The disastrous floods in KwaZulu-Natal, Cyclone Idai’s devastating impacts and the droughts in Cape Town have all laid bare the need for us to adapt and make our societies more resilient to the impacts of climate change. However, an often-overlooked element of preparing our societies for climate change is adapting our economies to grapple with the transition risks that come with climate action.
Transition risk refers to the potential losses facing high-carbon sectors of the economy due to increasing climate policy and market transformations moving the world to a low-carbon future. For instance, coal power plants risk becoming obsolete and uneconomic as the world acts to clean up the power sector and as the costs of renewable energy continue to plummet, creating the potential for a global 100% renewable energy future which economically outcompetes coal, oil and gas.
Last week, the Bank of England warned that transition risks could amount to trillions of dollars’ worth of assets being wiped out globally. South Africa is set to potentially take on a significant amount of those risks, as our highly carbon-intensive economy is not adequately preparing for the transition. According to the World Economic Forum, South Africa is ranked 114th out of 115 countries for progress in the transition towards a more sustainable and secure global energy system.
To help get a sense of the transition risk we face, a recent report from the Climate Policy Initiative attempted to quantify South Africa’s potential transition losses. They estimated the cumulative impact to 2035 could be more than R1.7-trillion in losses — that’s even under a relatively conservative climate action scenario in line with keeping warming to 2°C, rather than the Paris Climate Agreement’s stricter target of 1.5°C, which would prevent more devastating climate change, but entail more transition risks for South Africa.
The bulk of South Africa’s transition risks are in the coal sector and would be primarily as a result of international factors beyond our control, namely the rest of the world moving away from coal. As such, the ANC’s attempts to encourage more domestic coal use would not save us from the vast majority of those negative impacts. Instead, such measures would expose us to even more risk as new coal power is becoming increasingly obsolete in a world of cheap renewable energy and climate action.
Workers in the coal mining sector are particularly vulnerable to such losses, as multinational corporations will likely leave them high and dry in the face of economic headwinds created by transition risks. The government could help soften the blow through planning a just transition away from coal both for workers and dependent communities. The ANC, however, is going in the opposite direction, encouraging new coal, oil, gas and carbon-intensive development through its policies and future energy plans.
The Climate Policy Initiative report shows that by stubbornly proceeding with a high-carbon future our government could face a perfect storm of factors by mid-2020, consisting of 1) significant losses in revenue from coal exports; 2) underperforming loans from carbon-intensive sectors; 3) less revenue from state-owned entities and public banks over-exposed to high carbon sectors; and 4) expectations that the government would foot the bill to assist workers losing their jobs in high-carbon sectors.
Just how large the transition risks will be, depends on whether we take proactive measures to align our economy with a low-carbon future or dig ourselves deeper through more polluting investments. For example, if banks such as the Development Bank of Southern Africa rush ahead with financing new coal plants like Thabametsi and Khanyisa, they could be exposing South Africa to an additional few billion rands in potential losses, according to the Climate Policy Initiative report.
The risks of the shift to a low-carbon future extend to all sectors of our economy. Even our pension funds face significant transition risks — and if they do not act they could face a climate-induced Minsky Moment, where asset prices collapse due to climate and transition risks. According to a recent legal opinion, pension fund boards have a legal responsibility to consider these risks and shift their investments in line with a low-carbon future. If they fail to do so, they would be breaching their legal duty as trustees and face legal liability for associated losses.
In the end, the responsibility to climate-proof South Africa’s economy and move towards a low-carbon future falls to all sectors of our society. If we are to avert locking ourselves further into a risky, high-carbon, climate-destabilising future, then individuals, investors, shareholders, institutions, companies and government actors must shift their investment and resources to a low-carbon future.
By aligning with a low-carbon future, not only can we avert significant transition risks, we can also embrace the major economic and societal opportunities that come with a low-carbon future. South Africa is a renewable resource-rich country, and experts show if and when we embrace a renewable energy transition we could become a major destination for electricity-intensive industries seeking lower-cost, lower-carbon energy. A renewable future could also lower our energy costs, boost job growth, reduce pollution harming our communities and democratise energy.
Key to equitably unlocking a prosperous low-carbon future in the South African context of deep inequality, poverty and high unemployment is ensuring a just transition that does not leave behind workers and fossil fuel-dependent communities who will be most impacted in the transition.
We must also work to ensure that the transition uplifts those overlooked by our current heavily polluting, deeply unequal mode of development. At the same time, we must not mistake a just transition for a slow transition. Otherwise, we risk being left stranded by the rapidly shifting global tides towards a low-carbon future.
Of course, in all the economic talk of reducing transition risks, we must not lose sight of what is at stake if we do not transition to a low-carbon future — the very stability of our climate and environment. If we do not act, then we put at jeopardy the ecosystems that allow us to thrive. We risk reversing progress on poverty alleviation, development and equality, all of which could be largely wiped out in a world ravaged by climate chaos.
If South Africa wants to chart a path to prosperity for all in the 21st century, it is clear that a low-carbon future is the way forward. DM
Dr Alex Lenferna serves as South Africa Climate Justice Campaigner with 350.org. He is a Mandela Rhodes and Fulbright Scholar with a PhD on climate justice from the University of Washington.
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