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South Africa can reduce potential R2 trn in climate transition risk with policy action

December 7, 2019

  • Coal exports could fall sharply after peaking in the early 2020s causing problems for miners, rail, and port operators, as countries strive towards carbon reduction targets
  • Government bears largest share of risk via lower tax revenues, and support for companies, municipalities and workers in financial distress
  • Mitigation options and new opportunities for South Africa remain significant, including a potential R730bn ($5bn) gain from anticipated lower oil prices as a result of the global low carbon transition

JOHANNESBURG, 26 March 2019: South Africa’s exposure to high carbon commodities could result in an aggregate R2 trillion ($124bn)[1] worth of risk associated with the transition to a low carbon economy, according to analysis published by Climate Policy Initiative (CPI), a global think-tank based in London.

Understanding the impact of a low carbon transition on South Africa launched today examines the risks to South Africa from a global economic transition to a low-carbon economy[2] between 2013 and 2035.

CPI’s Energy Finance team has been working with a range of partners to develop a methodology and supporting models to evaluate the risk that countries, companies and the financial sector would face from a global economic transition to a low carbon economy. The results highlight measures and policies that sovereign governments, investors and the international community should take to prepare themselves for this global transformation.

This most recent work from CPI focused on the impact to the economy, including government, municipalities, companies and financial institutions, because of South Africa’s exposure to a global low-carbon transition. In respect of South African exports, CPI examined thermal coal and related infrastructure, including ports and freight rail. CPI 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.

The report found that even though only 16% of that R2trn of risk “explicitly” flows to government via lower taxes and reduced royalties, this proportion could rise to more than half, once “implicit” transfers and contingent liabilities are taken into account, eg via potential company and municipality bailouts, guarantees, and worker transition assistance. The report also identified a further $25bn in potential infrastructure investments currently being contemplated, that may not be economically viable in a low-carbon transition, even though they may appear financially feasible today.

Much of the risk to exports could crystallise quickly in the mid-2020s, which could cause a financial shock with repercussions across the wider economy, if companies and government have not planned for it.

However, the analysis also identifies significant upside from the transition, with a potential R730bn ($45.5bn) windfall from an anticipated reduction in the global oil price. Such cost reductions could offset in part at least, the expected cost of the transition.

David Nelson, executive director of CPI’s Energy Finance team said: “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.

“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.”

Patrick Dlamini, the chief executive and managing director of the Development Bank of Southern Africa, said: “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. We believe that as a country, stakeholders across all sectors must work together to ensure a just transition.”

Media contacts:

Felicity Carus, Head of Communications, CPI Energy Finance
Felicity.carus@cpilondon.org

Sebolelo Matsoso, Head of Communications, DBSA
sebolelom@dbsa.org

Ntombi Mnisi, Communications Specialist, DBSA
NtombiM@dbsa.org

 About CPI Energy Finance:

Climate Policy Initiative Energy Finance is a global think tank based in London, comprising a multidisciplinary team of economists, analysts and financial and energy industry professionals that develops innovative finance and market solutions to accelerate the energy transition.

CPI has been working intensively in the field of climate transition risk over the last six years. During that time CPI has developed innovative and leading methodologies to assess transition risk, and has built models and analytical tools to understand and quantify climate transition risk.

CPI defines transition risk as a measure of the impact that a transition scenario would have on the value of an asset, investment, or company, should that transition occur. We use a scenario for a climate transition consistent with the international target to keep global temperature increases well below 2C.

This report was supported by Agence Française de Développement and the Advisory Finance Group of the World Bank.

About Development Bank of Southern Africa
The Development Bank of Southern Africa (DBSA) is a leading Development Financial Institution (DFI) in Africa. The DBSA provides financing, project preparation and implementation support for economic and social infrastructure in South Africa, SADC and beyond. The institution’s mission is to improve people’s lives, boost economic growth and promote regional integration through infrastructure development. Visit www.dbsa.org for more information.

[1] Exchange rate of ZARUSD 14.47 used as of end of January 2019 for this analysis.

[2] For this study we define a ‘low-carbon economy’ as one that is consistent with a scenario that keeps average temperature rises well below 2°C above pre-industrial levels (2DS), as agreed at the 2015 Paris climate convention.