TIPS Annual Forum 2008 “The Sustainability of South Africa’s Energy Resources: The Impact of International Trade” … Marcel Kohler

Research Funded By: ERSA/DME Research Motivation: SA’s competitiveness is largely dependent on country’s abundant natural resources.SA’s competitiveness is largely dependent on country’s abundant natural resources. Mining and resource based industries have benefited from SA’s policy of subsidising industrial energy prices.Mining and resource based industries have benefited from SA’s policy of subsidising industrial energy prices. Reason to believe that SA’s trade has a significant impact on the country’s energy resources.Reason to believe that SA’s trade has a significant impact on the country’s energy resources.

Research Funded By: ERSA/DME Four Questions:  How do trade patterns effect energy use: what does this imply for SA?  How do SA’s energy prices impact on the competitiveness of industrial goods?  What is the value of energy services embodied in SA’s exports and imports? Does this impact on the country’s energy resources?  What factors are responsible for the changes in the energy intensity of SA exports and imports?

Research Funded By: ERSA/DME Question 1: How do trade patterns effect energy use? Trade theory suggests TWO alternatives: Factor Endowments Hypothesis (FEH)... energy use is influenced by competitiveness based on resource endowments Factor Endowments Hypothesis (FEH)... energy use is influenced by competitiveness based on resource endowments Pollution Havens Hypothesis (PHH)... energy use is influenced by competitiveness based on government policy (“intervention”) Pollution Havens Hypothesis (PHH)... energy use is influenced by competitiveness based on government policy (“intervention”)

Research Funded By: ERSA/DME Energy use effects? FEH: DCs rich in capital (energy) and hence export energy-intensive products DCs rich in capital (energy) and hence export energy-intensive products LDCs rich in labour and hence import energy-intensive products LDCs rich in labour and hence import energy-intensive productsPHH: DCs have strict environmental standards (eg: energy taxes) and hence import (dirty) energy-intensive products DCs have strict environmental standards (eg: energy taxes) and hence import (dirty) energy-intensive products LDCs have lax environmental standards (eg: energy subsidies) and hence export (dirty) energy-intensive products LDCs have lax environmental standards (eg: energy subsidies) and hence export (dirty) energy-intensive products

Research Funded By: ERSA/DME Implications for South Africa? FEH: SAs trade should SAVE energy resources?? SAs trade should SAVE energy resources?? ie: as a LDC, should: export labour-intensive products & import capital (& energy) –intensive products PHH: SAs trade should increase USE of energy resources?? SAs trade should increase USE of energy resources?? ie:as a LDC, should: export dirty (energy-intensive) products & import clean (energy-saving) products RESULT?...depends on source of SA’s competitiveness. an empirical issue!!

Research Funded By: ERSA/DME Question 2: How do SA’s industrial energy prices compare Internationally ? Industrial Energy Prices in South Africa and trading partners (in 2000 in US$ using PPPs) Source: IEA(2006) these are very cheap in comparison!!

Research Funded By: ERSA/DME SA Local Coal Prices: “Real prices remained very stable particularly in the case of bituminous coal” Source: DME (2005) & Xavier Prevost, DME

Research Funded By: ERSA/DME SA Electricity Prices: “ SA electricity prices amongst cheapest in the world ” Source: DME (2005) Real prices rel. unchanged since 1995 ! Nominal prices remained artificially low !

Research Funded By: ERSA/DME Energy Intensity Comparisons SA is energy intensive by international standards (IEA): SA is energy intensive by international standards (IEA):

Research Funded By: ERSA/DME SA’s rising Industrial Energy Prices Source: Author’s own calculations weighted coal, oil, gas & electicity ppi rel to manufacturing and mining ppi

Research Funded By: ERSA/DME Implications for SA’s competitiveness? SA’s energy policies have lowered the cost of industrial energy inputs substantially in particular coal and electicity costs (IEA, 2006) SA’s energy policies have lowered the cost of industrial energy inputs substantially in particular coal and electicity costs (IEA, 2006) Coal is responsible for 75% of SA’s industrial energy requirements (DME, 2006) Coal is responsible for 75% of SA’s industrial energy requirements (DME, 2006) Globally viewed, SA industrial activities are uniquely dependent on electicity derived from coal (Fine, 1996) Globally viewed, SA industrial activities are uniquely dependent on electicity derived from coal (Fine, 1996) This includes: mining & minerals processing and manufacturing activities closely related to MEC such as iron&steel, base metals and chemicals (Fine, 1996) This includes: mining & minerals processing and manufacturing activities closely related to MEC such as iron&steel, base metals and chemicals (Fine, 1996) SA’s rising energy prices should act as a catalyst for implementing energy-saving technologies. SA’s rising energy prices should act as a catalyst for implementing energy-saving technologies.

Research Funded By: ERSA/DME Question 3: How much energy is embodied in SA’s exports and imports? Methodology:  Study adopts a “structural input-output” approach in order to quantify the energy embodied in SA’s trade in industrial goods  Study then applies “shift-share” analysis to energy use patterns in SA traded industrial goods, to decompose the factors driving changes?....ie, are these structural, technological or input-output factors?

Research Funded By: ERSA/DME Methodology: “The Mathematics”  The decomposition relies on the standard Leontief I/O identity:  Given certain assumptions:

Research Funded By: ERSA/DME  Industy output: X = A.X + F or X = (1-A) -1.F, where:  X is vector of outputs of industry  A is matrix of intermediate purchases of industry  F is vector of industry final demands, allocated to households, buss inv, government & foreign trade  Energy use by industry: E = C.X, where:  C is a vector of energy intensities of industry  Inter-industry energy use is thus: E = C(1-A) -1.F “the value of output = value of all inputs plus value added”

Research Funded By: ERSA/DME Energy Content of SA Industrial Trade: Source: Author’s own calculations

Research Funded By: ERSA/DME Source: Author’s own calculations

Research Funded By: ERSA/DME Embodied Energy per Rands of SA Industrial Goods:  The energy intensity of exports exceeds that of imports Source: Author’s own calculations

Research Funded By: ERSA/DME Embodied Energy per Rands of SA Industrial Goods: Source: Author’s own calculations  The energy embodied in traded goods exceeds that of domestically consumed goods  The energy intensity of exports and imports falls by approx. 2c/Rand over the period

Research Funded By: ERSA/DME Energy Intensities of SA Industries: Source: Author’s own calculations  Non-ferrous metals and iron & steel are by far the most energy-intensive SA industrial sectors

Research Funded By: ERSA/DME Industrial shares of Embodied Energy Exported (%): Industry Share of Exported Embodied Energy [(e x t /e x ) x 100] Non-ferrous metals Iron & steel Metals products Mining Non metals Chemicals Electrical machinery All other manufactures  Exports of iron & steel industry are responsible for a significant increase in demand on SA’s energy resources.  Exports of mining industries are responsible for a significant decrease in demand on SA’s energy resources. Source: Author’s own calculations

Research Funded By: ERSA/DME Industrial shares of Embodied Energy Imported (%): Industry Share of Imported Embodied Energy [(e x t /e x ) x 100] Non-ferrous metals Iron & steel Metals products Mining Non metals Chemicals Electrical machinery All other manufactures  Imports of chemicals sector and ‘other manufacturing’ sectors help save a significant proportion of SA’s energy resources through the implicit importation of embodied energy services from abroad. Source: Author’s own calculations

Research Funded By: ERSA/DME  Changes in industry energy use are decomposed as follows:  E =  [C(1-A) -1.F] =  (C.L.F) =  (C.L.F) =  C(L.F) + C(  L)F + (C.L)  F + interaction terms =  C(L.F) + C(  L)F + (C.L)  F + interaction terms where: where:  C = change in energy intensity (“technology effect”)   L = change in inter-industry structure (“i-o effect”)   F = change in final demands (“composition effect”) Question 4: What factors are responsible for the changes in the energy intensity of SA exports and imports?

Research Funded By: ERSA/DME  The decomposition is then applied to trade components:  E =  [C.L(X)]...equation (1) and  E =  [C.L(X)]...equation (1) and  E =  [C.L(M)]...equation (2) where:  X or M is a vector of industry exports or imports and replaces the final demand.

Research Funded By: ERSA/DME Decomposition Results of Embodied Energy Intensity of South African Industry Trade Components:  the technology or intensity effect is the main driver of the approx. 2c decrease in energy expenditure per Rands worth of industrial exports and imports. A change in the composition of imports is resp for a 0.5c/Rand decrease in energy expenditure Source: Author’s own calculations

Research Funded By: ERSA/DME Findings of Research:  SA industrial exports are on average more energy intensive than her imports for the period  SA is adding significantly to her domestic energy requirements by being a net exporter of energy services embodied in industrial traded goods.  Energy resources along with other natural resources are a significant source of SA‘s industrial competitiveness.  In the decomposition of changes in energy intensity in SA‘s traded goods: the technology or intensity effect is the main driver of the decreases in energy intensity recorded.

Research Funded By: ERSA/DME Policy Suggestions?  SA can decrease demand on her domestic energy resources by: –exporting industrial goods that are less energy-intensive (e.g.: higher value added goods which are less materials intensive) –importing industrial goods that are more energy-intensive  This will require a significant change in the composition of the goods traded  An increase in the price of SA’s energy inputs can result in signif. investments in energy-saving technologies which will help conserve her domestic energy resources.

Research Funded By: ERSA/DME Thank You