“Transition risk” is the risk that the value of assets and incomes are less than expected because of climate policy and market transformations. A global low-carbon transition could reduce the demand and price for assets, including carbon-intensive fossil fuels such as coal and oil. Infrastructure that supports higher carbon activities built around fossil fuel industries may have to be replaced or retired early. Companies, investors, and workers could be hurt by lower prices and reduced demand for certain products. Governments may face reduced revenues, for example, from lower tax receipts, while their expenditure increases for financial assistance to industries and workers in transition.
Trade-offs associated with a low-carbon transition are particularly acute in South Africa. Its exposure to coal mining as a source of export revenues, as a fuel for domestic power generation, and as a key employer in certain provinces presents significant transition risk that is mirrored in many other resource exporting countries. Conversely, South Africa could gain via lower oil prices, new markets for minerals used in low-carbon technologies (e.g. platinum and manganese), or through the creation of new jobs in industries that are more resilient to, or would even benefit in, a low carbon world.
This report examines the transition risks to the economy of South Africa—and its government, municipalities, companies, and financial institutions—from a global economic transition to a low-carbon economy. The analysis in the report not only quantifies the downside risk of South Africa’s transition, but it also forecasts some of the potential benefits of a transition such as the impact of a lower global oil price that is passed through to consumers. It also outlines the measures that South Africa and its partners can take to reduce climate transition risk, avoid potential economy-damaging risk concentrations, and, in so doing, reduce the costs associated with the decarbonisation of the South African economy. More generally, this analysis can serve as a template with which to identify and evaluate the financial risk of a low-carbon transition for a variety of countries. Well managed and less concentrated risk can facilitate the transition and lower its cost in countries across the world.