If right this moment’s new child infants attain the age of 80, they’ll dwell to see the daybreak of the 22nd century. They may also in all probability expertise a quickly warming world with related excessive climate. Average international temperatures will likely be 2.5°C hotter than pre-industrial ranges by 2100 and floods, heatwaves, droughts, and violent storms will likely be way more frequent than right this moment.
This was the discovering of a new United Nations report forward of COP27, its annual local weather change convention that happened in Egypt this yr. It modelled the present commitments of the 193 governments which might be signatories to the Paris Agreement and located that the aim of limiting international warming to 1.5 oC above pre-industrial ranges by 2100 remains to be out of attain.
More needs to be performed, and all people is aware of this. The drawback is agreeing to what needs to be performed by whom.
Reducing the greenhouse emissions that trigger international warming, notably carbon dioxide, requires restructuring giant components of the worldwide economic system. This is already largely possible from a technological level of view, and certainly expertise continues to advance quickly. Green sources of power and transportation exist, as do greener methods of constructing.
Who ought to pay for what’s a very completely different query, as is who ought to make which sacrifices? For occasion, stopping deforestation and reforesting denuded areas is usually not a technical drawback, however a socio-political one.
How now?
Answering these “how” questions have all the time been tough, however the complexity has elevated considerably lately. The world’s largest two emitters are China and the US, and local weather progress requires their shut cooperation. However, the connection between the 2 is quickly deteriorating.
Moreover, inner US politics can also be deeply divided, and whereas the Biden administration is dedicated to tackling local weather change and has put actual cash behind the trigger, the climate-sceptic Republican Party is on monitor to retake the House of Representatives and should effectively declare the White House in 2024. Other massive emitters like India, Australia, Canada, and even South Africa, even have sturdy fossil gas lobbies that affect nationwide politics.
But maybe the largest complicating issue has been the Russian struggle on Ukraine, which has performed havoc with power methods.
Russia is a main producer of pure fuel, oil and coal, and has been chocking off fuel flows to Europe, whereas sanctions have restricted provides of the latter two. The outcome has been a surge in costs, but additionally the realisation that underinvestment in power safety has left many economies dangerously uncovered.
There has been a lot of funding in renewable power, however it’s coming off a low base and remains to be inadequate for the world to do with out fossil fuels. For occasion, the WEF estimates a document 10 million electrical autos will likely be bought this yr, however greater than 50 million inner combustion engine vehicles may also be bought. Therefore, it appears doubtless that there will likely be a lengthy transition interval through which renewable power and electrical autos will develop market share however fossil fuels stay necessary. Since many banks and traders are chopping off capital to new sources of oil, we might effectively discover that underinvestment continues resulting in sustained excessive costs or no less than risky costs.
This just isn’t a unhealthy factor from a local weather level of view, as excessive costs will decrease demand and encourage options. It is because of this that economists have lengthy argued that carbon taxes are the easiest way to combat local weather change. However, over the previous yr politicians have gone to nice lengths to defend customers from increased gas and electrical energy costs after the Russian invasion. It will take political braveness to just accept excessive costs and allow them to do their work.
The US launched hundreds of thousands of barrels of oil from its strategic reserve, whereas governments in Europe have capped electrical energy costs. And as an alternative of shifting away from coal as many international locations deliberate, coal demand has hit an all-time excessive in 2022 in accordance with the IEA as unaffordable fuel costs pressured substitution, even in a nation like Germany the place the Green Party is a component of the coalition authorities.
Canary within the coal mine
Most coal use is within the creating world, nevertheless, with China accounting for half of the overall, whereas India is the quantity two coal client. While China’s economic system is sputtering, impacting its electrical energy demand, India’s economic system is rising quickly and coal consumption is posting double digit development, in accordance with the IEA.
This is the place the notion of a Just Transition is available in.
While international locations like China and India are giant polluters, on a per individual foundation, emissions are low as a result of power use rises with earnings. A giant home with air conditioners and geysers requires way more electrical energy and subsequently generates extra emissions than a shack with a paraffin range. Therefore, justice calls for that the burden of adjusting to a future of internet zero carbon emissions needs to be shared pretty and never fall on the poor nor ought to it fall on employees in fossil gas industries.
At the extent of international locations, equity calls for that the burden of adjustment shouldn’t fall on poorer international locations when wealthy international locations used soiled power to develop wealthy and are the largest sources of per capita carbon emissions right this moment. They can even soak up the prices of transitioning extra simply, in addition to the impression of excessive climate.
The chart under offers some context on carbon emissions. While China, India and Indonesia are among the many largest polluters right this moment, their giant populations imply per capita emissions are fairly low. The US, Canada, Russia and Korea are excessive each in absolute and per individual phrases.
Global carbon emissions
Source: World Bank, knowledge for 2018
For South Africa, there may be a probability to kill two birds with one stone, to make use of a very environmentally unfriendly expression.
South Africa is the thirteenth highest carbon emitter, sitting between Mexico and Brazil. However, South Africa’s per individual emissions are nearer to Germany or Japan. This is principally as a result of of its reliance on coal for 80% of electrical energy era, but additionally as a result of Sasol runs the world’s largest coal-to-liquids amenities.
But South Africa can also be desperately quick of electrical energy. Load shedding has been off the charts this yr as Eskom’s previous coal-fired vegetation break down with rising frequency whereas the brand new mega-plants – Kusile and Medupi are among the many world’s 5 largest – endure from design and building faults which means they could as effectively be a long time previous. A scarcity of dependable electrical energy provide is the primary headwind for financial development and has been for the previous a number of years.
Eskom electrical energy manufacturing
Source: Stats SA
Irrespective of your views on local weather change, renewable power is the most affordable and quickest strategy to plug these gaps. The latest regulatory adjustments that permit for personal corporations to generate their very own energy are already delivering encouraging progress. South Africa has glorious wind and photo voltaic assets, among the many finest on the planet. A rapid build-out of renewable power sources, subsequently means we are able to decrease our carbon emissions and assist financial development.
Moreover, coming off a excessive base, it’s cheaper for South Africa to cut back its carbon emissions than it’s for, say France or Germany. Therefore, it is smart for wealthy international locations to pay South Africa to chop emissions. That is strictly the considering behind the Just Energy Transition Partnership (JETP) that was formally introduced at COP27 after a yr of gruelling negotiations.
In reality, it may be the one success story of COP27.
Several wealthy international locations will present South Africa with $8.5 billion over 5 years, principally within the kind of low cost loans, largely to decommission coal-fired vegetation and substitute them with renewable energy sources. There may also be funding to strengthen the grid (the Northern Cape has the very best photo voltaic potential however has restricted grid connections), assist electrical car manufacturing, and develop a inexperienced hydrogen sector.
Separately, however definitely associated, the World Bank has supplied $490 million to show Komati, the 60-year-old decommissioned coal plant, into a photo voltaic and wind plant. These are massive quantities, however not almost sufficiently big. South Africa’s Just Energy Transition Investment Plan (which provides impact to the JETP however provides one other complicated acronym to an already crowded discipline) envisages that the transition will value R1.5 trillion in complete. But these are necessary early steps to begin crowding in personal investments.
ESG backlash
There isn’t any query that the transition right here and overseas would require substantial funding from banks, pension funds, asset managers and different personal actors. Yet the previous yr has additionally seen a backlash towards the superficial software of environmental, social and governance (ESG) ideas in investing.
This just isn’t as a result of there may be something inherently incorrect with ESG – certainly the world needs extra deal with these points, not much less – however as a result of many lowered ESG to a tick-box train with out absolutely grappling with the complexities and essential trade-offs.
Even worse, it grew to become lowered to a gross sales instrument, empty rhetoric, and greenwashing.
Or as a wonderful Financial Mail cowl line put it “marketing departments hijacked ESG”.
The ESG gross sales pitch labored effectively when “cleaner” expertise shares had been vastly outperforming “dirty” power and supplies corporations within the decade earlier than 2021 and it might be argued that environmentally pleasant investments equalled extra returns. But over the previous two years, oil main ExxonMobil outperformed Meta (previously Facebook) by 250%-points whereas Sasol has overwhelmed Naspers by a comparable quantity on the JSE.
Investors who need to do what is true for future generations needs to be ready to sacrifice some returns if essential, but additionally interact meaningfully with the problems at hand.
This may imply, as an example, accepting that there’s a coal miner in your portfolio, however then additionally making certain that the mine has solely a finite lifespan, is run transparently and can finally be shut and rehabilitated in a approach that’s accountable to nature and the encircling communities. Selling the mine into opaque personal possession might “clean up” your portfolio however doesn’t change the precise actuality.
ExxonMobil and Meta share costs
Source: Refinitiv Datastream
Opportunities amid the dangers
With all this comes funding alternatives. Many trillions of {dollars} should be spent globally on clear power sources, increasing electrical grids, electrifying transport networks, and refitting buildings to cut back carbon emissions. Many trillions extra should be spent on strengthening cities, farms, industries, and provide chains within the face of excessive climate.
Much of this will likely be bodily investments, requiring uncooked supplies. Copper for electrical wiring is completely vital, however so are the battery metals (lithium, nickel, cobalt, and manganese). It may also require tons of metal and cement, and sadly, each are at present made utilizing carbon-intensive processes. Platinum is used to provide inexperienced hydrogen, touted by many because the clear gas of the long run.
Many of these commodities face provide constraints, nevertheless. Take Chile, as an example. The world’s primary copper producer has seen provide decline over the past 5 years. Neighbouring Peru, the quantity two producer, noticed output leap mid-decade, however there was significant development since.
South Africa’s total mining output tells a equally unhappy story of sensible constraints and coverage shortcomings. It is flat as a pancake over the previous decade
Mining output in Chile and South Africa
Source: Refinitiv Datastream
As the world economic system slows below the load of decades-high inflation and surging rates of interest within the coming months, it’s no shock that commodity costs are below stress.
However, the longer-term outlook is optimistic, and that is excellent news for a resource-rich economic system like South Africa. We have a lot of work to do to verify the nation can exploit these alternatives, and much more work to do to construct resilience as a future with wild climate looms.
Izak Odendaal, Investment Strategist at Old Mutual Wealth.