THE SOCIOECONOMIC IMPLICATIONS OF RENEWABLE ENERGY AND LOW CARBON

TRAJECTORIES IN SOUTH AFRICA

Green and Social Workshop 12-13 March 2014

Bonn, Germany

Tara Caetano and James Thurlow

Overview •  Introduction •  Literature Review •  Transmission Channels •  Scenarios •  Results •  Concluding Remarks

Introduction •  Challenge: Pursuing low carbon policies in the context of

high levels of unemployment, inequality and poverty. •  Two main mitigation actions:

o  Renewable energy investment o  Proposed Carbon Tax

•  Is this enough?

Literature Review •  Three studies have explored the introduction of carbon taxes in the

South African context: o  Pauw (2007):

•  Static CGE model; detailed energy technologies; partial equilibrium energy model •  Small reduction in welfare

o  Devarajan et al. (2011) •  Static CGE; one energy technology; no long-term electricity plan •  Decreases welfare; more efficient than other tax instruments in curbing energy use and

emissions o  Alton et al. (2012)

•  Dynamic CGE; energy price response; capture L and K market rigidities; tax recycling •  A CT of R12 per ton of CO2 in 2012 and projected to rise linearly to R210 per ton in

2022; sufficient to meet the national emissions reduction target. •  Highlights the importance of both tax design and method of recycling; trade-off between

growth and welfare; ‘ring-fencing’ the electricity sector is a limitation

•  This study: o  More disaggregated electricity sector – detailed renewable energy options o  Modeled the proposed carbon tax level

Renewable Energy Scenarios

0  10  20  30  40  50  60  70  80  90  100  

2005   10   15   20   25   30  

System

 capacity  (GW)  

Gas  Renewables  Hydro  Nuclear  Coal  

Base  Case  (BAU)  Cost:  R0.79  trillion  [US$108  bil.]  

0  10  20  30  40  50  60  70  80  90  100  

2005   10   15   20   25   30  

Policy-­‐Adjusted  Cost:  +-­‐R1.07  trillion  [US$147  bil.]  Emissions:  -­‐19%  of  BAU  by  2025  

0  10  20  30  40  50  60  70  80  90  100  

2005   10   15   20   25   30  

Emissions  3  Cost:  R1.25  trillion  [US$171  bil.]  Emissions:  -­‐42%  of  BAU  by  2030  

RE-IPPPP

R-

R500,00

R1 000,00

R1 500,00

R2 000,00

R2 500,00

R3 000,00

Bid 1 Bid 2 Bid 3

Price (Average Rand per MWh) (Base April 2011)

Solar PV

Wind

Solar CSP

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

Bid 1 Bid 2 Bid 3

Local Content Requirements

Solar PV

Wind

Solar CSP

Bid  1   Bid2   Bid  3  Solar  PV   MW  Alloca3on   632   417   435  

Construc3on  Jobs   2381   2270   2119  O&M  Jobs   6117   3809   7513  

Wind   MW  Alloca3on   634   562   787  Construc3on  Jobs   1810   1787   2612  O&M  Jobs   2461   2238   8506  

CSP   MW  Alloca3on   150   50   200  Construc3on  Jobs   1883   1164   3082  O&M  Jobs   1382   1180   1730  

Carbon Tax •  Carbon tax proposed by the South African government:

Partially implemented in 2015 and increased linearly to US$12 (R120) per ton of CO2

•  Complex exemptions for energy intensive sectors:

$-

$2,00

$4,00

$6,00

$8,00

$10,00

$12,00

Proposed All sectors Electricity Petroleum Iron and steel, cement, ceramics,

chemicals and fugitive emissions from coal mining

Agriculture and Waste

US

Dol

lars

per

met

ric

tonn

e of

CO

2

Effective Carbon Tax After Exemptions

Linkages: RE Investment •  Renewable Energy Investment

o  éRE è éINV Elec è ê INV Econ •  ê Growth: less investment available for more profitable sectors •  é Direct Employment: higher level of employment compared to coal (high-

skilled) •  ê Indirect Employment: profitable sectors also have é unskilled labour

shares; è negative impact on income distribution

o  é RE Cost of Elec generation (é Inv = same GWh) éPrice Elec è

•  é Price Electricity è ê Demand (dependent on the assumptions made about the ability to respond to energy price changes) è ê Employment

èNegative impact on income distribution

Linkages: Carbon Tax •  Assumption: Carbon Tax introduced with a uniform

reduction in indirect taxes o  Government revenue remains the same o  Relative price increase for energy intensive goods

•  é Price of energy intensive goods è êDemand è éCompetitiveness of less energy intensive goods èChance for Growth

•  Some energy intensive activities also employ a large

share of unskilled labour: Employment Impacts è Decreased Employment è Decrease in welfare

Results •  Based on two simulations:

o  One with no carbon tax o  One with a carbon tax of a the level value, R120/ton

•  Carbon tax levied on all fossil fuels burned in SA •  Imposed in 2015 and increased linearly to R120 per ton

in 2019 •  Uniform reduction in indirect sales tax

Results

3,90% 3,90%

3,82%

3,79%

3,67%

3,64%

3,50%

3,55%

3,60%

3,65%

3,70%

3,75%

3,80%

3,85%

3,90%

3,95% Av

erag

e Ann

ual G

DP

Gro

wth

(%)

GDP Growth

GDP Growth

Results

0,00%

29,26%

11,00%

39,66%

18,00%

43,62%

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

30,00%

35,00%

40,00%

45,00%

50,00%

Dev

iatio

n fr

om th

e ba

selin

e in

203

0

Emissions Reduction

Emissions Reduction

Results

1,32%

1,31% 1,31%

1,30%

1,29%

1,28%

1,26%

1,27%

1,28%

1,29%

1,30%

1,31%

1,32%

1,33%

Base Base CT Policy-Adjusted Policy-Adjusted CT

Emissions 3 Emissions 3 CT

Aver

age

Incr

ease

in E

mpl

oym

ent

Employment

Employment

Results 1,10%

1,06% 1,01%

0,97%

0,85% 0,81%

0,00%

0,20%

0,40%

0,60%

0,80%

1,00%

1,20%

Income Distribution

Relative Income Growth of Poor Households

Concluding Remarks •  Carbon tax is an effective mechanism for emissions

reduction •  Level is too low to get us to our Copenhagen pledge •  Won’t have a ‘devastating’ impact on the economy •  Direct employment impacts of renewable energy

investment likely to be drowned out by indirect impacts on employment – weakened by a decrease in cost

•  Choice of recycling mechanism is critical to ensure synergies between green and social

Thank you!

Comments and questions are welcome. tara.caetano@giga-hamburg.de

Energy as an intermediate input

Labor  Capital  

Inputs  

Sector  output  

LEO

Inputs  

Input  1  

Energy  

Input  n  

LEO

CES

Methodology •  2007 social accounting matrix (SAM)

o  55 activities and 47 commodities •  3 x agri, 44 x industry (4 x petr, 10 x elec), 8 services

o  7 factors of production •  4 labour groups (based on level of education), 1 energy and 1 non-energy

capital, 1 agricultural crop land o  14 households

•  10 deciles with the top decile divided into 5 sub-groups

•  Energy is an intermediate input o  Leontief: fixed proportions.

•  Energy-savings investment behaviour:

𝑖𝑜↓𝑖𝑗,𝑡+1 /𝑖𝑜↓𝑖𝑗𝑡  =1−(1− 𝑃↓𝑗𝑡 /𝑃↓𝑗,𝑡−1  ↑−𝜌 )∙ 𝑠↓𝑖 

Closure Rules •  Upward sloping labor supply curves for less-educated

workers; full employment for skilled labour

•  “Putty clay” capital and endogenous capital accumulation

•  Fixed current account with flexible real exchange rate

•  Savings-driven investment o  Distinguish between electricity (exogenous) and non-electricity sector investment o  Electricity investment differentiated by subsector (esp. import content and job

creation) o  Government borrows abroad to pay for investment (gradual interest and principal

repayment)

Energy-saving investment behaviour

•  Change in energy inputs per unit of output based on energy prices

•  Energy product input coefficient (ioij) falls when… o  Energy prices (pi) rise (provided there is some new investment) o  New investment share (sj) is positive (provided the price rises)

•  Governed by a response elasticity (ρ)

𝑖𝑜↓𝑖𝑗,𝑡+1 /𝑖𝑜↓𝑖𝑗𝑡  =1−(1− 𝑃↓𝑗𝑡 /𝑃↓𝑗,𝑡−1  ↑−𝜌 )∙ 𝑠↓𝑖 

REIPPP bid allocation

IRP Renewable Energy Breakdown

0

10

20

30

40

50

60

70

Baseline Policy Emissions

GW

Planned New Capacity Builds in the IRP (GW)

gas

waste

wind

CSP

PV

nuclear

coal

Committed

Economy-wide framework

Trade   Remittances  

Foreign  markets  and  countries  

Loans  

Taxes  

Public  sector  or  government  

Recurrent  spending    

Taxes  &    social  grants  

Taxes  

Public  investment   Foreign  

investment  

Savings  &  private  

investment  Productivity  

Human/physical  capital  

Product  markets  Production  

Payments  

Industry  

Agriculture  

Services  

Rural  

Urban  

Incomes  

Consumption  

Factor  markets  

Exports   Imports  

Total  supply  

Labor  Capital   Inputs  

Sector  output  

Factory  

Supplier  1   Supplier  n  

Output  1   Output  n  

Domestic  supply  

Warehouse  

Households  

Government  

Investment  

Intermediates  

Supermarket  

Traders  

Freight  transport  

Consumption  linkages  

Production  linkages  

Demand and supply linkages

CES LEO

LEO

CES

CET

CES

LES

LEO

LEO

Natural  gas  

Coal  

Electricity  

Solar  (photovoltaic)  

Solar  (thermal)  

Wind  

Waste  

Gas-­‐Eired  

Hydropower  

Gas-­‐to-­‐liquid  

Oil  reEining  

Biofuels  

Coal-­‐to-­‐liquid  

Petroleum  

Feedstock  

Crude  oil  

Final  users  Industries  Households  Government  Investment  

Coal-­‐Eired  (discard)  

Coal-­‐Eired  (low  grade)  

Nuclear  

Diesel  

Imports  

Energy sector

Partly exported

Imported

Partly imported

2007 energy balance (native units) Coal (kt)  

Crude oil (kt)  

Natural gas (TJ)  

Electricity (GWh)  

Petroleum (Ml)  

Production   247,666   128,033   247,587   25,528  Imports   1,783   19,042   45,383   10,624   4,859  Exports   66,964   13,589   4,743  Stocks   7,324  Total   175,162   19,042   173,417   244,622   25,645  Electricity   102,870   19,113  Petroleum   45,437   19,042   67,732   7,133  Industry   22,486   104,821   122,400   1,209  Transport   3,501   21,544  Agriculture   32   5,998   1,433  Commerce   3,201   864   32,705   704  Residential   1,135   53,771   754  

Differential electricity prices Rand  per  MWh  in  2005  

191

442

186 161 150

0

100

200

300

400

500

Aver

age

Plas

tic p

rodu

cts

Hou

seho

lds

Furn

iture

O

ther

che

mic

als

Clo

thin

g O

ther

serv

ices

and

pro

duce

rs

Mac

hine

ry

Fore

stry

A

gric

ultu

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Oth

er tr

ansp

ort e

quip

men

t Fi

sher

ies

Foot

wea

r Sc

ient

ific

equi

pmen

t B

ever

ages

and

toba

cco

Leat

her p

rodu

cts

Vehi

cles

Tr

ansp

ort s

ervi

ces

Food

pro

cess

ing

Met

al p

rodu

cts

Gov

ernm

ent s

ervi

ces

Oth

er m

anuf

actu

ring

Hot

els a

nd c

ater

ing

Bus

ines

s ser

vice

s G

lass

pro

duct

s Tr

ade

serv

ices

C

onst

ruct

ion

Fina

ncia

l ser

vice

s C

oal m

inin

g El

ectri

city

El

ectri

cal m

achi

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Pa

per

Com

mun

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ion

Bas

ic c

hem

ical

s Te

xtile

s N

on-m

etal

s O

ther

min

ing

Woo

d pr

oduc

ts

Rec

yclin

g N

onfe

rrou

s met

als

Rub

ber p

rodu

cts

Wat

er d

istri

butio

n Ir

on a

nd st

eel

Prin

ting

Petro

leum

refin

ing