At COP27, in early November 2022, South Africa positioned itself as the “Champion of the South” in the global effort to reduce carbon emissions. Not only did the country offer to decommission its first coal-fired plant (the so-called Komati project), Cyril Ramaphosa, President of South Africa, also unveiled an ambitious investment plan for the Equitable Energy Transition (JET). The cost of this plan, estimated at about $97 billion (1.5 trillion rand) over the next five years, has raised some eyebrows in both the national and international community.
While this is a significant cost, we argue that the joint payment plan must be implemented expeditiously, for two reasons: it will bring significant benefits to the country’s economy and its people, and the required financing will become available with the right combination of domestic policies and foreign aid.
Let’s start by making the case that even if you’re skeptical about the climate benefits of reducing carbon emissions, a just energy transition will make economic sense in South Africa; In fact, by 2030, it is likely that the economic gains will be at least twice as high as the projected costs above, as shown in Figure 1.
Figure 1. What is the cost of a just energy transition in South Africa (2023-2030)?
Source: World Bank calculations
Most of these gains will come as the country shifts away from coal towards low-carbon (primarily renewables) energy sources, already the least expensive option for South Africa due to its aging and lack of reliance on coal power plants. By investing in renewables (and transportation), the country can rapidly increase its electricity supply, which will help to offload large loads that are expected to cost the economy at least $24 billion in 2022. By simple extrapolation, the country can thus save about $192 billion by 2030 ($24 billion annually for eight years) by eliminating load dumping.
In addition, a just energy transition would improve the country’s competitiveness in global markets by reducing the carbon intensity of its exports. If the EU imposed a carbon tax at the border, about a third of South Africa’s exports would be at risk – a potential loss of $8 billion annually, or $64 billion by 2030. A third benefit would be reduced air and water pollution, which would reduce the risk of premature mortality and improves worker health and productivity.
The combination of these three benefits would accelerate South Africa’s economic growth and help create new jobs in many green and low-carbon sectors (such as renewables and batteries). We estimated, in the World Bank’s recently published Country Climate and Development Report, that JET could create up to 1 million jobs from 2023 to 2050, which would be many times higher than the number of jobs projected to be destroyed (about 300,000). However, South Africa will need to implement appropriate safety nets and active work programs to mitigate negative impacts on laid-off workers and local communities.
The second reason to support JET is that its costs are insurmountable: South Africa can find the resources to fund it. Moving cost falls into three main categories:
- New investment in power generation, primarily in renewables – about $66 billion through 2030: Given the age and condition of existing coal-fired power plants, renewables are the least expensive option for expanding the generation sector.
- New investment in energy transmission and distribution – about $11 billion through 2030.
- New measures and investments to address the economic and social harms to workers, communities, and municipal governments associated with decommissioning coal-fired plants (including mines)—approximately $20 billion through 2030.
It can be argued that South Africa can attract private domestic and foreign resources to finance new investments in power generation (largest part in Figure 2). Developers have been keen to invest in renewable energy sources, as evidenced by the success of various renewable energy programs: up to 6,000 megawatts of renewable energy sources were added to the grid between 2012 and 2022. The private sector through streamlining administrative and regulatory procedures and opening the market to more competition . By taking this approach, Vietnam, for example, attracted more private investment in solar energy than the entire sub-Saharan Africa region in 2020.
Figure 2: Funding Sources for the Transition, 2023-2030 (US$ billion)
Source: World Bank calculations
This would leave the country to find about $31 billion (or $3.9 billion a year). The government spent about $3 billion in 2021/2021 to support the financially troubled National Electric Power Company (Eskom). That aid could be cut in half – if the government succeeds in implementing a plan to return Eskom to the path of historic excellence, saving up to $12 billion in taxpayer money in 2023-2030. Another source of financing could be by pushing for an expansion of the carbon tax, which the national treasury has set for 2026. Eliminating existing exemptions and gradually increasing the tax rate could generate about $8 billion in additional revenue by 2030.
Thus, the funding gap will be around $11 billion in 2023-2030, which can be raised from external sources. The international community is willing to provide concessional financing to support South Africa’s decarbonization efforts, as this is in part a global public good. Five donors (the European Union, the United States, Germany, France and the United Kingdom) have committed $8.5 billion for this purpose over the next five years, while international financing institutions (particularly the World Bank and the African Development Bank) stand ready to assist South Africa through, at least For example, support for hybrid budget and financial instruments to reduce risks to private investors.
Against this background, we hope even climate skeptics will support the implementation of JET in South Africa. Jet aircraft obviously help reduce global carbon emissions, but the primary benefit of a rapid energy transition is for the country itself. The gains to the South African economy and people will greatly exceed the cost of transition, and the required financing can be drawn from available domestic and external resources.