Carbon tax hurts a vital industry that is already becoming cleaner
Minerals Council believes greenhouse gas emissions will be reduced without the need for a tax that affects investment in the mining sector
Public debate on the future of coal and other fossil fuels is very necessary in light of the urgency for humankind of the fight against climate change. In SA, the issue is particularly relevant, given the country’s high proportion of coal-fired power generation in the energy mix.
It is also the case that more than a century of coal-fired power generation in parts of the country, during times when both scientific knowledge of power station design and regulation were weak, has left (and in about cases of very old facilities, continue to leave) environmental legacies that are of legitimate concern.
What is needed is a sober, serious and realistic debate on the path of change that could conceivably occur. The Minerals Council SA and its members are not climate change denialists but we are pragmatists who advocate a just transition to a lower carbon energy economy. And we believe this transition will take time.
There are reasons for this: the nature of SA’s energy mix is a consequence of many decades of industrial development. It will change over time to a cleaner, less carbon-intensive one, both naturally and as a result of targeted and deliberate efforts.
It is the case that the older, less efficient power stations that emit higher levels of CO2 will see their lives come to an end as the newer, cleaner Medupi and Kusile take up a greater share of the load. These newer power stations will have almost double the energy efficiency of the older power stations, which, without any other measures, implies a halving of greenhouse gas emissions per unit of energy produced.
The economics of installing large-scale and renewable energy sources are well known. But what is often less recognised are the enormous hurdles faced by companies that attempt to put in place other power projects. A recent Minerals Council investigation revealed a millstone of red tape in bringing renewable energy cogeneration projects online. Further, new energy storage technology must be investigated and put in place by Eskom as a long-term solution.
An important driver of the just transition process will be the finalisation and approval of the Integrated Resource Plan (IRP) to ensure electrical energy security and direction. Creating an independent system operator to manage an independent state-owned grid and being responsible for planning and procurement of electricity is critical. And Eskom will have to adapt to the new market and become more efficient and sustainable, promoting innovation at the generation level.
The system operator would also promote competition by allowing “wheeling” on the network at an affordable cost to other players, which in turn leads to a low cost of electricity. Wheeling is the transport of electric energy (megawatt-hours) from within an electrical grid to an electrical load outside the grid boundaries. Access to the national grid would be easier and fair to all players. Economic growth will also be promoted as electricity security is achieved.
In the transition to a less carbon-intensive economy, we cannot destroy what we have as a country — an established coal sector that taps into SA’s 33-billion tons of coal resources. The coal sector is a significant contributor to the economy. It is the largest component of mining by sales value and is a critically important source of the primary energy (electricity and liquid fuels) that drives the economy, including a significant contribution to the petrochemicals complex. A significant amount of SA’s liquid fuels, chemicals, plastics, polymers and fertilisers are produced from coal.
In 2018, the coal mining industry generated total sales of R139.4bn from its production of 252.6-million tons (Mt) of coal. It paid about R4bn in tax and R1.6bn in royalties. And it invested about R16bn in fixed capital.
In 2018, the sector employed almost 90,000 people (representing about 19% of total employment in the mining sector), with another 180,000 people employed as a result of coal-mining activities. It is the only sector in the mining industry where employment has consistently risen on the past five years. These employees earned R24.7bn, much of it spent in local economies.
The sector has the potential to grow production in the medium term, especially focused on the higher-value export market, which would provide more jobs and more fixed investment.
In terms of domestic demand, Eskom buys 120Mt of coal annually. This, according to the latest IRP, is set to increase to 139Mt by 2023, and then to decline to the current level by 2033 and to 90Mt by 2050. This demand must be met if we are going to ensure that the power grid is stable enough to support the economy for the next 30 plus years.
Despite the country’s reliance on coal, SA’s carbon emissions are well below its commitments under the Paris climate agreement. SA’s nationally determined contribution took the form of a “peak, plateau and decline” approach, whereby emissions would peak between 2020 and 2025, plateau for roughly a decade and then start to fall. Emissions during 2020-2025 would be between 398Mt and 614Mt CO2e (carbon dioxide equivalent). This “plateau” would translate to a 14%-75% rise above 1990 levels.
Since SA’s first power crisis in 2008, rapidly increasing power prices (up 523% in the past decade) have already forced mines to minimise the amount of electrical power they use. They have done this through a range of measures, including using energy-efficient lighting systems underground and logistical planning that minimises vertical transport usage.
At the same time, the less carbon-intensive non-tradable service components of the economy have grown at a faster pace than the more carbon-intensive tradable export sectors. This has resulted in a decline in the carbon intensity for every unit of GDP.
There has also been, on an even longer period, a gradual shift from deep-level mining to less power-intensive surface mining as a number of gold mines reach the end of their lives and a number of deep-level platinum ore bodies cannot be viably mined given the decline in platinum prices and increasing costs of power and other inputs. As a consequence of these and other circumstances, Minerals Council research forecasts a reduction in SA’s greenhouse gas emissions of between 13% and 14.5% by 2025, and 26% and 33% by 2035.
This reduction in emissions will be achieved without the enforcement of the carbon tax. Instead, it is our view that the carbon tax will not have any positive effect in this regard. What it will do is raise costs, which will have serious effects on the viability of many mines that are already struggling to survive, and consequently worsen the country’s jobs crisis.
To be clear, the Minerals Council is not opposed to carbon regulation, but we are calling for a very clear pathway and greater clarity on the regulation.
The lack of certainty on tax-free portions, carbon budgets and carbon offsets creates significant policy and regulatory uncertainty, which will materially affect investment in the mining sector. Uncertainty on electricity prices over the next two decades, combined with this material policy uncertainty on the carbon tax, will mean SA will battle to attract any new electricity-intensive investment in mining, smelting or refining in the next decade, which will undermine growth and investment in the economy.
That is a high price to pay for a new tax that will have absolutely no affect on its stated purpose.
• Baxter is CEO of the Minerals Council SA.