Financing instruments need to be overhauled for a successful just transition

3rd December 2020 By: Marleny Arnoldi - Deputy Editor Online

Trade and Industrial Policy Strategies (TIPS) points out that South Africa needs to overhaul its existing financing mechanisms and instruments if communities are to truly benefit from a just energy transition to a green economy.

This emerged as a central theme during a TIPS-hosted development dialogue webinar, which was held to discuss a number of possible options to finance the just transition process in South Africa.

This dialogue was the fifth in a series of conversations focused on how to effect a just transition to a green economy in South Africa’s context of inequality, poverty and unemployment; and how to effectively address the negative impacts of climate change on vulnerable stakeholders, such as communities and workers. 

The speakers conceded that financing is currently done in a top-down approach, which ess not appropriate in the context of a just transition, TIPS noted in a statement issued after the webinar.

TIPS believed a rethink of financing and financing instruments was necessary. It stated that a shift away from coal needed to be placed at the centre of any conversation about financing the just transition.  

Ushiri Group founding director Itumeleng Leie agreed, and called for a more inclusive conversation around financial interventions linked to the just transition. He argued that “people should be at the centre of financing schemes and any transition conversation”.

He added that the finance measures proposed should also offer products that could be understood by ordinary people and that were targeted at the youth.

Climate Investment Funds senior evaluation and sustainability expert Mike Ward pointed out that the transition was happening faster than expected and the challenge for everyone was whether it was going to be a chaotic or a just process.

The challenge, he stressed, was exploring how a just transition could be achieved alongside the type of transformational change needed to address climate change.

In exploring this, Ward said a just transition framework needed to consider both procedural and distributive justice. He also explored different ways of pushing financing to be more ambitious.

Participants in the dialogue cautioned that, if key stakeholders were not conscious about what was needed to achieve a just transition, then financial institutions could take advantage and develop new just transition financial products which would not benefit the intended beneficiaries.

On this point, TIPS senior economist Gaylor Montmasson-Clair pointed out that financing was not an end in itself, but rather a means to an end; it was there to enable a just transition, not determine the agenda of the transition.

“Transition finance is different from green finance. It is financing to enable the managed phase down of carbon-intensive legacy assets,” comments Meridian Economics economist Emily Tyler.

Tyler explained that, in the South African context, a just transition finance structure could take the following form: Eskom and government commit to an accelerated coal phase down trajectory and replace that capacity with renewables; climate financiers extend and/or grant new (concessional) loan finance facilities to support this shift; remedies for nonperformance are implemented; and some concessional value accrues to a Just Transition Fund for affected communities and labour.

Tyler added that transition finance could address the serious credit risk Eskom currently faces. “It could create a vision for the power sector and beyond, hard-linking climate change mitigation and support to coal workers and communities.”

Climate change think tank E3G senior associate Jesse Burton noted that, in looking at the extensive subsidies provided over the years to the fossil fuel sector, a transition to a low-carbon, climate-resilient economy meant altering the structure of the economy and the flows of support that maintain the carbon-intensive, energy-intensive and low-labour absorbing economy that we have today.

It was ironic, she said, that while it was clear that the subsidies of the past to the coal sector were not serving the country now, those who have and are benefiting from them claim that the country cannot afford subsidies for a just transition.

TIPS will continue exploring policy options to move South Africa along the path of a just transition to a green economy in 2021 and beyond.