GRACELIN BASKARAN: Commodities windfall must be channelled into climate mitigation
Trade restrictions against high emissions countries are imminent, which will hit SA’s economy
It’s been good days for the mining sector — mining firms shelled out R76bn to shareholders this year amid the commodity boom. While firms and shareholders are celebrating, the government is too and the sharp rise in corporate income tax receipts from the mining sector has been a welcome relief. But like any stumble into a big wad of cash, the question remains, what do we do with it?
There are many noble allocation possibilities — including education, health, social grants and infrastructure — yet limited funds. So, here’s today’s dinner table question — if you were forced to pick one way to spend these windfalls to promote long-term sustainable growth, what would it be?
All roads lead to one answer: finance climate mitigation. If we don’t, we risk stunting SA’s growth for decades to come. Here are two key reasons:
First, trade restrictions against high emissions countries are likely to be imminent. This has a potentially catastrophic effect for SA, which is the 12th highest emitter of greenhouse gas emissions in the world, but also deeply reliant on the export economy. Between 2016 and 2020, real exports as a share of GDP averaged 26%. Several of the country’s main partners who have made strong commitments to tackle climate change — particularly China, the EU and US — are likely to apply trade tariffs or sanctions to high emissions partners in due course, with deliberations having already started.
In recent decades, trade sanctions have proliferated as countries seek to drive behavioural changes. In 2001, the US averaged three sanction announcements per month. In 2019, it averaged 13. Though the US has been a key user of sanctions, economists have advocated for using them reciprocally.
In 2019, Nobel laureate Joseph Stiglitz — an American — encouraged the EU and China to apply climate-related trade sanctions against the US, arguing the country became a free-rider on climate change under the Trump administration. The US became the biggest oil exporter for the first time in decades, exceeding both Saudi Arabia and Russia. Because the free-rider dynamics is in violation of global free trade rules, Stiglitz noted the legal precedent that enables the World Trade Organization to use trade sanctions to support global climate efforts.
More recently, many European leaders have announced opposition to a free trade agreement (FTA) between the EU and Mercosur, the South American trade bloc comprising Argentina, Brazil, Paraguay, Uruguay, and Venezuela. French President Emmanuel Macron has stated his country will maintain opposition to the FTA when it takes over the rotating EU presidency in early 2022, as it is incompatible with its climate and biodiversity agenda. Likewise, German Chancellor Angela Merkel expressed doubts about the implementation of the EU-Mercosur FTA amid the increasing destruction of the Amazon rainforest.
Second, some of SA’s key export sectors will forcibly contract due to declining global demand as the world takes on climate mitigation. Let’s look at manufacturing. In 2019, SA exported more automotive vehicles (and parts) than ever before, accounting for 12% of its total export basket. But SA manufactures internal combustion engine (ICE) vehicles, the ones that burn petrol or diesel rather than the electric vehicles (EV) that the world is asking for.
In 2021, the department of forestry, fisheries & environmental affairs announced that the transport sector will transition towards low-emission vehicles in the 2030s. This is much too late. Ten European countries and dozens of cities have announced plans to ban sales of new ICE vehicles by 2035. The US has targeted EVs account for half of all car sales by 2030. If SA starts in 2030, it will struggle to keep up with the EV technological capabilities and manufacturing capacity the rest of the world has built over two decades.
Challenge 1 (climate-related trade restrictions) and challenge 2 (contraction of key export sectors due to global climate mitigation efforts) will hit SA’s economy like a compounding storm, stunting growth and increasing unemployment.
Final dinner table question: OK, so we’ve agreed to spend the money on climate mitigation, what do we do with it?
First, we need to reduce total emissions, as this will be a first stop when considering trade restrictions. As a basic first step this involves ending plans to build any new coal-fired power stations, but also using windfall revenue to begin decommissioning existing plants.
And second, but more importantly, to reduce emissions while also building economic sectors that are resilient to climate change, windfall revenue should be used to develop public-private partnerships to finance, build and operate renewable energy infrastructure. I promise you that in 10, 20, 50 years from now this will have a far better return than most other public expenditure alternatives.
• Dr Baskaran (@gracebaskaran), a development economist, is a bye-fellow in economics at the University of Cambridge.
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