What COP26 means for South Africa

Posted in: Economics, i-Blog, South Africa on October 25, 2021


In the run-up to the Conference of the Parties (COP26) in Glasgow, Ireland, from October 31 to November 12, South Africa is trying to commit to an ambitious decarbonisation path and position itself as a leader in the fight against climate change.

However, a mixture of vested interests, ideology and politics has resulted in mixed messages about how to deal with the urgent problems that plague our energy sector, particularly as concerns decommissioning Eskom power stations.

In the context of South Africa’s immediate social and economic crises, some have argued that climate goals and leadership on these issues are less important than protecting jobs and industries, but the two are deeply linked.

What happens at COP26 will have a direct and relatively fast impact on both the immediate and long-term outlook for economic growth, jobs and the industrialisation of the country.

The outcomes of COP26 will have profound impacts on ordinary South Africans – in particular the speed and style of decarbonising – irrespective of whether the country “signs up” to them.

Complying with these new regulations, forced by shareholders, banks or global trade barriers will mean removing carbon emissions from those working with steel, transport, power generation and the chemicals industry, and those mining the coal and extracting the gas that feeds these emissions.

President Cyril Ramaphosa has already recognised the need for innovation and renewed industrialisation to replace coal with greener alternatives.

This will protect jobs in some industries, for instance by using hydrogen to make steel, but more needs to be done if South Africa is to weather the pressures.

For now, it appears as though the country is going to COP26 with a strong message about the importance of smoothing the transition to net zero to allow time for workers and industries to adapt.

There is an increasingly strategic focus in some quarters, especially in the Presidential Climate Commission, which has pulled together expertise and become a credible thought leader within government and in society at large.

Still, decisions are required right now and mixed messages are still being given, especially by Mineral Resources and Energy Minister Gwede Mantashe. While he may like to object, no company or foreign government funder is going to employ a team of Kremlinologists to decipher what he is saying.

The utterances of all ministers, most especially those of someone in charge of energy policy, have real impact on South Africa’s ability to navigate the Just Energy Transition and attract financing, which is going to be a major focus at COP26.

The truth is that South Africa has no fiscal or other balance sheet capacity (at Eskom say) to borrow the money it needs to ensure a smooth and just transition.

The power utility’s costs are at least R400 billion in the coming decade and the same again the decade after that. Total transition costs may be around R2 trillion.

Without such money, social and labour support cannot be offered and South Africa would face a cliff edge and a sharp step-up in unemployment and instability.

Importantly, this money is for new spending, not just to clean up historic Eskom balance sheet problems.

The money is on the table though at COP26 – lots of it. And it will become the new battleground in the political arena.

Recent comments from Mantashe indicated his disapproval of such funds because of the terms that come attached to them.

Indeed, our policymakers have struggled to understand what other emerging markets already consider normal – the state can borrow lots of cheap money (at low-interest rates not available elsewhere) to fund its development and accept the conditions if it wants to.

No one will force a country to take this money, and the conditions that will be imposed are things that South Africa would end up having to do anyway – such as a faster decommissioning of poorly functioning power stations.

The embarrassing collapse of World Bank loan negotiations last year was a sombre precedent.

The debate over such borrowing facilities often regresses to a focus on the motives of those providing the money. But why does this matter if you need the cash when the alternative is much worse and if the conditions are just about acceptable?

The political upside from throwing one’s toys out of the pram cannot be so great surely?

South Africa needs to transition for many reasons, of which carbon emissions is only one. For instance, sulphur dioxide emissions are killing thousands of people in Mpumalanga.

Conversely, a shift would unleash faster growing industries which can be labour intensive, such as rooftop solar PV installations.

The speed of travel is fast, however. It is faster than South Africa’s policymakers and leaders are used to working at. Herein lies the risk, but also an opportunity we cannot afford to miss.

Montalto is head of capital markets research at Intellidex, a research-led consulting company.

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