On electricity tariffs and fossil fuel subsidies

With the rising costs of fossil fuels and fossil-fuel based electricity generation, disparities in electricity tariffs and persistently high fossil-fuel subsidies are coming under the spotlight. This has important implications for South Africa's possible economic development trajectories.

From Moneyweb (see also Politicsweb with a link to the leaked dossier):

The Democratic Alliance (DA) can this morning reveal a secret 291 page Eskom dossier, which provides definitive proof, amongst other things, that Eskom has been charging vastly discounted electricity tariff rates to companies that provide little or no benefit to the South African economy. The document was leaked from high level officials in Eskom to the DA and we made use of its information yesterday to question the acting CEO in the portfolio committee on public enterprises. The chairperson of the portfolio committee tried to tell us not to use the report, but we are today releasing it in full, because we believe its contents are of manifest importance to the South African public. This report stands alongside the now notorious Olsen Report - also released publicly by the DA - in that it provides cast iron evidence of the extent of mismanagement at Eskom, the ANC government's complicity in it, and the damage that is being done to the South African economy as a consequence.

The signs were there much earlier as reported in the press (see here for example) and also on this blog in the context of potential additional carbon costs:

At an average emission rate of close to 0.9kg CO2/Kwh and a price for carbon between $20 and $40 per tCO2 start penciling in an additional cost of between 14-28 cents per Kwh ($1 = R7.5). To place this in perspective Business Day reports: Eskom is understood to have guaranteed the Coega project electricity at 14c/kWh.

Who pays the rest?

What was meant as a rhetorical question way back then is coming clearly in focus now. Of course, we South African citizens have been paying the rest, directly through our electricity bills and indirectly, with other global inhabitants, through the impacts of a changing climate.

Also this morning in my inbox was a study on worldwide fossil fuel subsidies - amounting to a whopping $500 billion annually. According to the report, South Africa subsidised electricity costs at almost $10 billion annually. It was not clear from the report what exactly went into this $10 billion, but that this is substantial is without doubt.

Cheap electricity used to be an integral part of South Africa's industrial policy. With rising electricity prices and potential carbon liabilities the costs of such a policy is becoming rapidly clearer. What the implications are and whether this creates space for new opportunities has been the focus of debate for some time now.

In this time of transition towards a new electricity regime expect more painful stories and hope for wise leadership in seeing opportunities.

Botswana, Ghana, Mauritius and South Africa...

From RePec an article highlighting the importance of governance and institutions in development success:

Development Progress in sub-Saharan Africa: Lessons from Botswana, Ghana, Mauritius and South Africa

Date:	2010
By:	Naudé, Wim
URL:	http://d.repec.org/n?u=RePEc:unu:wpaper:wp2010-07&r=afr
Botswana, Ghana, Mauritius and South Africa are sub-Saharan African countries that stand out for their development progress. Each of these countries has succeeded against the odds, against expectations. This paper synthesizes the common ingredients of these countries’ success, and derives lessons. It concludes that smallness, landlockedness, tropical location, distance from world markets, racism, colonialism and other challenges can be overcome through appropriate institutions, governance and good economic policies.
Keywords:	sub-Saharan Africa, development, success, country role models See also earlier blogposts "Unmasking Africa's seven success stories" and "Go Gabon"

A winning conclusion

Partha Dasgupta reviewed the interface between ecological economics and economic development in a new working paper "The Place of Nature in Economic Development". His conclusion wins the Sustainable Options Winning Conclusions Award for this week*:

Development policies that ignore our reliance on ecological capital are seriously harmful - they

don't pass the mildest test for equity among contemporaries, nor among people separated by

time and uncertain contingencies.

* A completely random award to all working on interesting issues spanning from Africa's development challenges to the beauty of sea horses in the Knysna lagoon. In the spirit of the Mo Ibrahim prize it may or may not be awarded.

(partial) Development Indicators

The South African government has released a third edition of the Development Indicators publication. The report does not contain a specific section on the trends in natural and environmental capital, but a few indicators did make it into the report:

- 470 000 'environmental' jobs were created in the expanded public works programme, compared to 980 000 in infrastructure and 200 000 in the social and economic spheres.

- membership of voluntary environmental organisations declined steeply from 7.9% of citizens in 1995 to 3.9% in 2006.

- International tourist arrivals increased sharply from 6.4m in 2002 to 9.6m in 2008.

- Greenhouse gas emissions per GDP is declining from 450MtCO2 eq in 1990 to 400MtCO2eq in 2007.

- Greenhouse gas emissions per capita is increasing from 9.87 tCO2eq per person in 1990 to 10.29 in 2007.

From an earlier blogpost:

The mainstream economic growth model assumes that natural capital and the environment is in abundant supply, or that a combination of technological developments and the price mechanism will take care of natural resource and environmental shocks on the economy. These are very strong assumptions to make and one that needs to evaluated in much more detail in the further discussion of these recommendations.

Clearly the dominant thinking in economic development is still that natural resources are in abundant supply and scarcity (in quality and/or quantity) will have no discernible feedback effects that may threaten the country's development path.

Water Shedding?

It was argued in an earlier post that natural resource constraints, which are generally ignored by macroeconomic planners advising South Africa's government, could have a detrimental impact on South Africa's development path. A new paper by South African economists James Blignaut and Jan van Heerden on water limits to economic development takes a stab in this direction. They do point out that increasing the price of water may help avert such a crises, but remain sceptical on the implementation of such measures:

Is Water Shedding Next?

James Blignaut and Jan van Heerden

July 22, 2009

Abstract

South Africa is in the grip of an electricity crisis marked by a euphemism known as ìload

sheddingî. The demand for electricity has grown to the point that the supply reserve margin is

often under threat, necessitating the electricity supplier to cut supply to some areas for various

periods of time, or to shed load. This is a condition previously unknown to South Africa since

the country has enjoyed electricity security from the mid-1950s. Are we, however, heading in

the same direction when considering water? Is water shedding inevitable?

We ask these questions since South Africa is a country classified has having chronic water

shortages, a condition exacerbated by climate change and the rapidly increasing demand for

water. Can we avert a water shedding crisis by being proactive? In this paper we address

this issue by applying a Computable General Equilibrium (CGE) model using an integrated

database comprising South Africaís Social Accounting Matrix (SAM) and sectoral water use

balances. We refer to AsgiSA, the governmentsíAccelerated and Shared Growth Initiative in

South Africa, and conclude that continuing business as usual will indeed lead to a situation

where water shedding will be inevitable.

Unlike electricity, however, water security is much more serious from livelihood, health and

socio-economic development perspectives since there are no substitutes for it, although its influ-

ence is not directly and immediately visible. This delayed effect can create a degree of comfort

and ill-founded complacency leading to non-action, whereas there is an urgent need for proactive measures.

See here for more on water pricing is an important policy instrument to manage water scarcity and risks.

ERE conference Cape Town

For the first time in almost a decade South Africa had its own Environmental & Resource Economics conference. 

I scribbled down a few notes:

1. Sometimes one needs to speak a hard language to reach soft targets. Speaking in terms of rands and cents can help achieve objectives of care and justice. Economics can be used for the good. It is not only a throwing of "the bones". Really.

2. The narrative to see the environment as a provider of goods and services in support of human well-being is well-entrenched. 

3. Watch those numbers! Flow values, stock values, net present values, discounted values, operational costs etc etc. Always compare apples with apples.

4. Seems like we need a fresh injection of institutional economics to support an analysis on the creation of viable institutions that can support the development of markets in ecosystems services. 

5. The transition from no markets to full PES markets rises many questions on the speed, timing and focus of market reform.  There should be some good learning somewhere in the historical development of financial markets and the transition from communism to market-economies.

6. Talking about payments for ecosystems services (PES); it is not a macro-developmental concept yet, but the signs are encouraging.  With still comparable low values to water and carbon services generated in rural areas, volumes and scale factors remain crucial for success.

7. Be cautious on how much PES at the end will help the rural poor. Do not oversell. Power traps can be deeply entrenched.

8. With increased scarcity of ecosystems good and services, investment in understanding how the "ecosystem supply factory" is working makes sense. More integrated socio-ecological systems modelling.

9. ERE operates in context. Valuation is a means to and end. Economic analysis and modelling is one input to the decision-making process. Invest in understanding where this can achieve the highest leverage.

It was a great event.

 

Air travel to Africa and climate change

The issue of carbon emissions caused by air travel is becoming an increasingly heated debate. Soon regulating airline emissions could become an integral part of the UK climate change bill.

This raises the question of what would happen in poorer countries of Africa (and elsewhere) which rely on tourism for much-needed international revenue and regard tourism as important part of their development strategy, if tourists would stop coming due to changes in air travel regulations. One helpful suggestion for tourists is given on the topic by an Africa specialist travel agency Rainbow Tours, which forms part of the Ethical Tour Operators Group in the UK:

"It is estimated that one new job is created by every eight tourists, and one job supports up to twenty people. In modern times, flying is an essential part of any trip to Africa, and if people were to stop visiting Africa because of a desire to cut down on flying, the effect on communities would be catastrophic. In many areas, tourism offers the only chance of employment and hope for the future.

Maybe a solution is to travel less and for longer. Make one longer visit, instead of two. We don’t offer long-weekends in Zanzibar, or in Cape Town. Cut out the flights you can afford to go without – to Edinburgh or Paris – and travel by train. Cut out the short-break in Barcelona, turn down the central heating and wear a jumper, but please don’t stop visiting Africa. They need you there."

However, it is clear that this issue also needs to be tackled at an international level far beyond the individual traveler´s decision-making , taking into account the relative importance of tourism for development in a tourist host region and even the much lower average carbon emission levels of the poorer host country rather than only the levels of the country of origin of the tourists.

H/T: Ron Mader - planeta.com, Green Travel Network