4. South Africa

4.1 National policy and regulatory context

This section of the report analyses the politics of climate finance in South Africa, an upper-middle income country with high levels of inequality in the distribution of wealth and intensity of emissions. The analysis of the political debates and contestation in the emerging climate finance policy arena focuses on two major aspects.

First, the debates on the current definitions of climate finance, which are not clear cut and can include private or public financial flows such as development aid, private equity, loans or concessional finance. The UNFCCC Standing Committee on Finance’s defines climate finance as “finance that aims at reducing emissions and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts”^[89] The vagueness of the definition is one of the central issues in political debates on climate finance. The ensuing questions include Do climate finance flows bring new funding or just go to redress existing commitments? Do loans count if countries need to pay them back? What about the conditionalities of these loans?

Second, the uncertainties of the definitions fuel the politics of climate finance along the central parameters of South Africa’s climate change puzzle. These parameters include an energy and emissions intensive economy with highly unequal distribution of wealth, high unemployment, technological lock in, political rent seeking and path dependencies in the traditional coal and mining sectors. At the same time, climate change has been formally recognised as a problem and a diplomatic drive has arisen in the government of South Africa to play an active role in the UN climate change negotiations.^[90]

4.1.1 Historical evolution of a coal-fuelled economy and electricity system

On the continent, South Africa’s economy stands out in its energy use and emission intensity. The country’s carbon footprint differs from other African countries, with per capita emissions similar to those in industrialised countries (Fig 4.1). However, the high energy input only translates into a GDP category of a middle-income country. The mining sector contributes around 11% of GDP and has recovered from the negative impacts of the COVID pandemic more quickly than other sectors, due to international investments and trade.^[91]

Fig 4.1 CO₂ emissions in metric tons per capita

Source: Authors’ compilation based on World Development Indicators

The economy has historically evolved from mining activities. Coal remains the main primary resource in South Africa’s energy sector and around 90% of South Africa’s electricity comes from coal. The abundance in coal has been conducive to the development of energy- and emissions-intensive industries including the polluting production of liquid fuels.

South Africa’s energy balances show heavy reliance on fossil fuels, including 65% of primary energy sources from coal, 18% from imported crude oil and 3% from gas. South Africa imports natural gas through an 865km long pipeline into Mozambique’s Temane and Pande gas fields, estimated to hold 2.6 trillion cubic feet. The pipeline has a capacity of 240 million gigajoules (GJ) per annum. Sasol uses approximately half of the imported quantities in the Gas-to Liquid processes and chemicals plant in Secunda. A pipeline network of 2000 km distributes the remaining quantities to industries in the Free State, Gauteng, Mpumalanga and KwaZulu-Natal (DMRE 2021).

The South African government released its South Africa’s 7th National Greenhouse Gas Inventory Report 2000 to 2017, which shows an increase by 10.4% in GHG emissions over the 17-year period (DFFE 2021). The energy sector remains the main source of GHGs, accounting for 80% of total emissions (Table 4.1).

The economic focus on extractive industries along with a legacy of exclusion of most of the population from independent economic opportunities has resulted in a highly unequal distribution of wealth. South Africa is the most unequal society in the world, as measured by the GINI index.^[92]

The uneven emissions balance translates into GDP ranging at ZAR 1.1 billion. Six out of ten industries have not yet recovered to pre-COVID levels, leaving 34.5% of South Africa’s labour force formally unemployed. These figures look even worse for those aged 15-24 years, with 63.9%, almost two thirds, unemployed and 42.1% unemployed in the age group 25- 34 years, and 47% of South Africa’s female labour force are currently unemployed.^[93]

Table 4.1 National GHG Emissions Inventory in South Africa, 2021

Source: DFFE 2021

4.1.2 Mitigation-focused climate policy

As a result of its reliance on fossil fuels and the high levels of unemployment, South African climate policy is dominated by debates on mitigation and emission reduction, the management of “just transitions” and employment implications of technological change (Table 4.2). These topics overshadow adaptation efforts to climate change, although the country is highly vulnerable to the impacts of climate change and is continuously suffering from extreme weather events.^[94]

Table 4.2 Central climate energy policies and legislations

Source: Authors’ compilation based on World Development Indicators

4.2 South African climate diplomacy and its role in the world

The South African government plays an active role in climate change negotiations, bridging the diverse positions between developing countries in Africa and negotiating groups of middle income countries. At the same time, South African diplomacy maintains bilateral cooperation agreements with “donor” countries in developed countries. Ties with Brazil, Russia, India and China have firmed up through the BRICS club over the past decade.^[95]

The South African engagements in the African Union, the G77 and China echo continental negotiation positions prioritising climate finance requests on adaptation and loss and damage. The differences in the economic performances and emissions outputs, however, create contestation between the least developed countries and the middle-income countries in Africa.

Ties to developed countries continue to play an important relationship in South African diplomacy both in its bilateral and multilateral forms. The South African government has close bilateral relationships with most European countries, the US, Canada, Japan and Australia. These bilateral relationships are critical for South Africa’s climate finance partnerships, while the traditional aid (Official Development Assistance - ODA) funds play a relatively minor role with less than 1% of the annual budget, according to the CPI.

The South African government was subject to international sanctions against its white minority regime over the course of the “lost decade” in the 1980s. As a result, the Structural Adjustment Programmes of the Bretton Woods Institutions under the Washington Consensus did not affect South Africa’s economy as much as they impacted Latin American and other African nations. A World Bank loan created access to finance for the largest new built coal plant – the Medupi power station.^[96] Medupi may lock South Africa’s economy into an emissions-intensive coal-dependent trajectory for another 50 years.^[97]

Historical sensitivities about conditionalities in the loans provided by Bretton Woods institutions remain. Nevertheless, the government accepted loans from the World Bank and, for the first time in history, from the IMF in support of its recovery efforts from the COVID pandemic.^[98] Caution about conditional policy reform in return to access to loans persists in the negotiations in the novel Just Energy Transitions Partnership (JET-P) – see Box 1. The JET-P is a critical partnership that evolved during preparations for COP26 in Glasgow during the updating process of South Africa’s NDC. The JET-P stood out, at the time, for its ambition in both funding amounts and impact on emission reductions.^[99] The following sections unpack the JET-P in South Africa’s current eco-system of climate finance actors, flows and projects.

BOX 1: Innovation and institutional change in South Africa’s Just Energy Transition Partnership (JET-P)

The South African government signed a framework agreement with a group of international partners to unlock US$8.5 billion of climate finance in support of just energy transitions. The much-lauded agreement was presented at the COP26 in Glasgow. Over the course of the year, the parties in the JET-P - South Africa, UK, US, EU, Germany and France - have worked towards an investment plan in support of retiring coal plants, rolling out renewable energy, developing green hydrogen and transitioning towards electric vehicles. The plan will be launched at the COP 27 in Sharm El-Sheikh and released for public comment.

What is new and what is relevant for other developing countries?

Innovative elements:

• Institutional innovation lies in the partnership itself, which convenes a new multilateral group of states and facilitates exchange between governments, implementation agencies and scientific experts.
• JET-P is well aligned to the objectives of the South African NDC and creates a formal link and investment instrument that can facilitate the implementation of the NDC in the absence of a formal plan (RSA 2015, RSA 2021).
• The partnership implicitly structured consensus to decrease the dependence on coal in South Africa, but underlying contestation within the South African political economy may undermine this narrative.

Risks and considerations:

• Risks emerge from the details of the transaction including the competitiveness of interest rates for concessional finance and conditionalities for implementation and political reform. The JET-P agreement is a loan instrument and does not foresee any grants.
• There is a major question around the implementation and conditionalities of these loans using the same development agencies and banks with similar instruments in the absence of grants. The JET-P may well reduce the cost of mitigation, depending on the finance modalities. In the absence of access to the classified investment plan, it is difficult to tell how the transaction will support the “justice” element of the various transitions.
• Implementation risks emerge from possible changes in the South African government. President Cyril Ramaphosa stands for election for his second term as president of the African National Congress (ANC). The outcome will determine the ANC’s presidential candidate in the next election, which the party is expected to win in the absence of a competing dual-party system. The competing faction in the ANC may reverse the slow progress in the renewable energy roll out and revert to the leadership practices of former president Jacob Zuma. His ex-wife Nkosazana Dlamini Zuma is likely to stand for election for the ANC presidency again; she lost narrowly to Ramaphosa in 2017.
• The above-mentioned institutional innovation may mitigate risks from changes in the government.
• JET-P has already inspired different actors to develop similar frameworks for Indonesia, Vietnam and Senegal.

Food for thought for countries in Africa from South Africa’s experiences in the JET-P:

• How can access to cheaper finance contribute to just transitions in the absence of highly emitting energy sectors?
  • Use it for the expedited roll out of renewable energy to ensure security of supply and decarbonize future energy infrastructure.
• How can climate finance best work for adaptation without replicating ODA-funded projects?
  • Observe the capital markets so that you will not commit to unnecessary conditionalities without accessing the cheapest finance – there may be cheaper options.
  • Develop an implementation plan for your NDC so that you know what you need to fund and how these funds can be used strategically in support of your net-zero journey.
  • Replicate new multi-lateral partnerships on the African side to strengthen regional approaches to fast-track the integration of Africa’s power pools.
  • Use climate finance to increase transmission lines between the power pools and expedite building renewable energy infrastructure so that security of energy supply will be inclusive to all countries on the continent without locking limited capital into unnecessary new coal plants.
• Increasing regional collaboration between African countries can strengthen their negotiating power to access climate finance jointly, to increase accountability and to reduce temptations of small national elites to eye further development of fossil fuels.

4.3 NDC gap analysis: South Africa’s climate mitigation and adaptation plans

South African society has experienced a change in its climate policy processes since 2020. The government had submitted its INDC prior to the conference of the parties in Paris 2015. The INDC built on the National Climate Change Response White Paper (NCCRWP) and mirrored a politically contested range of emission reduction scenarios.^[100] The ranges of emission reduction scenarios in the NCCRWP were criticised for lack of ambition and their logic of peak plateau and decline in emissions, which delay any climate action into a future post 2030 (Fig 4-2).^[101]

The South African government articulated financial support for implementing climate action in adaptation and mitigation in 2015. The adaptation component of the INDC articulates six goals for adaptation action based on the NCCRWP. These include

• develop a NAP to implement the White Paper up to 2030
• build subnational and sector policy frameworks between 2020 – 2030
• build institutional capacity for climate change response
• develop an early warning, vulnerability and adaptation monitoring system to understand vulnerable sectors and geographies
• develop a vulnerability assessment and adaptation needs framework, and lastly,
• communicate investments in adaptation to increase awareness, learning and international recognition. Fig 4.2 South Africa’s peak plateau and decline scenarios in 2011

Fig 4.2 South Africa’s peak plateau and decline scenarios in 2011

Source:South African Government

The South African government reports an increase in domestic investment in adaptation from US$1.64 billion to US$2.3 billion between 2010 and 2015 (INDC 2015). The INDC reports a wide emissions range between 2025 and 2030 at 398 and 614 Mt Co₂e, in line with the NCCRWP. The main climate finance reported in the mitigation component emerged from investments in a Renewable Energy Programme, which allowed IPPs to sell electricity to the utility for the first time in the country’s history. The programme attracted investments of US$16 billion between 2012 and 2015 alone. Costs to expand the programme to 2025 were estimated at US$3 billion per year.

Fig 4.2 South Africa’s peak plateau and decline scenarios in 2011

Source:Cassiem et al (2021)^[102]

Institutionally, climate policy processes were historically mainly coordinated under the authority of the Department of Environment. The NCCRWP emerged in a favourable window for policy change ahead of the 17th UN Conference of the Parties (COP17) in 2011. The international attention on South Africa created performance pressures and opportunities for institutional change in South Africa’s central climate policies.^[103] The NCCRWP informed the emission reduction scenarios for the INDC, which turned into an NDC after ratification of the Paris Agreement in 2016. One of the means for mitigation in the White Paper includes a carbon budget for large emitters, which are in the process of being substantiated through a climate change bill.

The carbon tax process under the lead of the Department of Finance or National Treasury exemplifies coordination struggles between government departments. The implications for employment emerging from technological change through an increase in renewable energy technology triggered a global concern around justice in technological transitions. These concerns resonated in South Africa as the coal and mining sectors are traditionally important for employment. As a result, a job summit in 2018 led to the establishment of a cross-governmental Commission in charge of managing transitional justice in the energy sector.

Once established in 2020, the Presidential Climate Commission (PCC) wasted no time in engaging a far-reaching stakeholder process on South African climate policy. The Commission supported the Department of Environment (DFFE) in its updating process of the NDC to a cross-governmental process that created a new and transparent policy arena. The PCC lead strategically supported DFFE’s NDC processes and managed a process towards lowering the emissions range of the updated NDC. The association of emission-intensive businesses, Business Unit South Africa, revised its position on the mitigation target three times over the course of the participative process.^[104]

As a result, South Africa’s mitigation targets aim for lower ranges at 398 - 510 MT CO₂e for 2025 and 350 – 420 MT CO₂e for 2030. The most significant progress is a 32% reduction of the upper-end target by 2030.^[105] Achieving these emission reductions targets will depend on the successful implementation of measures to decarbonize the electricity and transport sectors.

The PCC’s argument for a more ambitious NDC framed a wider concept of climate finance in support of South Africa’s economic recovery, increased competitiveness through decarbonization and new social opportunities through just transitions. The PCC argued for a unique window of opportunity to shape novel and robust frameworks for the implementation of the NDC.^[106]

The consultation processes for updating the NDC created space for research and knowledge production. Outstanding, by developing country standards, is that the research space was dominated by South African-based researchers and institutions.

The University of Cape Town’s Energy Systems Research Group estimated costs of US$12 billion (ZAR 200 billion) for every additional 50 Mt CO₂e emissions reduced.^[107] A study at the University of Cape Town’s Bertha Centre collaborated with the international CPI, which estimated climate finance for mitigation only at an average of US$3 billion (ZAR 50 billion) per annum, accounting for 81% of the finance flows.^[108]

The National Business Initiative estimated the cost of transitioning towards “emissions optimal pathways” to 2050 at US$170 billion (ZAR2.9 trillion).^[109]

South Africa’s policy arena in climate finance

Generally speaking, South Africa has a relatively favourable investment climate compared to most other African countries.^[110] Critical institutions in the court system including the central bank are still functioning, despite a decade of state capture. Credit ratings have been positive and stable in 2022 for the first time in 15 years.

4.4.1 Stakeholder mapping and alignment, national perspectives on climate finance needs

The South African climate policy arena is currently a busy space in terms of actors and different negotiations. The main nation state contributors in the international climate finance architecture are Australia, Canada, the EU, France, Spain, the UK, Germany, Japan, Norway, the US, Denmark (Fig 4-4). These governments operate through their bilateral implementation agencies – many of them being the same actors who implement ODA-funded projects. Alternatively, these states commit funding into dedicated climate finance funds. Examples are the German International Climate Initiative (IKI) or the British International Climate Finance (ICF). IKI currently funds 53 projects in South Africa with different focus areas ranging from supporting the implementation of the Paris Agreement, to green economy, transport and biodiversity projects.^[111]

Multilateral climate finance arrangements operate within the UNFCCC’s financial mechanisms, such as the GCF, the GEF and the Adaptation Fund. Market mechanisms include the Joint Implementation Facility and the Clean Development Mechanism. Examples include the GCF engagements with the Development Bank of Southern Africa supporting renewable energy infrastructure.^[112]

Other multilateral institutions outside the UNFCCC include the United Nations Environment and Development Programmes,and the United Nations Development Program (UNDP), the World Bank and regional development banks, such as the AfDB.

In line with its diplomatic strategies, the South African government has established close relations in building climate finance programmes with the regional organisations such as the AfDB and the EU. Germany and France are significant bilateral climate funders contributing about a third of South Africa’s public finance.^[113]

Fig 4.4 Actors in South Africa’s climate financing space

Source:20211^[114] cited in Winkler et al 2021^[115]

South Africa’s JET-P comprises a new partnership that includes some of the main funders – the EU, France, Germany, the UK, the US. The governments of JET-P have pledged an initial amount of US$8.5 billion to implement South Africa’s NDC and associated “Just Transitions”. Originally, the partnership emerged through the discussions concerning the NDC update.^[116] Eskom, South Africa’s largest energy supplier, carried a US$24 billion debt, which has continuously lowered the economy’s credit rating over time. About half of this amount is regarded as “stranded debt”, unlikely to be recovered under Eskom’s current business model and electricity generation costs and tariffs. Over the course of domestic negotiations between the National Treasury, the departments of Public Enterprises and of Environments, the Presidency and other actors in the government, the proposal emerged for a decarbonization plan with Eskom at its core.^[117] The declaration negotiated at theCOP26 in Glasgow, however, expanded the decarbonization plan beyond the electricity sector and included electric vehicles, green hydrogen and socio-technical transitions, which are even harder to achieve.^[118]

The governance of the partnership is structured between the international consortium of funders, the South African government delegation and a secretariat supported by academic, business and non-governmental organisation (NGO) representatives. The current state of the partnership has resulted in an investment plan that is currently undergoing the processes of cabinet approval and will be presented at the COP27 in Egypt. The current state of negotiations involves predominantly loans, structured by the development banks and agencies of the European and the US governments and the World Bank. The collective of these organisations has yet to prove whether it can produce an impactful set of instruments to overcome the underlying inequalities that have nurtured the current climate crises in South Africa over decades.

Central barriers to the influx of climate finance into South Africa are associated with investment risks. These differ between the different sectors. The energy sector mainly suffered from political risk as the uncertainties about the pace of the bidding windows in the Renewable Energy Independent Power Procurement Programme (REIPPP), uncertainties around achieving financial closure and the agreed power purchase agreements from Eskom. Risks have now, in the 5th bidding window, increased, with inflation and changes in pricing for technological components, but the winners of previous rounds keep winning and have learned how to manoeuvre the local environments.^[119] The state may not continue to provide guarantees on the Power Purchase Agreements and where financial institutions such as the ICF may fund transmission infrastructure.^[120]

The new power plan lifted the 100 MW limit for generation, so there is a lot more room for investment in the South African power market. The current shortages in electricity supply have increased the pressure on the government to procure and open the market to investors. The energy sector exemplifies the critical role of the government in creating enabling conditions for private investments. Other sectors for climate finance are even more difficult to de-risk, as they are often less known and less accessible to foreign investments.^[121]

The internal party politics pose a major risk to implementing the JET-P. The partnership plans for decarbonization of considerably more renewables than are in the Integrated Resource Plan (20 GW) – a big gap in the decommissioning plan. The presidency supports this plan, but its implementability depends on the outcome of the ANC election and the continuity in government policy.

4.5 Mapping climate financing flows in South Africa

The South African climate finance composition stands out, by comparison to other African countries, with its predominant focus on mitigation. An IPCC comparison based on OECD data shows the ratios between adaptation and mitigation finances for other African countries (Fig 4-5). Two local studies confirm that there is an alarming underfinancing of adaptation funding in relation to the focus on mitigation funding. Adaptation finance only adds up to a 10th of mitigation finance flows.^[122] According to a tracking effort of climate finance flows in South Africa between 2017 – 2018, adaptation funding only added up to 7% of the total in those years with an average of ZAR 4.3 billion per year.

In addition, 90% of these funds were public funds, 10% came from so-called “blended finance” approaches, where public or philanthropic finance mobilises additional private funds in public private partnerships.^[123] The most significant international funds for adaptation activities emerge from a partnership between the GCF and the South African Biodiversity Institute. The imbalance may be problematic as South African society is highly vulnerable to the impacts of climate change. Drought and flooding are already acting as stressors especially on communities that are already experiencing deprivation

Fig 4.5 Total African adaptation and mitigation-related finance commitments, 2014–2018

Source:IPCC (2022)^[124]

The same IPCC report tracked ZAR 22 billion or 25% of total climate finance in South Africa in 2017 and 2018 from public finance. These funds are mainly provided by governments, international development finance institutions and international finance institutions. Most of these funds were raised and spent domestically.

Private finance in clean energy plays the biggest role in South Africa’s climate finance flows. Two thirds of the tracked private investments were raised as debt, a quarter in equity.^[125] Three local banks, the International Finance Corporation and the AfDB count as the main financing institutions for renewable energy and are involved in parts of the negotiations around the JET- P.^[126] The detail of the tracking study needs to be understood in the larger context of the energy sector reform.

The first NDC had already reported US$16 billion as the critical investment into clean energy infrastructure as a success story between 2011-2015. The pace of the REIPPP procurement windows had slowed down significantly during the second term of the Zuma administration from 2015-2018. The inability of the electricity system to meet demand caused planned power outages (locally known as load-shedding), which were caused by unreliable performance of Eskom’s ageing coal fleet, and partially combined with strike action.^[127] The negative impacts on economic recovery eventually gave path to policy reforms, which opened up the electricity sector for private investments.^[128]

The decline in renewable energy investments and the recovery since 2018 align with the change in the presidency and the restart of the IPP programme. South Africa has many of the policy mechanisms in place to attract private investment, even beyond the REIPPP programme. Independent power producers in South Africa alone added more renewable energy capacity through the competitive bidding programs in only four years than the rest of Sub-Saharan Africa has in more than 20 years.^[129] Over the course of four auction processes, Eskom signed some power purchase agreements at a lower cost than the utility’s average cost of supply.^[130] The progress in the large-scale diffusion of renewable energy remains politically contested, despite significant coalitions in support of the programme.^[131]

Resolving political contestation and successful regional integration will be critical for South Africa’s clean energy future. Least-cost-optimised models for the Southern African Power Pool have shown that wind and solar technologies can supply Africa’s largest power pool, which currently heavily relies on fossil fuels.^[132] Grid investments will be essential to expand transmission, which will make new coal infrastructure unnecessary. Hence, renewable energy technologies can set African countries on low emissions development pathways that can power Africa’s ambitious human development agenda and create universal energy access. The main risk to realising clean energy futures resides in the political decision-making process, which need to prioritise the diffusion of renewable energy rapidly and inclusively.

4.6 Summary

South Africa’s decarbonization challenge can be resolved through private and blended finance. There is a high risk that adaptation finance will be overlooked, as reducing the coal dominance of the electricity sector dominates. The global divestment pressures may attract investors into exploiting the large potential for renewable energy if government policy continues to enable these investments.

A regional perspective on the larger Southern African energy pool and its climate vulnerability may be conducive to unlocking greater volumes of private investments, increasing electricity access in neighbouring countries and preventing further new investments into coal-fired power plants in the region.

Whether the current transition partnerships will expand their scope to rethinking justice at a regional, rather than provincial and national perspectives, remains to be seen.