By Saliem Fakir
Introduction: how is a low-carbon future relevant in these troubling times of climate change doubt?
The failure to reach a global deal in Copenhagen may be music to the skeptics’ ears. For them, it is the death of the carbon-constrained world as they see it.
The failure of global collective action may mark a certain departure point: the idea that a low-carbon economy idea or transition, as concept and action, is incapable of staying alive. This is no nearer to the truth than saying that the earth is flat.
What may be a failure globally looks very different from what is happening within the national context. Practically speaking, most of the developed and emerging economies are having to grapple with the idea of a low-carbon economy in one way or the other.
It is an ‘inconvenient truth’ staring them in the face.
The starting points of different economies may vary. Some may come at it purely to tackle climate change mitigation; others see it from an energy security point of view; and yet others consider it an opportunity to develop new types of industry.
Those countries that are most dependent on fossil fuels, and thus susceptible to the volatility of price movements for these commodities, have long worked to wean themselves off fossil fuels as their own national security is at stake.
For instance, the recession provided the opportunity for both the United States and China to use green fiscal stimulus measures to seed a long-term low-carbon trajectory. In the US, opposition to coal-fired power stations is so intense that it makes developers of new coal-fired power plants think harder about the investment before they venture in that direction.
Two stages to a low-carbon future
All of this points to a certain current paradox: the intensification of fossil fuel usage with a simultaneous emphasis (growth in investments and research) on low-carbon solutions.
There are, in effect, two stages to developing a low-carbon future. The transition will not happen in parallel with, but will have to emerge from the bosom of, the current fossil-based system.
The two-stage argument is simply that as demand for fossil energy grows, so will the competition for the last remaining reserves of fossil fuels. One will see a distinct Asia-Pacific emphasis, with that region accounting for more than 84% of growth in fossil energy demand. For the first time in 2008, non-OECD consumption of energy exceeded that of OECD countries, two-thirds of which was from China alone. For the sixth year running, coal was the fastest-growing fuel. The majority of the demand was from Asia.
There will be fierce competition for the last remaining reserves of uranium, coal, gas, oil and other key commodities, which major economic powerhouses depend on for their own economic growth and sustainability.
To put things into perspective: global carbon dioxide emissions stand at around 30 Gts/ annum. The power sector contributes about 11-12 Gts/annum, and by 2030 the sector’s contribution will most likely reach 18 Gts/annum. Most of this constitutes emissions from the use of coal. According to 2008 figures from the International Energy Agency (IEA), about 43% of carbon emissions are from coal, 37% from oil and 20% from gas.
Future economic growth is pivotal to financing the transition to energy alternatives. The transition to a low-carbon economy is the second stage. It can’t happen until the first phase, the intensification of fossil fuel use, has had time to mature enough to give birth to the second.
The transition to the second stage will require significant accumulation of capital, investment flows and the development of strategic expertise and knowledge. A scenario for 100% renewables will require close to $100 trillion in investments globally.
The second phase will also necessitate profound shifts in human behaviour. Should the transition to a low-carbon future not happen in time, planning will have to address how we work in and use cities in the interim.
This is not to imply that the first phase will give rise to the second in a linear progression. To the contrary, both are emerging in parallel. The scramble for fossil-based energy security, especially for the great powers, must give them sufficient lead time to accomplish the second phase. The scramble, in itself, demonstrates that the era of fossil security and surplus will shortly reach its zenith.
All the major powers involved in the grab for fossil fuels are simultaneously seeking ways to wean themselves off them. For example, China and the US are already making significant strategic investments in clean technology. They will, in a few years, be the leading countries in this sector. Currently, however, both are net importers of oil and gas. The same pattern prevails in Europe and other major world economies.
Peak oil scenarios and low-carbon future dynamics
The energy sector - both power generation and transport - is the key driver of carbon dependency. Whatever happens in this sector will ripple through the rest of the economy. Thus, the transition will have to begin there, and then spread beyond. The energy sector will not be the only focus of transformation, however. Whether or not one subscribes to the climate change scenario, the default trajectory to a new energy revolution will be a low-carbon one, across the board.
For now, our fossil fuel economy lives more generously than low-carbon solutions can. Partly, this has to do with funding; also, low-carbon technologies and solutions are not as widely applicable and replicable as are fossil fuel technologies. It is also unfortunately the case that those with financial, technical and institutional capability will be able to transit to this new type of energy economy much faster than will those lacking these resources.
But let us examine how the interplay between fossil fuel dependency and the search for low-carbon solutions will work, assuming a peak oil trajectory is inevitable. Peak oil scenarios are a useful guide, since they illustrate how a low-carbon economy is likely to evolve in the mobility sector.
A paradox arises in the relationship between peak oil and new technology development. New discoveries can extend peak oil periods. At the same time, increases in oil prices make technologically expensive options feasible, and formerly unrecoverable reserves recoverable. This makes it difficult to predict exact dates for the peak oil phenomenon. That said, inconsistencies in peak oil predictions should not lull us into complacency.
Greater demand creates scarcity value. Scarcity may result from actual reserve depletion; it may also reflect a lag behind demand with respect to investment in expanding total extractions and new finds. Both of these affect the price. As the resource becomes scarcer, price incentives will induce further investment in exploration and in expanding the total reserves of oil. This will encourage the development of non-conventional sources such as coal-to-liquid projects, extraction of oil from tar sands and shale, and the production of biofuels. The total volume of fuel available can expand dramatically, particularly if prices remain stable and high for long periods. At the same time, however, the high prices driving these developments will be reined in by inflation intolerance.
The utility of oil can also be extended through efficiency improvements in the internal combustion engine; the building of smaller vehicles that use less fuel; the development of hybrids, hydrogen fuel cars and electric cars; or simply behavioural changes in car usage by consumers. Collectively, these permutations will eventually force progressive reductions in the use of oil, or will perhaps completely displace it as an energy source.
The irony goes two ways: although the fossil fuel economy endures, anticipation of its approaching peak - and the associated price increases - actually foments transition to new low-carbon solutions and the use of stranded fossil or unconventional sources.
Further promoting this trend is insecurity deriving from the transitional peak oil scenario, which in turn drives high levels of price volatility. Volatility in price makes investments in stranded, conventional or uneconomic reserve sources more uncertain. The concomitant disruptions will push investors to less volatile sources, and motivate them to diversify their portfolios in order to improve resource security and lower supply risk. Thus, fossil intensification, as marked by volume expansion and limited lifespan, is inextricably intertwined with the transition to a low-carbon economy within the logic and dynamic of the fossil fuel economy.
This is the paradox of peak oil: its nature is to create internal contradictions that, to some extent, reinforce both the old and the new. Nonetheless, it is likely that the new will displace some or all of the old as the major driver of mobility. Consequently, there may always be oil, but it will be used less and less as prices for new fuels come down. It may also be that we will have to live with both energy economies, side by side, for quite some time before a systemic solution is found to replace fossil fuels completely.
Here, too, an irony will prevail: the fossil economy will be the mother of the new out of sheer necessity until the new can walk on its own two feet. As it is, decoupling from fossil fuels will not happen with immediate effect, and meanwhile, the politics of every country’s energy economy will either retard or fast-track the decoupling process.
Why South Africa will have to decouple from fossil fuels
Since fossil fuels can’t last forever, the decoupling will happen in one way or another. Talk of a low-carbon future for South Africa has been met with some derision. But as always, some see the light and others are stuck, like fossils, in the old paradigm.
There are several compelling reasons why South Africa has to go low-carbon. It is important to recognise that the new normative regime’s energy real-politik imposes different constraints on energy developments from those associated with the previous dispensation. At the policy level, at least, South Africa recently bought into low carbon by announcing that it is willing to cut carbon emissions from a business-as-usual trajectory to 34% by 2020 and 42% by 2025. Even though this commitment is conditional, it would be hard for the South African government to back off from it: it is being used in a range of political strategies, from arguing for new emissions taxes on cars to modelling parameters for the new Integrated Resource Plan 2.
In today’s normative world, no country can avoid the low-carbon question; but there are additional factors that will drive this transition in South Africa. The main constraint on further fossil fuel development is the very resource hailed as our cheap energy source - coal itself! Coal supplies close to 90% of our electricity and 40% of our liquid fuels. Their high coal use is one reason why Eskom and SASOL are the largest contributors to our GHG emissions.
Yet despite all the bold boasts that we have enough coal to last 200 years, we don’t really know how much we have. The last resource estimate was done in 1982. So claims that it is cheap and abundant may be just rhetoric based on false knowledge. The proposed coal roadmap to be initiated by the Fossil Fuel Foundation may give us a better picture of the coal situation in three years or so, when the study is complete.
International trends have shown that new coal resource estimates tend to downgrade significantly older resource and reserve estimates. The same is predicted for South Africa, whose existing coal estimates may be reduced by as much as 60-80 years of economically recoverable reserves.
The real problem, though, is that established, mature mines (those that are mineable) are expected to peak in in ten years. Meanwhile, the rate of extraction for exports and domestic use goes up if the global economy grows faster. So estimates should ideally be adjusted on an annual basis, as they are for oil.
Still other challenges are emerging with respect to coal.
The calorific value of steam coal is declining as we extract from more and more marginal stocks. The new ‘vast’ potential in the Waterberg, for example, is not the same as for the seamless and rich deposits in Mpumalanga and other areas. Eskom itself has acknowledged this, and complained recently that it is having to use lower grades of coal, reducing load factors and increasing pollution.
Much has been made of the Waterberg as a new coal nirvana. The estimated resource here is about 70-80 billion tons, but only 6-7 billion tons are economically recoverable. The coal is low-grade, and the area needs considerable infrastructure. Further, mining rights are held in too many small parcels, which entails higher transaction costs for negotiating deals and recovering mineable coal with good economies of scale.
As with all new mines, limited water availability is the biggest constraint on growth. Then there is the problem of coal producers having the incentive to export, versus producing for domestic supply at lower costs. Coal mining is privately dominated in South Africa. We have no nationalised coal mines. If energy is of such importance to national security, our reliance on market players to do national good when it comes to the crunch is highly optimistic.
All of these problems can be solved, but not without cost and time lags. It can’t be taken for granted that because we have the advantage of ‘abundant’ coal that it is easily mineable, that it can be supplied securely, nor that its price can be kept low enough to hold electricity and liquid fuels to an affordable level. Not surprisingly, then, coal’s heyday is on the wane. Cheap financing for coal projects is likely to dry up, and other technologies will benefit from the shift.
Any bets on coal as a cheap energy source have to be slightly weighted. Price predictions vary between $100/ton and $300/ton. The risks increase when we add to these low-high scenarios the added externality costs associated with Carbon Capture and Storage and Flue Gas Desulpherization. The impact of coal mining on tourism and agriculture adds to the risk weighting. Where we win in coal mining growth, we may lose in other sectors.
The impact of border tax adjustments on the exports industry
The long view on the future of our carbon-intensive economy is that we are most likely to be vulnerable to border carbon adjustments (BCAs) for our exports. A study carried out for the South African Renewables Initiative (SARI) by the International Institute for Sustainable Development, sponsored by the Department of Public Enterprises, shows that South Africa is potentially vulnerable to carbon border taxes to the tune of R85 billion, or R2.7 billion on an annual basis from 2020 onwards.
This would dramatically reduce South Africa’s export competitiveness. If these BCAs are implemented, they will have a severe impact on export-led growth and job creation in these industries. Any form of BCA will undoubtedly affect export industries’ growth, and there will most likely be job losses as a result.
Predictions are that carbon border tariffs are probable from 2020, with private labels likely to be implemented even earlier. For illustrative purposes, if the European Union were to impose BCAs, they would affect 71 South African products, accounting for about R64 billion in trade. BCA taxes can reach tariff levels as high as 7% for the iron and steel sector and 3.6% for non-ferrous metals. Similar product ranges would be affected if the US were also to impose BCAs.
The inescapable conclusion is that we have to shift away from coal, and that this trajectory shift must be initiated now, rather than later. This is not just because of climate change, but because of our over-dependence on coal for both electricity and liquid fuels. The embedded risk in this dependence is self-evident.
The question is, how much can we come down from the current 90% coal usage for electricity? Could we reduce by 70%, 60% or 50%? And if so, what will replace this loss? The shift from coal to low-carbon industries must be accomplished gradually, to accommodate potential job losses and create new jobs.
The challenges are daunting and the options limited. The more we delay making tough strategic choices, the more the issues keep multiplying, introducing new dynamics and constraints. But we can’t solve the puzzle by securing every piece of it before acting. As each piece is laid down, it will ease one or more constraints so that the next piece can be added.
The energy-industry nexus and the low-carbon future
Embeddedness solely in the coal paradigm locks us into a system that simultaneously locks us out of many other new opportunities in the long term. The energy complex and the economy are interlinked - or, shall we say, so bound together that they have long been inseparable, and will continue to be so.
For this reason, the debate about energy-mix solutions must address the related industrial mix. The new configuration of energy carriers will produce different industrial complexes or pathways. If we can’t use the energy complex as a lever for stimulating new growth and shifting us to new industrial sectors, we will lose the advantages of this crucial investment. We do not have the luxury to squander limited resources. At this critical moment in South Africa’s history, energy choices and economic choices are converging. Navigating the few trade-offs available to us requires the sharpest of minds and the most difficult of decisions. We need to avoid the compartmentalisation of energy policy, on one hand, and economic policy, on the other - a situation fostered by our fractured approach to policy development in these two crucial areas.
For the first time, the inter-relatedness of the energy complex and the economic roadmap being crafted is starkly obvious. Yet the crafting is immersed in policy indecision and obscurations. In this environment, the pregnant potential in both areas cannot come to fruition.
The previously referenced work under SARI shows that if renewables - wind and concentrated solar power - were scaled up to supply 15% of total electricity demand by 2020 (about 17-18GW of installed capacity), emissions from the South African grid could be reduced by 39%. This would produce significant benefits for higher energy users.
Implementing renewables at this scale would address four strategic areas of concern to the South African economy: meeting our mitigation challenge announced in Copenhagen; diversifying our energy mix and meeting short-term energy security needs; reducing the threat of BCAs; and building new industries with the potential to create 40 000 permanent jobs.
Upgrading the energy mix with substantial renewables will not only attract private investments and promote localisation, but also reduce the cost of electricity over time. This scenario assumes that an increase in global demand will drive up the spot price of coal as a traded commodity, making renewables cheaper and more competitive with current coal prices. This will serve to create a positive social benefit, as it will bring more and more affordable electricity on to the grid. Further socio-economic benefits will derive from the reduction of pollution, and from removing the threats of new mining to agriculture and tourism in provinces with untapped coal deposits.
The resistance to renewables on the basis of spurious least-cost arguments is mind-boggling. Renewables have zero fuel costs, and their rapid deployment in the short term makes them far more attractive than coal and nuclear as solutions to the power crisis. A strategic opportunity stares us right in the face; but we’ll miss it if we always take a least-cost approach.
Concluding remarks
The cost issue always seems to settle on comparing renewables with coal. But we miss the strategic point when we merely compare sum A with sum B. Large-scale, cost-effective base-load capacity will take a long time to come on board in South Africa, but in the interim, we will face another power crisis.
After the last power crisis in 2007-2008, NERSA estimated the effective loss of power through load shedding at about R75/kwh, or R50 billion. This is the penalty for not having initiated new build programmes that should have been implemented ten years ago. So solving the interim power loss problem effectively is an insurance and risk-hedging cost we will have to incur. The premium will not be as high as the R75/kwh we incurred during the power crisis, and which within a few weeks ran into billions of Rands. The cost of avoiding such catastrophes is probably no more than 50-60 cents higher than the avoided cost of coal - except that the cost of new coal is actually comparable to that of good wind capacity. If we don’t like the wind developers, we should burn more diesel at R2-R3/kwh to fill the gap during power shortages. The social and economic impact of more load shedding will exact a severe toll on South Africa’s economy. It is simply unaffordable.
A low-carbon future for South Africa is inevitable. The only question is whether it comes about via wise public policy choice or a through sheer crisis, forced by circumstance. The latter route holds great peril. It will be done in a panic, probably a little too late, and the choices we make may not be the best. That’s when we’ll kick ourselves for not investing in a low-carbon future right now, because doing it later will be so much more costly.