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Coal-dependent SA will need an ordered retreat from fossil fuels

In 2019 about 11,000 scientists from around the world clearly and unequivocally stated that the earth is facing a climate emergency. As the world works towards on an economic growth path that is aligned with a well below 2ºC future, we can anticipate increasing social and political pressure.

SA is a highly carbon-intensive economy; we’re one of the top 20 largest emitters of greenhouse gases and, on a per-unit-of-GDP basis, we rank well above the global average. In the context of the global effort to decouple economic growth from fossil fuel use, these statistics have material bearing on SA’s long-term economic competitiveness. Winners in the long run will be those countries, and companies, that can decarbonise their growth. The low-carbon transition could reduce the demand for and price of assets, including carbon-intensive fossil fuels such as coal and oil. Similarly, the infrastructure that supports these assets is also at risk. This includes rail, port and energy infrastructure that may see declined use or early retirement.

Exposed to coal

The tradeoff for a country such as SA is particularly acute given the triple challenges of poverty, unemployment and inequality. As a country we are materially exposed to coal, which is used to generate about 90% of our energy requirements and 20% of all our liquid fuel requirements, meaning Sasol and Eskom collectively account for about half of our annual greenhouse gas emissions.

However, simply turning these two entities off in order to address climate concerns is not a solution, certainly not in the short term, considering how important these companies are to the running of our economy and as sources of employment.

The Minerals Council SA reports that the coal industry employs about 82,000 people (down from a historical high of 120,000 jobs in the 1980s). Eskom provides work for more than 50,000 people in its primary coal fleet and Sasol, while being a global company, provides the bulk of its 31,000 jobs in SA. 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 socioeconomic development more broadly.

From a purely financial perspective, Sasol is one the largest taxpayers in SA, contributing R39.5bn in taxes to the 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 SA’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.

Nevertheless, the coal sector faces headwinds, both globally and locally. Already coal demand has peaked 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 pure economics and steeply failing prices of alternative energy. The implications of these global dynamics are material for SA, especially if a phaseout of coal is not well planned. A Climate Policy Initiative report on SA’s low carbon transition indicated that SA could have lost as much as $60bn in revenue from seaborne coal exports, against a 2013 business-as-usual scenario for the period 2013 to 2017. The report projected that a further $29.4bn is at risk if the coal exports further adapt to the 2ºC scenario.

Declining revenues in the coal sector could wipe out mining profits and government tax royalties, but could also leave borrowers out of pocket, resulting in debt defaults cascading through the markets. These risks will ultimately be borne by consumers and workers — with the net result being a reduction in economic activity in mine communities and a decline in investment in social infrastructure.

An ordered retreat is always preferable. In the context of SA’s transition to a low-carbon economy, the implications of an ordered retreat are material not only for those directly employed in the coal value chain, but also for the economy and returns prospects for SA savers.

On the plus side, an increased role for renewables in the energy mix, (up to 60%) is seen as technically viable. With this comes benefits of net new job creation and the potential for local supply chain development. So while SA 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 socioeconomic transition risks will require a coherent plan from the government, with broad support from civil society, labour and business.

The risks surrounding Eskom show us just how vulnerable we are to a collapsed energy system. Along with that, tackling 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 solve the transition to a low-carbon economy. This presents SA 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. The inexorable energy transition is under way globally, and SA Inc would do well to work collectively in this endeavour.
Source: Business Day Live

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