Companies are likely to lead decarbonization work but the state of the economy, slow pace of regulatory change and unreliability of electricity supply are hindering progress, while heavy-emitting industries could be affected by the EU’s Carbon Border Adjustment Mechanism.
South Africa’s greatest opportunities to move towards net zero at present come from the private sector. Foreign-listed multinationals and companies with international investors will in many cases have to increase their reporting on climate change risks and develop plans to decarbonize. However, there are financial pressures to delay such work. “There is not a big drive for companies in South Africa that are trying to make ends meet in a very slow economy to embrace additional measures linked to net zero,” says Pieter Scholtz, Partner and Africa ESG Lead, KPMG in South Africa.
The government is doing little to help or force companies to decarbonize, whether through legislation or other measures. A June 2021 speech by President Cyril Ramaphosa discussed an expansion of renewable energy, which at present provides only a small proportion of the country’s electricity, but this has not been sustained. “The slow pace of regulatory change is a challenge,” says Poogendri Reddy, Associate Director, Sustainability Services, KPMG in South Africa. Plans from 2019 to break up the government-owned and coal-dependent power group Eskom are progressing slowly, although in July the country’s energy regulator licensed its plans to set up a separate transmission operator.1
Eskom frequently imposes ‘load shedding’ — planned power cuts — on customers, given a chronic lack of capacity resulting from severe financial, plant and labor problems with cuts occurring on 288 days in 2022. In February, President Ramaphosa declared a state of disaster because of what he called “the electricity crisis”.2 As part of its response, in March the government created a new minister of electricity post, initially held by Kgosientsho Ramokgopa, previously the head of the Presidency’s Investment and Infrastructure Unit.3
The government has also allowed Eskom to bypass sulfur dioxide pollution controls at its Kusile coal power station so the company could resume production from generation units proving 2GW of electricity, despite this risking severe health problems for those living nearby.4 “Stability of supply right now outweighs current emissions concerns,” says Reddy, although this has an impact on the uptake of levers for decarbonization adopted in other countries. One example is the slow adoption of electric vehicles if access to power needed for charging them is unreliable and such power is still generated from coal.
CBAM’s industrial impact
The introduction of the EU’s Carbon Border Adjustment Mechanism (CBAM) as well as similar schemes elsewhere will provide the country’s heavy-emitting industrial companies with financial reasons to decarbonize, by applying charges on imports designed to match carbon taxes levied on domestic producers. A February 2023 paper published by South Africa’s Presidential Climate Commission found that EU countries imported an annual average of US$1.4 billion of products from South Africa that could attract charges under CBAM from 2017-21 with iron, steel and aluminum production most likely to be affected.5 The South African Revenue Service and National Treasury are considering responses to CBAM, which will be phased in over the next few years.
Scholtz says that some large companies in the energy and natural resources sectors have been working on CBAM programs for a couple of years, but the large scale of the changes required means these will take time to implement. He says that South African companies of all kinds need to have a strategy for net zero based on gathering accurate data on their current emissions, including scope 3 ones from suppliers, then develop long-term plans based on these with a target net zero date and interim reduction targets. He adds that companies in some sectors, including energy, natural resources and telecoms, are making good progress on such planning.
1 Energy regulator decisions of meeting number 262 of 27 July 2023’, National Energy Regulator of South Africa. https://www.nersa.org.za/wp-content/uploads/bsk-pdf-manager/2023/07/Media-Statement-Energy-Regulator-Decisions-of-Meeting-No-262-of-27-July-2023_-1.pdf
2 Cecilia Macaulay, 'Eskom crisis: What does South Africa’s state of disaster mean?', BBC News, 10 February 2023. https://www.bbc.co.uk/news/world-africa-64594499
3 Paballo Lephaka, 'Profile: meet SA’s Minister of Electricity, Dr Kgosientsho Ramokgopa', SABC News, 7 March 2023. https://www.sabcnews.com/sabcnews/profile-meet-sas-minister-of-electricity-dr-kgosientsho-ramokgopa/
4 Sheree Bega, 'Eskom’s Kusile pollution rules exemption to ease blackouts threatens health', Mail and Guardian, 16 March 2023. https://mg.co.za/environment/2023-03-16-kusile-pollution-rules-exemption-to-ease-blackouts-threatens-health/
5 'Carbon border adjustment mechanisms and implications for South Africa', Presidential Climate Commission, February 2023. https://www.climatecommission.org.za/publications/cbam