The Wealth of Nations: Coal versus Carbon in the Vhembe
South Africa’s real natural assets can be worth more than its petroleum resources:
The case of the Vhembe’s natural carbon sink and the Greater Soutpansberg Coalfield
Lauren Liebenberg, Living Limpopo Blog Post, 8 May 2024
Lanner Gorge, Levuvhu River, Makuleke Wetlands
Not everyone believes that climate change ‘is the single gravest threat’ to our future as the United Nations Framework Convention on Climate Change (UNFCC) proclaims. Yet even among those who doubt the prophesied apocalypse, a sense of dread pervades, not only of the consequences of climate derangement, but of the violent destruction of the natural world that is even more visible to the naked eye and harder to deny. We bear witness, it seems, to nature’s death by a thousand cuts.
The climate and nature crises are indeed closely bound, but so too are the solutions we are just beginning to grasp. For Sub-Saharan Africa, mostly poor, mostly arid, intensely vulnerable to the impacts of a temperature rise above 2oC, our abundant natural assets and the emerging markets for nature represent more than just an important mechanism for combatting rising greenhouse gas emissions, they represent an unrivalled opportunity to accelerate growth and economic development. South Africa’s policymakers need to radically re-think their moribund ideas about natural resources if we are to seize this chance to leave the 20th century’s failing economic models behind. The remote northern Vhembe District of Limpopo Province provides a vivid illustration of the intersection we have reached.
Government is fixated on the coal resource ‘endowment’[1] of the impoverished Vhembe region and is doggedly pursuing an industrialisation plan that harks back to the 19th C to unlock the estimated 10 billion tons of coal contained in the Greater Soutpansberg Coalfield before the last gasp of the fossil fuel era is over. A crude steel manufacturing megaproject is planned as the anchor of the Musina-Makhado Special Economic Zone (MMSEZ), a sprawling 60Km2 Chinese-South African state-backed industrial zone being developed in the coalfield. The smelter is meant to support and enable the coalfield’s exploitation by creating a purpose-built buyer for the coal on the edge of the coalpits – coal is a primary raw material in steel-making[2] – and by funding the rail links that will enable the export of the raw coal along with the steel produced, both critical to the coalfield’s viability according to the reserves statements of the coal mining companies involved.
Despite a herculean effort by its state-backers and large sums of taxpayer money expended – R600million is presently being doled out in the tender fest for ‘site establishment’ – neither the industrial zone nor the planned expansion of coal mining has made any real progress over the last decade. Opponents of a latter-day ISCOR are blamed for the project’s stagnation – it is presently the subject of three High Court judicial review applications brought by several civil society organisations, including Living Limpopo, an advocacy group promoting a nature-based alternative development path in the Vhembe and Wits University’s CALS represented by public interest law firm, All Rise – however, in reality, it is the poor economic merits of both the smelter and the coalfield’s development that are conspiring against them.
The capital costs to build the so-called Musina Dam, a Cahora Basa for the Limpopo River, and the dedicated 3,300MW power plant needed to make 5 million tons a year of the metal dubbed ‘congealed energy’ are eyewatering. Building the dedicated rail, water and power infrastructure is pegged at R96 billion in the Master Plan for the project. And the market case for doubling South Africa's annual steel output is weak. Beyond creating a local baseload off-taker for the coal, it makes little sense for South Africa to build a heavily subsidised industrial tax-haven for foreigners to cannibalise[i] the domestic steel industry that’s already plagued with chronic over-capacity and job-shedding. If you squint hard enough, the rationale for the mega-project looks marginally better from the Chinese perspective to mop up surplus capacity in its civils industry, but it remains doubtful whether the SEZ will ever deliver the ‘connected sequence’ of coal-guzzling furnaces from the coal mines to the railway line to drive the strip-mining of the Vhembe.
And so the coal remains buried beneath the Baobabs. Since the closure of Exxaro’s Tshikondeni Mine near Pafuri in 2014, the Department of Mineral Resources and Energy (DMRE) has tried to support the revival of the coalfield’s exploitation. It has granted mining rights to MC Mining (formerly Coal of Africa) to develop five new open-cast coal mines on an area of 110,000 hectares. Yet the ailing junior mining company has been unable to raise the capital to even break ground on its Makhado Colliery, located adjacent to the MMSEZ smelter site, which it bills as its ‘fully-licensed and shovel-ready flagship steelmaking hard coking coal project’ (although half of its reserves are low-grade thermal coal).
In the meanwhile, the world has moved on. ‘Peak coal’ is already behind us, according to the conservative International Energy Agency, and demand is now in terminal decline. At the same time, among the seismic shifts happening in our economic system is that for the first time in the history of consumption-driven, extractivist capitalism, all of nature is no longer valued only as a resource to convert to commodities until exhausted:
One of the biggest failures of our economic system is that prices don’t tell the truth. The true costs of production frequently aren’t borne by producers and passed on to consumers in prices – although they are inevitably borne. ‘Externalised costs’, including the costs of pollution and resource depletion, get dumped onto wider society and future generations. The climate crisis is driving a reckoning of this free plunder of the commons. Newly-introduced carbon taxes, including in South Africa under the Carbon Tax Act, and tradable carbon permits such as in the EU’s Emissions Trading System, force polluters to pay to dump their carbon pollution into the atmosphere – to pay for what remains of its finite capacity to absorb greenhouse gasses before destabilising climate change ensues. These fiscal penalties drive the internalisation of hitherto externalised costs – a form of reparation for loss and damages caused – which incentivise investment in clean energy by emitters keen to avoid paying, accelerating the transition to renewable energy.
Depending on the market and its rules, which are painfully splintered right now, one of the ways that carbon emitters can meet part of their tax liabilities or their voluntary net-zero commitments (yes, that’s right, there is a voluntary market running ahead of regulatory compliance obligations being imposed by laggard governments), is by paying to protect and restore natural carbon sinks – to enhance the carbon capture and storage capacity of forests, mangrove swamps, savannas and other ecosystems. The tradeable carbon credit, representing 1 ton of carbon dioxide equivalent (CO2e) reduced or removed from the atmosphere from a verified and validated carbon reduction project, has overnight turned nature into an asset worth investing in for the returns it can generate – converting intact functioning ecosystems into natural infrastructure that can earn revenue from the ecosystem services they provide, including carbon draw-down in biomass and soil.
Yet these market mechanisms and ‘Nature-Based Solutions’ to the climate crisis are both highly controversial within the climate lobby. Pilloried as ‘permits to pollute’, extremists see offsetting even a fraction of unabated emissions by paying to slow the remorseless rate of deforestation or for reforestation as a fraud. Many also rail against ‘privatising the air’ and ‘putting a price on nature’ to save it, when of course, what’s truly repugnant is a system where Glencore has a market capitalisation of US$59 billion, while the earth’s atmosphere is worth zero, where an oil spill in the Arctic has only a positive effect on GDP, where a tree only has monetary value felled for its timber, or the coal buried beneath it as the case may be. Carbon pricing and carbon markets, as well as the even newer biodiversity credit markets, attach hard, realisable economic value to the trees rooted in the soil. That’s revolutionary.
Fortunately, for wildlife and communities on the frontlines of the conservation of our shrinking wildlife habitats, there is continued recognition under the UNFCC’s Paris Agreement and the UN’s Global Biodiversity Framework that arresting and reversing the collapse of natural systems is critical to regulating the carbon cycle and the climate, and that carbon and nature markets have a vital role to play in channelling financial flows to fund both nature’s restoration and the energy transition. The carbon market remains inhibited by tax nets that are still far too narrow, shallow and riddled with holes (the World Bank estimates that only about 23% of global GHG emissions are priced at present, up from about 5% a decade ago), and voluntary market buyers are spooked by the sustained anti-carbon credit market campaign in the media (an overblown backlash against shameless corporate greenwashing especially prevalent in the early days of the market that persists in the press despite mounting evidence that these markets do work). Nonetheless, growth has still been robust. Today the global compliance carbon market is worth about US$850 billion a year, while tax revenues collected by governments amount to some US$100 billion. Financial flows into carbon markets are accelerating, according to market analysts MSCI, and growth forecasts are bullish as carbon pricing and markets proliferate across the globe.
Back to Limpopo’s Vhembe District. As it happens, the Vhembe doesn’t only boast the stubbornly unprofitable Greater Soutpansberg Coalfield, it is also a designated UNESCO Biosphere Reserve in recognition of its outstanding biodiversity and its potential to pioneer sustainable development. Analysis by Living Limpopo indicates that the gross value in biodiversity and carbon credits of the biodiversity reservoir and carbon draw-dawn capacity that can be yielded by the creation of the Great Vhembe Conservation Area, a joint initiative of the Vhembe Biosphere Reserve and Living Limpopo based on the Limpopo Protected Areas Expansion Strategy, exceeds the gross value of the coal after discounting for confidence levels of exploration assets – and profit margins for conservation projects tend to be vastly better than for capital-intensive mining. As an added bonus of this competing land use scenario, no rail link needs to be built to any port, no water resources will be depleted, no severe and irreversible environmental degradation will be caused, avoiding any damage to the agricultural and tourism sectors, and nor will human health, food and water security be threatened. Instead, the expansion of the protected areas network, funded with credit sales revenue split with communities participating in the Biodiversity Stewardship Programme, will provide the feedstock for the consumptive biodiversity economy which Minister Barabara Creecy so enthusiastically champions of late, and will stimulate the growth of tourism – which is forty times more efficient at generating job opportunities compared to investment in mining, according to the Limpopo provincial government’s economic analysis for the Limpopo Conservation Plan. Yet every minute and every Rand spent by government on planning for Limpopo’s future is devoted to mining coal and shovelling coal into an ore smelter to make unwanted steel and emitting 33 million tons of carbon dioxide every year for 30 years[ii].
Meanwhile South Africa’s neighbours have been ramping up their exports of the continent’s vast forest and savanna biomes’ carbon sequestration capacity. Most of the front-runners in establishing bilateral trade agreements under Article 6.2 of the Paris Agreement are African. Rwanda, Malawi, Ghana, Ethiopia and Kenya have all created enabling regulatory frameworks and done deals with counterparts including Singapore, Norway, Korea, Switzerland and Sweden. The past year also saw deals signed between United Arab Emirates’ US$50 billion Blue Carbon Initiative with the governments of Liberia, Tanzania, and Zambia. The Africa Carbon Markets Initiative (ACMI), has secured US$1 billion in intentions to buy and aggregate high-integrity African carbon credits by 2030 across seven African jurisdictions. South Africa doesn’t even number in the top five African countries that account for two-thirds of the continent’s carbon credit issuances.
South Africa is at risk of failing to meet its Nationally Determined Contribution commitments under the Paris Agreement, exposing our exports to carbon leakage sanctions among other unpleasantries, and is ignoring its related UNFCC obligations to ‘protect and enhance carbon sinks and reservoirs’ which could help. At the same time, we urgently need to find funding solutions to meet our ‘30x30’ obligations under the Global Biodiversity Framework. Yet the effective carbon tax rate sits at US$1.99/t of CO2e after tax-free allowances (ESKOM is exempt) – hardly likely to drive investment in decarbonising value chains or enhancing our natural carbon sinks, and won’t be swelling the public coffers that could do with a windfall, not least to pay for climate change mitigation and adaption. Lingering policy uncertainty and schizophrenic planning trajectories are throttling the domestic and export market, and we are being left behind, scrabbling in the dirt for more coal while our biodiversity value degrades.
It’s time we wake up, dump our Apartheid-era thinking on the sources of wealth creation, and embrace the turbulent new markets for nature if we are to seize the wild opportunity of the century.
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[1] Description of the MMSEZ from MMSEZ SOC website - https://mmsez.co.za/: “The Vhembe district in the Limpopo Province is endowed with mineral resources such a[s] diamond. Coking coal with potential for beneficiation. This Special Economic Zone (SEZ) is intended to accelerate economic growth, development and job creation in Limpopo through: Promoting Industrialisation; Facilitating increased trade and investment; Supporting the development if sustainable enterprises; Ensuring Infrastructure Development”
[2] Description of the Energy-Metallurgical Zone of the MMSEZ from the EMSEZ website (the Chinese operator of the zone) - http://emsez.com/en/about.php?id=19: “The coking coal mine→coal washery→coking plant→power plant→ferroalloy plant→iron making plant→steel making plant form a connected sequence of energy and metallurgy production”
[i] The displacement argument is mooted in the Specialist Climate Impact Assessment for the Environmental Impact Assessment for the MMSEZ
[ii] To give a flavour, in the 2023 State of the Province address given by Premier Stanley Mathabatha, SEZs and the MMSEZ were mentioned 19 times, industrialisation another 6, and mining and mineral resources 14 times. Tourism was mentioned thrice. Natural capital, the biodiversity economy, biodiversity and carbon sinks, biodiversity stewardship and protected areas were mentioned zero times. The single-minded obsession with this economic loser is evident in every annual budget, spatial, economic development and infrastructure planning instrument to come out of the provincial government for the last decade. In other words, there is a major disconnect between our real economic potential in northern Limpopo and our policymakers’ grasp of where the opportunity lies. And as a result, the potential is being steadily eroded. In 2023, MC Mining managed to operationalise Vele Colliery located 5 Km from the Mapungubwe National Park’s boundary, after a decade on care and maintenance, before the mine was once again mothballed earlier this year as coal prices sunk below its breakeven levels – but not before it had inflicted more irreversible damage to the Limpopo River on whose banks it is built.