A dragline works to reshape the rocky landscape in some of the last sections to be mined for coal at the Hobet site in Boone County, West Virginia, US. File photo: REUTERS
A dragline works to reshape the rocky landscape in some of the last sections to be mined for coal at the Hobet site in Boone County, West Virginia, US. File photo: REUTERS

SA faces a pivotal moment as Eskom’s debt crisis and the recent bout of load-shedding threaten to trigger financial shocks that could end up on the state’s balance sheet. But the power utility’s plight is a just a ripple in a wider pattern of financial risks that are emerging in SA and beyond.

In 2017 Standard & Poor’s and Fitch downgraded SA. Friday this week may yet prove to be another day of reckoning if Moody’s strips the country of its last investment grade rating. That downgrade would make borrowing more expensive, further reducing the  Treasury’s options to balance the books just as the country starts to recover its confidence under President Cyril Ramaphosa. If a downgrade is avoided and the immediate emergency at Eskom can be brought under control, SA can look forward to a brighter future.

Around the world there are many who argue that the low carbon transition is not compatible with economic development. SA, as a major exporter of coal, is no exception. But there is also a growing number of people in the country who say SA may well pay a much higher price without any action on carbon.

Climate transition risk is the reduction in the value of assets and income because of climate policy and market transformations, such as the switch away from coal-fired power. But what determines the impact of this risk is how it is managed.

Globally, that transition is already happening. Demand for SA’s coal is likely to peak and then fall in the next few years as countries such as China and India strive to meet their carbon reduction targets and prioritise domestic coal supply. In our report to be published later this week, we identify more than R2-trillion of “transition risk” in climate risk exposure to SA’s economy between now and 2035 if the country continues with current policy and the world decarbonises in line with the Paris agreement.

An average 3% reduction in GDP over that period would be painful, but likely manageable. However, we found that much of the risk would be concentrated within the early 2020s. That’s just one investment cycle away. Beyond the headline figures, we also find that almost a third of that risk could end up with parties not able to manage them, such as workers, municipalities and smaller companies, causing them financial distress and “implicitly” spilling over onto the public balance sheet.

So, while national government explicitly bears only 16% of the total risk via lower royalties and taxes, that proportion may yet rise to more than half.

However, we also found that SA has some natural advantages in a low carbon transition. A lower global oil price could allow it to benefit by R650bn because of the reduced costs of imports. With proactive government policymaking that would offset a large amount of the $124bn in transition risk, and go some way to improve the country’s balance sheet and sovereign credit rating.

SA also has the benefit of some of the largest reserves of minerals that will drive the low-carbon transition, such as manganese and vanadium used in energy storage technologies. Platinum group metals, the largest export commodity, could also benefit if there is significant global take-up of fuel cell technologies.

We cannot downplay the hard work and difficult choices — though there are some clear steps ahead. First, potential pathways for the coal industry must include all interests, including labour, municipalities, coal, gas, renewable energy and infrastructure companies as well as national government and the finance industry. Second, state-backed finance plays a major role in avoiding additional investments that may become stranded in a low-carbon scenario. Third, those most vulnerable in a transition need specific transition assistance plans.

SA needs not go it alone. Its international partners have important lessons to share about their own transitions and many of their development institutions are ready to support this transition, which will be globally significant. By following a different path from business as usual, companies  such as Eskom can become a beacon for what is possible in the low-carbon transition, rather than a lightning rod for criticism.

• Nelson is executive director of Climate Policy Initiative Energy Finance, a global climate policy think-tank based in London.