< Back to all Publications

Understanding the impact of a low carbon transition on South Africa

, and

Published: March, 2019

Climate Policy Initiative (CPI), with the support of Agence Française de Développement and the Advisory Finance Group of the World Bank, have examined the risks to the economy of South Africa – and its government, municipalities, companies and financial institutions – from a global economic transition to a low-carbon economy.

A global low-carbon transition could reduce the demand and price for assets including carbon-intensive fossil fuels such as coal and oil. Infrastructure that supports higher carbon activities including rail, power plants or ports built around fossil fuel industries, may have to be replaced or retired early. Companies, investors and workers could be hurt by lower prices and reduced demand for certain products. Governments may face reduced revenues, for example from lower tax receipts, while their expenditure increases for financial assistance to industries and workers in transition.

“Transition risk” is widely regarded as the risk that the value of assets and income are less than expected because of climate policy and market transformations, such as the switch away from coal-fired power.

However, the analysis in this report not only quantifies the downside risk of South Africa’s transition, ie the negative impact on assets and revenues, but it also attempts to forecast some of the potential benefits of a transition, such as the impact of a lower global oil price that is passed through to consumers.

Trade-offs associated with a low-carbon transition are particularly acute in South Africa, a country with high levels of unemployment2 and inequality and an ambitious development agenda.4 South Africa’s exposure to coal mining as a source of export revenues, as a fuel for domestic power generation and as a key employer in certain provinces presents significant transition risk that is mirrored in many other resource exporting countries.

Conversely, South Africa could gain via lower oil prices, through new markets for minerals used in low-carbon technologies (eg, platinum and manganese) or through the creation of new jobs in industries that are more resilient to, or would even benefit in, a low carbon world, compared to today.

This report outlines the measures that South Africa and its partners can take to reduce climate transition risk, avoid potential economy-damaging risk concentrations and in so doing, reduce the costs associated with the decarbonisation of the South African economy. More generally, this analysis can serve as a template with which to identify and evaluate the financial risk of a low-carbon transition for a variety of countries. Well managed and less concentrated risk can facilitate the transition and lower its cost in countries across the world.