South Africa and its partner countries are working to finalise the details of a major climate finance plan in time for the UN Cop 27 climate conference that will take place on 6-18 November.
The Just Energy Transition Partnership (JET-P) — under which the UK, France, Germany, the US and the EU last year pledged 31bn rand ($8.5bn) to support South Africa’s transition to a low-carbon economy and, specifically, to accelerate its phase-out of coal-fired power — is seen as a model for how developing countries across the globe can use international support to achieve their decarbonisation goals by moving towards cleaner energy sources. There is already considerable interest in the partnership from other potential financiers and donors.
A key feature of JET-P is its focus on ensuring — through the structuring of the investment plan and financing package — a just, equitable and inclusive transition for affected workers and communities dependent on the fossil fuel industry for their livelihoods. South Africa’s single biggest contributor to its greenhouse gas (GHG) emissions is electricity production, with a 41pc share of overall emissions, which is why decarbonising this sector is a main focus for the partnership.
Reducing emissions in the power sector will also position South Africa to exploit opportunities in electric vehicles and green hydrogen. In addition, the transport sector offers high emission-reduction potential.
The details of the funding package — which includes grants and concessional loans — are still being negotiated by the South African Presidential Climate Finance Task Team (PCFTT), which was established for this purpose in February. It reports to an inter-ministerial committee chaired by South Africa’s president Cyril Ramaphosa, and its mandate is to engage with international partners with a view to advising cabinet on the composition, affordability and alignment of the financing package with the South African regulatory environment. The PCFTT also has to co-ordinate government departments, development finance institutions and the private sector, as well as oversee the development of relevant financing mechanisms to enable the flow of international climate finance to South Africa.
Key to JET-P’s success will be an actionable investment plan to identify projects and guide funding. The technical details of this plan are being worked on, as well as the conditions and components of JET-P’s financial offer, including the proportion of grants, concessional and non-concessional, and public and private finance. Parties are examining how the package can be structured for maximum impact and to leverage additional finance. They are also cognizant that it has to be appropriately structured to meet South Africa’s investment needs and fiscal realities.
Financing instruments should reflect South Africa’s unique fiscal challenges and incorporate risk-sharing arrangements that support its transition without impacting national borrowing programmes and budgets, according to PCFTT head Daniel Mminele. The National Treasury (finance ministry) is playing a critical role in analysing the implications of any proposed financing package. Any loan terms should be more attractive than those that the country could secure in the capital markets without unduly onerous reporting requirements, Mminele says.
The level of concessionality must reflect the obligation of developed countries to finance mitigation and adaptation measures in developing countries, and the significant cost of these measures. Finance flows from partner countries need to be predictable and certain to sustain the momentum of South Africa’s move towards its target of net-zero carbon emissions by 2050. In addition, a coherent South African approach that draws on input from government, private sector, civil society, business, academia and policy think-tanks is critical. “The JET-P is not the magical pot at the end of a rainbow,” Mminele says. “At best it is an initial contribution to our national efforts, and we need the creativity and impetus of South African-grown solutions to take us further.”
South Africa last year raised its GHG emissions reduction target — or nationally determined contribution (NDC) — under the Paris climate agreement so that its emissions would be limited to 350mn-420mn t/yr of CO2 equivalent (CO2e) by 2030. A preliminary assessment of the cost and policy implications for the country to achieve the lower end of its updated NDC range is under way. But it is already clear that the scale of investment needed for it to achieve the most ambitious target possible far exceeds $8.5bn.
For green hydrogen alone, for example, it is estimated that South Africa requires initial seed capital of $1bn to achieve green hydrogen exports of 20,000 t/yr, and a further $13bn to scale production to 270,000 t/yr. So, additional funding from a broad range of partners is necessary — and private-sector capital to supplement public finance is particularly critical.
South Africa faces multiple, complex and urgent climate-related challenges, which affect its development and growth trajectory. Its vulnerability to climate change was demonstrated by the recent devastating floods and loss of life and property in KwaZulu-Natal and the Eastern Cape. In addition, high levels of inequality and poverty persist alongside energy and water scarcity. Meanwhile, South Africa also faces the economic risk of looming carbon border taxes due to be implemented by its trading partners in the global north. In light of all this, the urgency of investments in climate-resilient infrastructure is clear.
The financial sector could be a powerful force in advancing South Africa’s just energy transition, Mminele points out, and the entire system could be strengthened by making it compatible with the country’s climate response. But to support national development over coming decades, its financial institutions have to be flexible and innovative enough to balance new climate-related risks and returns.
Mminele applauded initial steps by South Africa’s financial sector to promote the country’s climate response. Work already under way to embed ESG and sustainability goals into business models, and efforts to bolster disclosure — the National Treasury’s green finance taxonomy and the Johannesburg Stock Exchange’s sustainability-focused listing and disclosure guidance — hold promise.
South Africa has implemented numerous policy reforms □ that affirm the relevance and focus of JET-P. An updated Climate Change Bill was tabled in parliament in early 2022. It will create a regulatory framework that enables the development of an effective climate change response and a long-term, just transition to a low-carbon economy and climate-resilient society.
The National Treasury indicates that the carbon tax rate will progressively increase every year to reach $20/t CO2e by 2026, with more aggressive annual tax increases implemented to at least $30/t CO2e by 2030, accelerating to higher levels by 2035, 2040 and up to $120/t CO2e beyond 2050.
Taken cumulatively, these developments have placed the just energy transition at the centre of the national policy agenda and action by stakeholders across society. Likewise, JET-P is widely seen as a potential catalyst to leverage private-sector investment supporting more rapid decarbonisation. Specifically, its potential to help resolve South Africa’s chronic electricity supply shortfall and rolling power cuts could boost the country’s recovery and create employment opportunities that will help to improve the quality of livelihoods affected by the energy transition.
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