How South Africa Can Advance Reforms to Achieve its Climate Goals
IMF News, February 18, 2022
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- Authors: Haonan Qu IMF African Department February
- Published: February 18, 2022
Overview
- The review explores how to raise growth, reduce inequality and unemployment, and bolster the economy’s green credentials and climate resilience.
- The pandemic deepened South Africa’s economic problems, including a decade-long stagnation of per-capita income, high unemployment, and vast income inequality.
- The rebound from the crisis presents an opportunity that requires addressing deep structural constraints to make the recovery durable.
- South Africa’s ambition of achieving carbon-neutrality by midcentury requires a profound economic transformation built on significant green investments, supported by:
- a business-friendly environment,
- a labor market that makes it easier to create jobs, and
- improved governance and transparency.
A just climate transition
- South Africa is vulnerable to the increased frequency and severity of extreme weather events.
- High dependence on coal for energy increases greenhouse gas emissions.
- A just transition involves moving away from fossil fuels while sharing benefits broadly:
- Improves environmental and health conditions and creates new and better jobs.
- Ensures affected communities can face the transition at a minimum cost and benefit from a more climate-resilient economy.
- Challenges: millions of livelihoods connected to the coal value chain make a just transition difficult and necessitate careful implementation.
- Authorities have taken encouraging initial steps; the international community has shown interest in contributing as evidenced by the support pledged at the COP26 climate summit.
Making the energy market competitive with reliable supply at lower costs
- In a competitive market, the energy sector would respond to relative prices of different sources, particularly coal and renewables.
- Drivers that will help bring down costs and facilitate the transition:
- Adequate carbon pricing,
- Advances in technology,
- Enhanced competition in the sector.
- The cost of renewable energy in South Africa has declined significantly and become competitive with coal.
- IMF staff simulations: assuming a progressive increase in the carbon tax to $75 a ton of greenhouse gases by 2030, the share of renewable energy could more than double in a competitive energy market comparing to that in a rigid one.
- Fundamental changes needed:
- An overhaul of the state power company, Eskom:
- High-debt monopoly has become an impediment to economic growth via rising electricity tariffs and frequent power outages.
- Eskom should move to a viable business model, reduce its footprint in the sector, and compete with private-sector producers and providers.
- Regulatory streamlining:
- Red tape and burdensome bureaucratic procedures in the sector should be streamlined to give better opportunities for businesses to compete and innovate.
Reforms to facilitate a green transition
- A green and climate-resilient future with lower poverty and inequality will require higher growth; achieving higher growth requires reforms to:
- Put public debt on a sustainable path:
- Contain fiscal risks, including from state-owned enterprises (SOEs) vulnerable to decarbonization transition (notably those in charge of network industries).
- Streamline inefficient government transfers to SOEs to create room for more productive activities.
- Better design of carbon taxes (now too low when factoring in allowances and exemptions) would:
- Provide a more effective price signal to reduce greenhouse gas emissions, and
- Open policy room to assist low-income households and vulnerable workers and regions.
- Promote job creation to help workers migrate out of the coal value chain:
- The economic recovery in 2021, mainly driven by lifting pandemic-related mobility restrictions and improvements in terms of trade and global financial conditions, has not created many jobs.
- Renewable energy rollout will create jobs, but challenges include mismatches in job location and necessary qualifications as well as education and training.
- Addressing these challenges is essential to support displaced workers and to prepare the young for the future.
- Welcome all firms to invest and compete on a level playing field to stimulate private investment:
- Policy signals related to a green recovery need to be consistent.
- Address governance vulnerabilities:
- Accelerating governance reforms and fighting corruption will foster trust among stakeholders and contribute to better planning and implementation of the climate transition.
- Efficient utilization of resources to support affected communities and regions will be essential to ensuring social cohesion.
Key findings and projections
- Carbon-neutrality target: midcentury.
- IMF simulation assumption: progressive increase in the carbon tax to $75 a ton of greenhouse gases by 2030.
- Outcome in simulation: the share of renewable energy could more than double in a competitive energy market versus a rigid one.
- Recent recovery context: economic recovery in 2021 has not created many jobs.
Policy recommendations (summary)
- Overhaul Eskom to reduce its footprint, adopt a viable business model, and allow competition with private producers.
- Streamline regulatory red tape in the energy sector to spur competition and innovation.
- Reform fiscal policy to put public debt on a sustainable path and limit fiscal risks from SOEs.
- Redesign carbon taxes to be more effective (current design is too low when factoring in allowances and exemptions) and use revenue to protect low-income households and vulnerable workers and regions.
- Promote job creation and targeted education and training to facilitate worker transition out of the coal value chain.
- Ensure consistent policy signals to welcome private investment and competition.
- Accelerate governance reforms and anti-corruption measures to improve planning, implementation, and social cohesion.
By Haonan Qu, IMF African Department.