HOW DO WE GET THERE?

South Africa is a highly carbon-intensive economy; we’re one of the top 20 largest emitters of greenhouse gases (GHG) in the world and, on a per unit of GDP basis, we rank well above the global average. It is important that these statistics are seen in the context of the global effort to decouple economic growth from fossil fuel use. Winners will be those countries, and companies, that can decarbonise their growth. On this score South Africa’s participation in the global economic race comes with a handicap, one we can ill afford, especially considering our high levels of poverty, unemployment and inequality.

As a country we rely on coal to generate about 90% of our energy requirements and some 20% of all our liquid fuel requirements, meaning that Sasol and Eskom collectively account for c50% of our annual GHG and some 85% of domestic coal consumption. Simply turning these two entities off to address climate concerns is however not a solution, certainly not in the short term, especially when considering how important these companies are to the running of our economy as well as a source of employment.

COAL LIVES MATTER?

The Minerals Council South Africa reports that 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 29%, any effort to decarbonise our economy needs to carefully consider potential jobs losses, as well as long-term national socio-economic development more broadly.

From a purely financial perspective, Sasol is one the largest tax payers in South Africa, contributing R39.5 billion 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 economics and the 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.

AN ORDERLY RETREAT

An orderly retreat is always preferable. In 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 return prospects for South African savers. On the plus side, an increased role for renewables in the South African energy mix (up to 60%) is seen as technically viable. With this comes benefits of nett 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 labour, business and civil society. 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 programme our country has seen since the dawn of democracy. This will require Government to take an intentional stand and work aggressively towards our Paris Accord commitments. As it stands our National Determined Contributions (the intended reductions in GHG emissions under the United Nations Framework Convention on Climate Change) explicitly state the need for a just transition and acknowledge the declining role of coal in our economy. The inexorable energy transition is underway globally. South Africa Inc would do well to work collectively in this endeavour.

AUTHOR

JON DUNCAN
HEAD OF RESPONSIBLE INVESTMENT, OLD MUTUAL INVESTMENT GROUP

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