COP 26 and South Africa's Just Energy Transition goals

COP26 is the 2021 United Nations Climate Change Conference. For nearly three decades the UN has been bringing together almost every country for global climate summits – called COPs – which stands for ‘Conference of the Parties’. In that time climate change has gone from being a fringe issue to a global priority. This year saw the 26th annual summit – giving it the name COP26. With the UK as President, COP26 took place in Glasgow from 31 October-13 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.

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%. Although nuclear power generation has fallen out of favor 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.

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.

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 mobilized over the next three to five years through a variety of instruments to support South Africa’s move to embrace climate resilience.

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.

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.

This balance will not be easy to achieve. Many of South Africa’s labor-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.

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