Socio-economic Implications of Mitigation Actions in the power sector including carbon taxes in South Africa Authors: B Merven, A Moyo, A Stone, A Dane & H Winkler Date: 5 November 2014 Presented at EconLab III, Cape Town

Background: policy questions Emissions in South Africa are mainly from the electricity generation sector ±45% of total emissions in South Africa According to the IRP Policy adjusted scenario, RE would contribute 14% to the electricity generating mix by REIPPPP was launched to help contribute to the expansion of renewable energy The South African government is planning to implement a carbon tax in 2016 It is important to align mitigation policies and measures with other national objectives. The NDP puts the reduction of poverty and inequality as top priorities The New Growth Path highlights the importance of job creation

Motivation for Linked Energy- Economy-wide Models  Need a tool that can measure the macro- and socio-economic impacts of Energy Policy  Available tools:  Detailed bottom-up energy sector models  Economy-wide models  But existing models approaches are inadequate  Economy-wide Model (CGE type): over-simplification of the energy system  Optimization Energy System Models: no/little economy and energy system feed-back  We chose the iterative linked modeling approach over full integration:  Full inter-temporal integration constrains the level of detail  Stakeholders like to see detail that they can relate to

Electricity Sector Model: SATIM-el  Inter-temporal bottom-up partial equilibrium optimisation model of South Africa’s energy sector (Energy Research Centre)  SATIM-el: South African TIMES Model - Electricity Sector  Optimisation problem  Minimize the sum of all discounted costs over the planning horizon subject to constraints and system parameters  Costs include capital costs, operating costs and taxes (e.g. CO 2 tax)  Constraints: electricity demand, resource limits, reserve margin, policy targets  System Parameters: load curves, existing stock of power plants, new power plant options, fuel price and availability  Other: discount rate, taxes, etc.  SATIM-el:  SATIM Calibrated and parameterised in line with recent Integrated Resource Planning Report (update 2013)  20 time-slices, annual periods to 2040

Economy-wide Model: e-SAGE  General equilibrium model of South African economy (SAGE, UNU-WIDER)  Recursive dynamic country-level economy-wide model  eSAGE: detailed electricity sector  Comprehensive representation  62 industries  49 products  9 factors of production  14 representative households  Energy treated as an intermediate input (Leontief)  Simplified energy-saving investment behaviour, which allow sectors of production to reduce energy intensity in response to increasing energy prices constrained by the rate of investment in the sector  Upward sloping labor supply curves for less-educated workers and full employment for skilled labour  “Putty clay” capital and endogenous capital accumulation  Fixed current account with flexible real exchange rate  Savings-driven investment

e-SAGE-SATIM-el Iteration Process e-SAGE SATIM-el Electricity demand Fuel prices Electricity production mix by technology/fuel Electricity price Power plant construction expenditure schedule SAGE SATIM 2007 SAGE SATIM SAGE Iterative coupled runs CommittedForecast SATIM TC TT (IRP) Emulating the Planning (IRP) process

Convergence

NT CO 2 tax and RE Scenarios and assumptions Reference Scenario Power sector without any mitigations actions or emissions constraints A National Treasury (NT) CO 2 tax Scenario From $5 (R48)/ ton CO 2 in 2016, increasing to $12(R120)/ton CO 2 in 2025 Tax Recycled through reduction in sales tax Two renewable energy programme scenarios, that is, aiming to reach 20% share of centralised generation by 2030 and 30% in 2040 (RE Prog 1) 30% share of centralised generation by 2030 and 40% in 2040 (RE Prog 2) In the ‘optimistic’ scenario (RE Opt) projected investment cost reductions for renewable technologies are aligned to the IRP 2010 (and the IRP update). In the ‘conservative’ scenario, there are halved.

Results: NT CO 2 tax and RE Scenarios CO 2 emissions from power sector with and without CGE Link CGE-linked scenarios show slight demand response

Impact on economic growth by sector Results: NT CO 2 tax and RE Scenarios All the policy scenarios would result in slight GDP loss in 2040, relative to the reference case Impact is more severe with RE program 2 mainly because of the higher electricity price and higher capital intensity Mining and metals sectors are the most negatively affected However, in the RE scenarios, the electricity sector grows quite significantly 2010 share of GDP Reference Scenario Change in 2040 GDP relative to Reference (%) average annual growth (%) NT CO 2 tax RE Program 1Program 2 Total GDP 3,08-0,72-1,46-1,85 Agriculture3,113,280,25-0,68-0,35 Industry30,773,07-1,19-0,98-1,12 Mining8,833,61-1,48-4,82-6,58 Manufacturing16,832,76-1,16-1,84-2,57 Other industry5,113,01-0,659,7914,98 Electricity1,812,860,1236,0754,52 Water distribution 0,593,04-1,73-2,73-3,85 Construction2,73,09-0,86-2,75-3,9 Services66,123,07-0,56-1,72-2,27

Total number of new jobs created, (1000) Difference in new jobs created by 2040 (%) New jobs created in Reference (2010) NT CO 2 tax RE Program 1 RE Program 2 Total Labour ,6-2,47-3,87 Unskilled labour * ,47-4,24-6,65 Primary ,49-4,02-6,22 Middle ,45-4,35-6,86 * Skilled labour growth specified exogenously as stated in assumptions in the earlier section, Results: NT CO 2 tax and RE Scenarios All the policy scenarios result in slight drop in employment in 2040, relative to the reference case for the less educated category (more educated is exogenous)

Results: NT CO 2 tax and RE Scenarios Drop in per capita consumption in 2040 (%), relative to the reference Drop in consumption due to slower growth

CO 2 emissions from power sector with CGE Link Results: Carbon Tax Sensitivity Analysis Tipping point for CO 2 emissions somewhere between $10 and $20 tax levels.

Change in 2040 GDP relative to Reference (%) Results: Carbon Tax Sensitivity Analysis Includes Power Sector Mining taking greatest hit

Results: Carbon Tax Sensitivity analysis Drop in per capita consumption in 2040 (%), relative to the Reference Scenario Reduction in new jobs created by 2040 (%), relative to the Reference Scenario

Future work includes considering redistributed RE. Could also consider sensitivity to higher coal prices We will also be integrating the other sectors to the CGE to allow for fuel switching Consider other recycling options for tax revenues Next Steps

Thank you This document is an output from a project funded by the UK Department for International Development (DFID) and the Netherlands Directorate-General for International Cooperation(DGIS) for the benefit of developing countries. However, the views expressed and information contained in it are not necessarily those of or endorsed by DFID or DGIS, who can accept no responsibility for such views or information or for any reliance placed on them.