South Africa’s transition to green energy come with tremendous socioeconomic risks to those directly affected by the move away from coal.
South Africa can only meet its commitments to reach net zero emissions with help from local and transnational financing, from both the public and private sectors
COP27 concluded with yet another acknowledgement of the importance of climate finance, but questions linger over how a developing country like South Africa can shift from its current fossil fuel-intensive economy over the next two decades. This transition is not only necessary to avoid the worst impacts of climate change, but to ensure that the country’s export market is not at risk of being left behind and crippled by its reliance on carbon-intensive products. Climate action, or lack thereof, therefore has broad macroeconomic implications.
Intellidex, a research and consulting firm that specialises in capital markets and financial services in Africa, says in its Capital Markets Report 2022 that South Africa will need between R4 trillion and R8.5 trillion over the next 30 years for financing the country’s climate mitigation commitments. This will require substantial and innovative financing mechanisms and drastic changes to capital market flow structures. The World Bank says the R8.5 trillion needs to be divided roughly into R4.2 trillion for mitigation, R2.2 trillion for adaptation and R2 trillion for the Just Economic Transition (JET).
In the short term, Eskom requires an estimated R1.2 trillion in infrastructure investment by 2030 to develop a successful transition in the power sector. This includes R990 billion for generation capacity, R130 billion for transmission capacity and R56 billion for distribution capacity.
What is climate finance, and why is it limited in the capital market?
South Africa can only meet its commitments to reach net zero emissions by mid century with the help of local and transnational financing from both the public purse and the private sector. Unlocking the level of finance required cannot hinge solely on the state’s coffers, which are limited by weak growth and a widening debt-to-GDP ratio.
South Africa must transition from a fossil fuel-intensive economy to mitigate climate change and ensure that its export market is not crippled by its reliance on carbon-intensive products. Photo: Waldo Swiegers/Bloomberg via Getty Images
It will need new and innovative approaches which, according to the Intellidex report, “will help bridge the gap between traditional philanthropic funding, development aid and public sector financing on the one end of the spectrum, to commercial investors on the other end”.
Globally, the existing capital markets structure has shown to be limiting and insensitive to the scale of support and investment required for this transition to happen at the pace required. President Cyril Ramaphosa told the 27th Conference of the Parties (COP) in Egypt that at present, multilateral banks are risk averse, and that financing is generally inaccessible for developing nations.
“The multilateral development banks need to be reformed to meet the needs of developing economies for sustainable development and climate resilience. At present, multilateral support is out of reach of the majority of the world’s population due to lending policies that are risk averse and carry onerous costs and conditionalities,” Ramaphosa said.
The Intellidex report says continued blockages in the existing capital markets include:
- a lack of investable pipelines;
- ambiguity around the Just Energy Transition (JET) conceptualisation;
- a leadership vacuum;
- lack of strategic integration of JET;
- issues related to liquidity, FX risks and lacklustre demand;
- insufficient financial innovation;
- skills shortages;
- [a lack of] sustainable investing and ESG integration practices;
- the green finance taxonomy;
- JSE sustainability and climate disclosures;
- poor macroeconomic fundamentals; and
- poor quality data.
South Africa’s transition risks are geographically concentrated and come with tremendous socioeconomic risks to those directly affected by the move away from coal. While the COP26 JET partnership offer of $8.5 billion by the International Partners Group is a landmark development in international climate financing, it is unlikely that this model of funding could finance the entire transition; major shifts in the private sector are also needed to channel appropriate finance.
“The challenge for financing the JET is not only how to deliver large-scale new renewable infrastructure and associated grid and storage capacity (as well as other components of the energy ecosystem), but also how to ensure that the losers from the transition are appropriately compensated or have a fair stake in the success of it, and indeed how those social solutions are financed,” states the Intellidex report.
South Africa has been slow to adopt newer finance instruments such as green, social and sustainability bonds. The JSE has expanded its green bond segment to include sustainability but this remains largely underdeveloped, according to the report findings. A lack of pipeline projects has also meant that banks have no need to issue higher sustainability bonds. To date, data shows the value of these bonds are nowhere near to what is needed.
But the JSE’s Transition Finance segment has an important role to play in helping facilitate a just transition by ensuring that heavy emitters and hard-to-abate sectors are not cut off from capital markets entirely, and thereby not forced to shut down abruptly. For it to work, institutional investors need to be sensitised to how this segment works.
A number of other finding mechanisms are also required from banks and insurers. “To reach the scale required, banks will need to move assets off the balance sheet to the institutional market,” the Intellidex report states.
To accelerate the just energy transition, the report concludes that South Africa must:
- identify the gaps in the local ecosystem that need to be closed to crowd in commercial funders;
- identify the key aspects from a technical ESG application perspective that need to be addressed, to ensure that commercial investors as well as development financiers can allocate capital to the markets most urgently in need of funding to achieve the SDGs; and
- identify the key areas for philanthropic funders to provide catalytic capital to achieve measurable, scalable and replicable impact on the JET.
This may assist in addressing the pressing blockages that are currently limiting finance for the country’s road to carbon neutrality in the next 30 years.
— Tunicia Phillips
There are still many blockages that are currently limiting financing for South Africa’s long road to carbon neutrality
Lost in the jargon
The gap to avoid certain future disasters is closing and the world is strolling to avoid the worst, according to scientists. This is why it is critical that everyone understands climate change language. Climate change diplomacy at large conferences like the 27th gathering of the COP in Egypt involve technical language and common concepts that are often unfamiliar to the general public, yet the outcomes have enormous consequences for everyone, particularly society’s most vulnerable
Climate change issues are loaded with technical terms that directly relate to dealing with and preventing the unnatural warming of our planet.
This warming is fueled by past and present greenhouse gas emissions that are trapping heat in the air: Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and the fluorinated gases (F gases) that are released from various industrial, commercial and domestic activities such as electricity generation, steel and cement production, transport, agriculture, refrigeration and air conditioning.
Global energy production is still largely reliant on fossil fuels, which have released the bulk of historical emissions trapped in the atmosphere. Scientific assessments like those of the Intergovernmental Panel of Climate Change (IPCC) dating back to 1990 have evolved with technological and scientific modelling advancements and have consistently shown increased proof that this heating is occurring and that it is anthropogenic, meaning it originates from human activity.
The science
The IPCC gains its credibility from the transparent, robust peer reviewing and rigorous checking process on its research and supporting data, showing the extent and risks of the warming. It took eight years before it released the Sixth Assessment in 2022, warning, among other things, that our capacity to handle the current projected warming is slowly narrowing, and so is the time available to avoid the worst.
The reports are a synthesis of large quantities of available data and research by hundreds of experts around the world. In the Fifth Assessment, 830 lead authors and review editors drew on the work of over 1 000 contributors. In addition about 2 000 experts provided over 140 000 review comments. The IPCC findings are largely responsible for the 1.5C warming target.
To put warming into perspective, there is only a 2% temperature difference between a person whose body temperature is regarded as normal (36 or 37C) and readings that indicate someone is seriously ill from infection at 38, 39 and 40 degrees celsius. In climate science, one degree of warming can be the difference between liveable and unlivable land. At present the outcomes of the COP are not aligned to the urgency and scale of the IPCC science and recommendations.
Mitigation
Mitigation is the act of stopping current and future greenhouse gas emissions to limit warming to liveable levels. It involves decarbonising major industries and moving towards greener sustainable development that is less reliant on fossil fuels. Other greenhouse gases such as methane are expected to see an uptick as countries turn to natural gas for energy. Meanwhile fossil fuels like coal are seeing increased demand and boom in the global market in the short term because of global energy insecurity, and a number of developing nations are only willing to peak their emissions after 2025 and 2030. This may require historically high emitters to reduce emissions at a faster pace and scale to bring emissions as close to zero as possible by 2050. Reforestation and restoration are key to mitigating climate change by using plants’ natural ability to absorb carbon dioxide, although questions around whether they can single-handedly do so is a continued topic of debate.
To support mitigation various financial mechanisms have been introduced, such as carbon tax on high emitting industries and carbon markets, which are essentially trading in certificates linked to emission reduction activities. Sasol, for example, can contribute to emission reduction activities away from its operations and count that credit towards its reductions or sell that credit on the carbon market. Finance is needed to move global energy to renewable systems and invest in the technology to capture CO2 in the future.
Fair Share
For share refers to a country’s responsibility on climate action in the context of its development and historical emissions, which are generally low for emerging markets. Parties under the COP submit nationally determined contributions that indicate how much they are willing to cut emissions over a certain period in relation to their fair share of the crisis. A country like Zimbabwe, for example, would not share the same responsibility towards mitigation as the US or Australia. Developing countries are heavily reliant on financial support to cut emissions and developed nations have committed to helping them.
Adaptation & Resilience
Adaptation and resilience are society’s ability to withstand present and future climate related shocks such as extreme weather, slow onset disasters like drought and sea level rise as well as the health, economic and social risks associated with these events. Calls to put as much focus on adaptation as mitigation at the COP level have intensified over the years, but financial targets have been missed. Wealthy nations are already due to set a new financial target to support developing countries faced with the risks of climate change — a task that COP27 failed to complete. Scientists have recommended restoration of natural ecosystems as key to building the natural adaptation capacity to withstand current and future climate impacts. This is driving global calls for a new deal for nature that will conserve and restore nature’s ability to continue providing resources for humanity.