COP26 means opportunities and risks for South Africa

COP26 means opportunities and risks for South Africa, especially after the governments of France, Germany, the United Kingdom, the United States and the European Union decided to mobilise an initial $8.5 billion (R131 billion) over the next three to five years to support South Africa’s move to embrace climate resilience.

While this partnership reaffirms the commitment of the global community to work together to reduce greenhouse gas emissions, accelerate investment in renewable energy while creating jobs and advances the sustainable growth of developing countries, various opportunities are in the pipeline.

The 26th session of the Conference of Parties (COP) of the United Nations Framework Convention on Climate Change (UNFCCC), referred to as COP26, is taking place in Glasgow. This session was especially important considering the findings of the sixth assessment report of the Intergovernmental Panel on Climate Change (IPCC).

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IPCC Report

The report indicated that global surface temperatures were approximately 1.09 ⁰C higher from 2011 to 2020 than from 1850 to 1901 due to human-related activities. In addition, the modelling scenarios suggest that the average global temperature could rise by an additional 1.5 ⁰C by 2040

For regions such as Africa and Asia, this means that warmer temperatures will intensify global water cycles, bringing heavy precipitation and associated floods on the one end and an increase in aridity, as well as agricultural and ecological droughts on the other.

South Africa has made modest progress, with a set of policies to address climate change, including the Carbon Tax Act, Green Transport Strategy and plans to finalise the Climate Change Bill to decarbonise the country’s economy on the long term.

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Opportunities after COP26

According to Thato Kola, economics and fixed income analyst at Matrix Fund Managers, these opportunities are waiting for South Africa and the transition to renewable energy:

• Access to much-needed climate financing to drive low carbon projects in the short term.
• Investment in renewable energy sources in the medium term can provide a necessary boost for the economy through infrastructure spending.
• Fast-tracking the decommissioning of existing coal power stations on the long term.
• A diversified energy mix that is more reliable and cost effective in the process.

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Risks of decarbonisation

However, Kola warns that there will also be these risks:

• Failure to curb greenhouse gas emission may result in carbon taxes imposed on locally produced exports.
• Increasing challenges to fund carbon intensive projects from financial markets.
• Significant socio-economic challenges as the transition to clean energy ramps up when jobs are lost in the coal sector and its associated value chain.

Kola says the Paris Agreement places significant emphasis on the provision and direction of financial flows to be aligned with pathways towards lower greenhouse gas emissions and climate resilient development.

“This means that all financial actors, including financial institutions, corporates and governments, must align their decision-making frameworks, practices and investments towards managing and adapting to climate change risks.”

That is why the mobilisation of financial resources to reduce emissions and assist communities to adapt to climate change risks forms part of the goals of COP26, he explains. “Similarly, South Africa’s National Determined Contribution (NDC) also emphasises that, for developing countries to be able to implement and adopt mitigation targets effectively, multilateral co-operation and financial support is required from developed economies.”

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Outcomes of COP26

Kola points out that the outcomes of COP26 will drive the pace of climate policy actions across the world for the coming decade and beyond. “The transition to renewable sources of energy is a certainty, with the responsibility now on national governments. Developing economies must introduce adaption and mitigation plans to ensure that the transition is just and equitable and aligns with the developmental objectives of their countries.”

He says this balance will not be easy to achieve as many of South Africa’s labour-intensive sectors are also carbon heavy. The transition could mean large-scale job losses and increasing pressure on the fiscus to roll out more support, such as a basic income grant.

While there is the potential for diversification for investors as governments and parastatals become more reliant on alternative instruments, such as green and sustainability bonds, there will have to be trade-offs as the domestic savings pool is limited.

“This means that some other asset classes may have to forego funds for us to afford large-scale green investment. Alternatively, a credible climate change strategy with attractive yields could entice foreign savings into the greening of the economy.”