broad support from civil society, labour and business.
The current risks surrounding Eskom show us just how vulnerable we are to a collapsed energy system. Along with that, addressing climate change issues has never been more pertinent. What is clear is that through global concessionary climate funding, it is possible to both fix Eskom and to solve for the transition to a low-carbon economy. This presents South Africa with the unique opportunity to reset our long-term energy plans and drive perhaps the biggest industrialisation program our country has seen since the dawn of democracy. The inexorable energy transition is underway globally, South Africa Inc would do well to work collectively in this endeavour. BM
This article was written by Jon Duncan, Head of Responsible Investment: Old Mutual Investment Group

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