Climate change - Challenging change: The transition to a sustainable economy

Occasional paper 2/2021

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May 2021

Author: Yaseen Lockhat

BA Geography (Honours), PGDip Planning, MSc Development Planning

Abstract

Humanity is experiencing an anthropogenic-induced climate emergency. Climate change is framed as an emergency due to the numerous catastrophic physical risks, which are increasing over time. A global response is needed to address the challenges posed by climate change. It will require redesigning many sectors and activities of the economy to reduce its environmental impact, in particular the energy sector which is responsible for a significant amount of the total emitted carbon. The transition to a low-carbon economy is a complex process due to the magnitude of the shift and the dependencies of the economy on the activities that need to change, thus the transition also poses a severe risk. However, the benefits of transitioning far outweighs the costs. It is vital for South Africa to have a holistic climate change strategy, as the country is susceptible to both physical and transitional risks.

Introduction

Climate change can be described as one of the single greatest challenges that humanity has ever faced. It poses a highly complex challenge due to its interconnected and multifaceted nature. Climate change is a consequence of certain activities within the current societal and economic systems, yet at the same time it negatively impacts these very same systems. Thus, climate change needs to be addressed methodically as it is embedded at a universal level within the global systems people are dependent on. The one thing that is guaranteed by both climate change and climate action, is change. Whether there is climate action or inaction, there will be drastic changes. Humanity is however at a point where the change can be influenced for the better. The globe is faced with a choice. It can either focus efforts on transitioning to a sustainable economy that will ensure a high quality of life for future generations or decide not to respond to climate change, which may result in short-term gains that will be eroded by the rapid deterioration of the physical environment. However, both climate action and inaction pose risks, and this is particularly true for South Africa.

This paper will explore the physical risks posed by climate change, the physical risk posed to South Africa, the global response to climate change and its challenges, the South African context, and conclude with recommendations for the country.

Climate change of the Anthropocene

There is an overwhelming scientific consensus that climate change is driven by anthropogenic activities (Oreske, 2018). Whilst climate change as a process is a cyclical phenomenon that is undoubtedly a part of the earth’s natural climatic process, it was previously thought that humans do not have the capacity to alter or influence a system as large as the earth. However, since the industrial revolution, technological improvements led to the acceleration of greenhouse gas (GHG) emissions, most notably carbon dioxide through the burning of fossil fuels and land coverage change, most notably deforestation. These two shifts, albeit land coverage change to a lesser extent, have led to the drastic increase of heat retained in the atmosphere and ultimately the acceleration of the climate change process (IPCC, 2007; IPCC 2019).

Scientific consensus is demonstrated through the Intergovernmental Panel on Climate Change (IPCC), a global body established by the United Nations to consolidate various climate change studies, from hundreds of scientists across the globe, into assessment reports that shed light on climate change ‘implications and potential future risks’ and to suggest ‘adaptation and mitigation options’ to governments and policymakers (IPCC, 2021). The IPCC reports are cited for their credibility as ‘In the scientific community and media, its reports are broadly viewed as the most comprehensive and reliable assessments of climate change’ (DW, 2019).

In 2018 the IPCC produced the ‘Special Report Global Warming of 1.5°C’ on the need to curb emissions to 1.5°C above pre-industrial levels. The report is authored by 91 experts from over 30 countries including South Africa. The report paints a bleak picture of the current climate change risk trends, as it reveals that anthropogenic activities have already resulted in climatic changes. Moreover, the IPCC report further reveals that climatic changes will increase, and the associated risks will be exacerbated as global warming continues, with the report emphasising that a mere half a degree of warming may result in significant changes. For example, Dosio et al., (2018) found that at 1.5°C, 13.8% of the global population will experience an extreme heatwave once every five years, whilst this percentage may drastically increase to 36.9% of the global population at 2°C warming. Climatic change will not be evenly distributed as certain regions will warm at higher rates than the global average and consequently, as seen by the example citing Dosio et al., (2018) these areas will likely experience more severe extreme climatic events. This is further reinforced by a study by Arnell et al., (2019) which found that there is an increase in frequency across climatic events when average temperatures increase. Thus, this phenomenon is not unique to heatwaves but is also true for other extreme weather events such as drought and flooding.

Figure 1: Climate risks of a 1.5°C change compared to a 2°C change (Source: World Wide Fund for Nature, 2018)

Climate change in Southern Africa

According to the IPCC ‘Special Report’ (2018) Southern Africa warms at twice the rate of the global average. This means that if the globe warms by an average of 1.5°C, Southern Africa will experience an average rate of 3°C warming. As temperatures increase, Southern Africa is expected to experience drier, warmer conditions with an increase in rainfall variability, and of consequence, an increase in extreme weather events that are linked to these climatic changes (IPCC, 2018; Miller et al., 2020).

A closer examination of South Africa indicates that the west of the country may become drier and experience an increase in drought, whilst the north-east of the country may experience an increase in ‘extreme rainfall events’ such as flooding and cyclones (IPCC, 2018; Vogel, 2019; Engelbrecht, 2020, cited in Arnoldi, 2020; Mbokodo et al., 2020). Of particular concern is the threat climate change poses to South Africa’s water security, as the country is already classified as a water stressed country that is ranked as the 30th most arid country (GreenCape, 2020).

Physical climate risk

Climate change will result in a plethora of physical climate risks and the paradox is that human activities are responsible for climate change, and yet it is also negatively impacted by climate change. In certain instances, this can be the same activity, for example there are agricultural practises that contribute to climate change, such as clearing forests for farmland, and yet agriculture is also impacted by climate change as the changing climatic conditions may result in lower yields (Dean and Green, 2019).

The following are examples of risks that are directly attributed to the physical risk of climate change: food insecurity may increase – as shifting weather patterns decrease arable areas; risk to health and physical wellbeing – as more people are exposed to extreme weather events; and financial risk – as it may disrupt business supply chains (Chersich and Wright, 2019; Nhamo et al., 2019; Mbokodo et al., 2020). Often these issues affect the most vulnerable groups and thus may exacerbate poverty, inequality, and other socio-economic issues.

The climate change response

The scientific body of climate change literature is enhancing and growing and is thus improving the understanding of the physical implications of climate change. In addition, more climate risks are materialising, as risks move from perceived risks to actual occurrences. Thus, the need to respond (to climate change) has become more urgent.

The World Economic Forum’s (WEF) annual risk ranking report The Global Risk Report (2021) is dominated by environmental risks that are linked to climate change. The report ranks ‘extreme weather’ as the number one global risk in terms of likelihood, the second is ‘climate action failure’ and the third is ‘human environmental damage’. Only one of the top five risks in terms of likelihood is not classified as an environmental risk, and that is the risk of ‘infectious diseases’, which is ranked fourth. This is profound as even during the global Covid-19 pandemic, climate change poses the greater material risk. A similar trend is observed in the report’s risk impact ranking, with three of the top five risks classified as environmental risk related; ‘climate action failure’ is ranked as the risk most impactful after the risk of ‘infectious disease’. Lately, scientific consensus has broadened to agree that the world is in a climate emergency, which is further testament to the severity of climate change and the need for urgent action (Fischetti, 2021).

Figure 2: World Economic Forum Global Risk Report (2021).

In response there is a global effort to address climate change and in recent years this effort has intensified. At a global level, the Conference of the Parties’ (COP 21) Paris Agreement (PA) has been instrumental for action against climate change. The PA is a global, legally binding agreement signed in 2015 that commits signatory countries to reduce their carbon emissions and to adapt to the changes that are brought about by climate change. The agreement was signed by 195 countries, including South Africa, who are required to submit a National Determined Contribution (NDC) report, which is a framework document that outlines how a country will achieve their PA targets for both emission reduction and climate adaption. The ‘ratchet mechanism’ within the PA requires countries to update their NDCs by increasing their climate action ‘ambition’, once every five years. Other aspects of the PA cover financing, transparency and loss and damages (United Nations, 2015).

Climate action: adaption vs mitigation

As demonstrated in the PA, climate change can be addressed via two methods namely, climate adaption and climate mitigation. Mitigation is described by the IPCC (2014, p.4) as ‘a human intervention to reduce the sources or enhance the sinks of greenhouse gasses’. The PA requires countries to reduce their emissions so that global warming is kept below 2°C above pre-industrial temperatures. However, it does encourage countries to preferably limit warming to 1.5°C. To achieve their commitments to the PA, countries must embark on a transition away from high carbon intensity. Countries will need to develop mitigation pathways to transition various sectors of the economy over time. Most countries are focusing their mitigation efforts on the decarbonisation of the electricity sector, as the electricity sector is one of the largest sources of carbon emissions, primarily through the burning of fossil fuels (EEA, 2017; Markard, 2018; Doh, Budhwar and Wood, 2021). In addition, technological advancements in renewable energy, battery storage, and other related infrastructure are further driving the energy transition, as improvements and wide-scale adoption has led to a sharp decrease in the costs of renewable energy (WEF, 2019).

Transitioning to a low or a decarbonised economy adds to the complexity of climate change, as the process poses significant risks, which is termed ‘transitional risk’ (CISL, 2019; Oliver Wynman, 2019). Transitional risks may manifest through the following (CISL, 2019):

• Policy and regulation

May increase the cost of carbon intensive business activities, for example the implementation of a carbon tax.

• Consumer preferences

Consumers and clients opting for ‘green’ alternatives, for example individuals preferring electric vehicles over petrol- and diesel-powered vehicles.

• Technological advancements

Innovation disrupting ‘traditional’ activities/sectors.

• Reputational damage

Stakeholders litigating against, disassociating from, or disinvesting from organisations linked to climate change.

The transition

These risks are most likely to affect individual companies, but it can result in systemic risk if there is a disorderly transition. A disorderly transition can be characterised as a transition that occurs as a set of events that unpredictably and suddenly result in the limiting of emissions or other restrictions on carbon intensive activities. Whilst an orderly transition can be characterised as a transition that occurs steadily according to a long-term plan that outlines the country’s transition strategy (UNEP Finance Initiative, 2021).

An orderly transition strategy (roadmap) may be based on a climate scenario coupled with a study that considers when various mitigating technologies become technologically and financially viable to optimally limit emissions in a manner that is least disruptive from a socio-economic perspective. Transitional risk is of particular concern for countries that have a concentration of carbon intensive sectors, including financial institutions with portfolios that have a significant percentage of assets in carbon intensive sectors/activities.

Whilst there is risk with the transition, the cost of not transitioning will be far more costly. A study by Swiss RE (2021) indicates a correlation between the rise in global temperatures and economic contraction. With a 2°C increase in temperature, it is predicted that the global gross domestic product (GDP) will contract by 11%, whereas at a 3.2°C rise the global GDP is expected to contract by 18.1%. On a regional basis, the Middle East and Africa are predicted to fare worse than the rest of the globe, with an estimated 14% contraction of its GDP with a 2°C increase, and an estimated 27.6% contraction with a 3.2°C increase.

The role of financial institutions in the transition

The financial sector plays a critical role in addressing climate change, and thus far this paper has only explored the relationship between climate change and financial risk. But transitioning to a low carbon economy also presents an opportunity for the financial sector, as the process requires significant investment and financing. It is estimated that a global investment of between $1.5 trillion and $2 trillion is needed annually for the next 30 years to achieve carbon neutrality. This represents 1.5% of the world’s combined GDP. That said, it is a fraction of the cost when compared to the cost of allowing climate change to increase to temperatures beyond 2°C (Turner, 2020).

To assist the financial sector with navigating through the transition and climate change, the Basel Financial Sustainability Board developed the Task Force on Climate-related Financial Disclosures (TCFD). The purpose of the TCFD is for companies to produce detailed information on their strategic and risk management processes in respect of climate risks and opportunities. The TCFD has created a set of recommendations, which focuses on four key operational areas, namely governance, strategic risk management, and metrics and targets. There is additional guidance for certain crucial sectors, including the financial sector. Ultimately, having credible and standardised disclosures will assist the financial sector in making better long-term decisions (for finance, investment, insurance and even disinvestment) (TCFD, 2021).

The just transition

It is vital for transitioning countries and companies to do so in a just manner. The ‘just transition’ is a concept that was first promoted by labour unions. The Just Transition Centre (2017, p. 3) describes the International Labour Organisation’s concept of a just transition as:

‘a bridge from where we are today to a future where all jobs are green and decent, poverty is eradicated, and communities are thriving and resilient. More precisely, it is a systemic and whole of economy approach to sustainability. It includes both measures to reduce the impact of job losses and industry phase-out on workers and communities, and measures to produce new, green and decent jobs, sectors and healthy communities.’

A just transition is recognised as a critical component to achieving a successful transition, as it addresses social sustainability risk that may emanate from the transition to a low carbon economy, and without a just transition, socio-economic issues will be exacerbated. Consequently, the notion of a just transition has been adopted by global multilateral organisations as well as within countries’, and even within companies’ strategic plans and roadmaps.

Contextualising South Africa's response

South Africa is in an invidious position with regards to climate change. On the one hand, the country is vulnerable to several physical climate change risks and on the other hand it is vulnerable to transition risk. South Africa ranks as the largest GHG emitter in Africa and the 14th-largest emitter in the world (McSweeney and Timperley, 2018), with 39% of the country’s total emissions attributed to Eskom (Full Disclosure, 2019) who burns fossil fuels, primarily coal, to generate most of the country’s electricity.

Thus, a large part of South Africa’s transitional risk is linked to electricity and the coal value chain. A report by Climate Policy Initiative (CPI) (2019) indicates that South Africa lost an estimated $60 billion of coal export revenue between 2013 and 2017 and is susceptible to a further $120 billion of transitional risk, most of which is predicted to emanate from the loss of coal export revenue as countries transition their energy sector to align with the PA (CPI, 2019). Moreover, major sectors of the economy such as the agricultural, electricity, mining, and transport sectors are vulnerable to both physical and transitional risk, and consequently this places thousands of jobs at risk. These sectors contribute 22% to South Africa’s total GDP (Stats SA, 2021a) and employ 15% of the workforce (Stats, SA, 2021b).

South Africa’s climate response predates the country’s signing of the PA. In fact, South Africa is seen as one of the most climate change progressive developing countries, as it has produced several pieces of policy and legislation in response to climate change. Most notably is the National Climate Change Response White Paper (published in 2011), which provides the basis for all other policy and legislation. However, despite the release of the White Paper, the country’s climate response decelerated from 2009 to 2018, as there have been several delays to key policies and programmes amidst political and economic turbulence (Averchenkova, Gannon and Curran, 2019). Despite these delays, the release of the Low Emission Development Strategy (LEDS) (2018), the implementation of carbon tax (in 2018), the drafting of the Climate Change Bill (first draft released in 2017), will all build on the White Paper, together with the recently released draft update of the NDC which was opened for public commentary. In addition to these policies the Presidency has established a Climate Commission, where a broad stakeholder base is focussing on creating a ‘just transition’ pathway to transition to a low carbon economy, and National Treasury (NT) has released a technical paper termed ‘Financing a Sustainable Economy’ (2020). A financial sector-wide Climate Risk Forum (CRF) is currently focusing on implementing the recommendations of the NT technical paper.

The purpose of the CRF is to provide a financial sector-wide platform to address climate risk and other, non-competitive, climate issues that impact the financial sector. The CRF’s current focus is to give effect to the general recommendations of the technical paper, which is envisaged to increase the capital allocation to sustainable development and the transition to a ‘climate-resilient economy’ (Climate Risk Forum, 2020). The NT technical paper recommends the development of:

• A sustainability taxonomy

• Technical guidance for disclosures as per TCFD

• The sectors’ competency and capacity (for both the financial and public sector)

• A climate risk benchmark scenario

• The sustainable finance landscape

As indicated in previous sections of this paper, the finance sector should play a vital role in the climate response and thus the CRF is seen as a critical part of the process to address climate change and its associated financial risks in South Africa, including the provision of sustainable finance to enable the just transition to a low carbon economy.

However, despite the establishment of the CRF and the aforementioned policies and initiatives, South Africa is yet to demonstrate an integrated and co-ordinated vision and response to climate change. By way of example, the Independent Resource Plan (IRP) 2019 contradicts the LEDS aim to achieve carbon neutrality by 2050, as the IRP 2019 includes coal in the energy mix post 2050 and allows coal-based power stations to be built until 2030 (Climate Action Tracker, n.d.). In addition, government seemingly wants to expand the country’s economic reliance on fossil fuels as the Department of Mineral Resources and Energy is seeking to promulgate the Upstream Petroleum Resources Bill (released in 2019), which aims to develop the country’s petrol and gas industries following discoveries of offshore gas fields (Reeler, 2021).

Such a fragmented and misaligned approach increases the likelihood of a disorderly transition as well as heightened physical climate risk, where mitigation and adaptation strategies to minimise the socio-economic impacts may not be maximised.

Conclusion

South Africa has scope to enhance its climate response. But if South Africa does not adequately coordinate and address its carbon emission transition and build resilience to climate change, the country may be less competitive, as this may result in the marginalisation of the country on the global stage. To expand, as countries transition, so too will their consumption patterns and, thus, products, manufactured using fossil fuel energy or within countries that do not adhere to international carbon emission commitments, may be subjected to carbon tariffs when exported to compliant countries.

South Africa should create an overarching transition strategy for climate change that describes a unified vision for South Africa’s decarbonisation, including the year when carbon neutrality is possible and under what supporting conditions (developed countries committed themselves to providing technological and funding support to developing countries for transition purposes in the PA). Most countries that have set a net-zero carbon goal intend to do so by 2050.

Furthermore, South Africa needs a detailed roadmap which is more encompassing than the abovementioned LEDS. It should provide a detailed overview of the sectors and activities that contribute to climate change as well as the sectors and activities that are to be impacted by climate change. The roadmap should contain a detailed adaption plan for impacted sectors and a detailed mitigation strategy for contributing sectors.

The mitigation strategy may be based on a study that details how best to transition these sectors and activities based on their economic and technological viability. For example, sectors may not be able to transition due to the lack of carbon neutral technology or the cost to implement such technology, whilst other sectors may require an electricity transition to enable their transition, such as manufacturing and electric vehicles. Therefore, as previously explored, the electricity sector represents a low-hanging fruit as it currently offers a viable transition pathway, which is attributed to the advances in renewable energy technology.

The energy sector will be further shaped by advancements in green hydrogen technology as it progresses to a level where it will be a viable source of energy and where it, together with renewable energy, is expected to dominate energy sources globally. South Africa ought to capitalise on these opportunities given the country’s competitive advantage, due to its favourable climatic conditions, by producing renewable energy and green hydrogen.

The roadmap should also leverage off work that is currently being undertaken, such as work by the CRF, the Climate Commission and the ‘Just Transitions Pathway Project’ that is being conducted by Business Unity South Africa and the National Business Initiative (National Business Initiative, 2020). The roadmap should combine the findings of all these studies into its strategy. In addition, the strategy should ensure that there is policy certainty, alignment and mainstreaming across all three spheres of government. There cannot be contradictory messaging from departments and all public programmes should align to the climate strategy, for example the department responsible for mining activities should not explore opportunities to increase the country’s coal mining capabilities, but rather it should align to the climate strategy and ensure that there is climate resilient mining infrastructure. This structured approach will allow for the management of an orderly transition, and ensure that there is a just transition, as it can pre-empt the sectors where there will be job losses, provide the necessary upskilling of human resources affected by the transition, and determine sectors where there will be job and economic opportunities.

It is crucial for the roadmap to contain a cost analysis of the envisaged transition, as this will assist in allocating and assessing the finances required to undertake the transition, including the quantum of international funding support required. Government will not be able to solely finance the transition and thus would need to crowd in private and development finance by ensuring projects are commercially viable and sustainable. Where projects are not commercially viable and sustainable, government would need to access donor funding or employ innovative financing models, such as blended finance. This once again highlights the importance of finance in addressing climate change, but it also highlights the importance of a detailed climate change roadmap as it will provide credibility and certainty, and thus attract international investment and funding.

This paper reinforces that both climate change and climate action will bring about significant change and risk. However, if carefully managed a transition to a low carbon economy can address the many climate change challenges and may even result in benefits that transcend the environment, as a just transition promotes social sustainability. Thus, an adequate climate response offers South Africa a chance to not only respond to climate change, but to also determine its own course of change. In doing so, it may result in solutions for many other challenges that the country is faced with such as the lack of energy security and the high degree of social inequality.

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This report has been published by the Inclusive Society Institute

The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.

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