In a growth-challenged world, decarbonisation remains a powerful structural growth trend. COVID-19 has created opportunities and challenges for investors aiming to tap into it.
Jul 7, 2021
This article first appeared in Business Day on 29 June 2021.
As governments prepare for November’s COP26 summit on limiting climate change, a glib refrain has begun to echo amongst developed market capital allocators. It goes like this: “Let us reduce carbon by divesting ourselves of carbon-intensive assets and exiting carbon-intensive places – and let us do so now.” This is not just glib. It is also ill-conceived, and it is dangerous.
Imagine, for a moment, the consequences for South Africa if this approach became the policy of nations and investors across developed markets. This country produces the world’s most carbon-intensive electricity, which bloats the carbon footprint of all its people and enterprises.
South Africa and other carbon-intensive emerging markets run a perilous risk in the climate-change debate. Should we fail to convince developed nations and investors to focus on a fair and orderly transition to reducing emissions globally – instead of rushing to a Pyrrhic victory – we might be starved of international capital flows.
Right now, Europe is thinking about imposing tariffs on imports from high carbon-emission zones. This would hobble South African exports and reduce foreign investment in such industries as auto manufacturing. If the exclusion approach gains traction, foreign investors might be inhibited from buying high emitters’ sovereign or corporate debt and equity. This would push up South Africa’s borrowing costs.
It is cold comfort that South Africa is but one of many nations that would be penalised. About 90% of future carbon-emissions growth is projected to come from emerging markets. If a default “sell South Africa, buy Ireland” approach takes hold, the decarbonisation efforts of most emerging markets would be severely constrained. The $2.5 trillion in annual investment that emerging markets need to reduce carbon would never arrive. Instead, capital that once flowed freely would concentrate in developed markets and their companies. Most of the world’s 7.9 billion people would be starved of investment. Would the world achieve net zero? No. It would achieve a partial net zero, which is no net zero at all.
Watching, in silence, is not good enough. To paraphrase Ernest Hemingway, something bad happens gradually, then suddenly. This country must find its voice, and quickly, for its own sake and for emerging markets everywhere. South Africa can lead the case for a just and inclusive transition – a path to the permanent reduction of carbon emissions that encompasses all the world.
Here is the argument that needs making: Emerging markets need time and financial help to reduce their carbon emissions.
Our own most compelling proxy for this argument is Eskom, whose travails and challenges provide South Africa with incentives to enter the global debate and turn the argument.
Let us remind ourselves what we confront with our public electricity utility. Eskom has a large quantum of stranded debt that will need to move off the balance sheet as part of a holistic solution for the entity. The longer it takes, the larger the portion of unsupportable debt.
Daunting, yes. But this is also where we find an opportunity.
The global move to achieving net zero carbon emissions by the year 2050 means South Africa could tap substantial amounts of climate finance to mitigate the debt the government needs to absorb.
The latest BNEF analysis of levelised electricity costs finds that in countries representing 46% of the world’s population and 48% of electricity generation, either new photovoltaic (PV) or onshore wind is now competitive with the cost of running typical amortised existing coal- and gas-fired power plants. Given the 70% to 90% plunge in renewable energy prices over the past decade, South Africa could accelerate the closure of coal power stations and reduce emissions by 1Gt+ of carbon relative to IRP2019. In return, the developed world should provide compensation or, effectively, transition finance.
Developed economies have in principle committed to large-scale financial support for developing economies to transition to net zero, but the financial models have yet to be worked out.
South Africa has an open – though rapidly narrowing – window of time to make the case. We must do so with urgency, so that we are influencing opinion where it matters well before countries meet in Glasgow on Monday, 1 November. For 12 days, the Conference of the Parties (COP) to the UN Framework Convention on Climate Change will gather for their 26th summit (hence, COP26).
This summit might be unlike any of the 25 that have come before. It feels like the world is reaching an inflection point. The ways forward diverge, and a choice will be made. A consensus will embed and become policy. The low road would be an approach that encourages rapid and large-scale divestment, tariffs, and other inhibiting measures. The high road would be an approach that recognises emerging markets need time and investment to make an orderly transition to reducing carbon and, in return, demands that these markets and companies commit to plans that lead to net zero emissions.
South Africa must step into the debate not merely to achieve a sustainable future for Eskom, but to re-ignite our country’s economic growth, set the nation on course for a sustainable future, and help do the same for all emerging markets.
South Africa should as soon as possible initiate talks about a meaningful climate-finance transaction. This country needs to signal it is ready and willing to reduce its carbon emissions in return for compensation – or transition finance.
A deal would encourage an arrangement for all emerging markets. This is the high-road approach that would give the whole world the best chance of achieving a true net zero in emissions. Developed nations would help finance the transition of developing nations. The payoff would be an ever-lasting reduction in carbon emissions for the whole planet and the avoidance of catastrophic climate change.
The energy transition and related sustainability revolution presents a once-in-a-generation structural change in the global economy. South Africa should seize the opportunity to transform its economy and regain much needed structural-growth momentum.
This is a moment for South Africa to lead, to help forge a high road into the future just as the country did it in 1994, when we delivered a peaceful transition to a democratic and constitutional order and inspired the world. Then, the ANC had a remarkable chief negotiator, one Cyril Ramaphosa. Now, as President Ramaphosa, he can be a powerful voice not just for this nation, but for all developing markets.
This is a moment for the president to shape his legacy and put South Africa back on the path to prosperity.