Eskom is urging South Africa to adopt a “cap-and-trade” system and create a market for companies to buy or trade carbon allowances.
Such a move would be a major reform that creates a financial incentive to innovate and lower emissions reduction costs.
Eskom’s proposal is a softer alternative to a carbon tax, which is a direct tax on the emission of greenhouse gases. Cap-and-trade, meanwhile, is a market-based system for reducing greenhouse gas emissions.
The entity is grappling with the most effective way of achieving meaningful sulphur dioxide (SO₂) emission reductions at its eight coal-fired power stations, which have been granted exemptions to bypass compliance with air pollution laws. It warns that emissions charges will lead to astronomical increases in energy prices for consumers.
Under the cap-and-trade system, the government sets an emissions cap and issues a quantity of emission allowances consistent with that cap.
Companies can sell excess emissions credits, providing an incentive to reduce pollution and potentially profit from cleaner technology investments.
The department of forestry, fisheries & the environment last year caused an uproar in environmental rights circles when it granted Eskom an exemption under the minimum emission standards (MES) for Lethabo, Kendal, Tutuka, Matla, Duvha, Majuba, Matimba and Medupi — under strict conditions.
One of the conditions was the requirement to reduce the coal burnt at each power station, thereby reducing emissions, specifically the amount of sulphur dioxide emitted into the atmosphere. Eskom has now completed the process, subject to a public consultation process.
According to an Eskom report, it opposes the sulphur dioxide emission charge route, arguing it will increase energy costs with only a minimal effect on the broader goal of reducing total emissions.
The report covers Eskom’s emission prioritisation strategy and has been put out for public comment before Eskom submits its final report to the department. The public has until the end of the month to comment on it.
Of the several emissions charge options available to Eskom, the most effective at reducing emissions will over the next five years come at a cost of R46bn, which is likely to be passed on to consumers.
“A substantial reduction in SO₂ emissions requires the implementation of a significantly higher emission charge. For example, applying a charge of R6,575 per tonne would result in a 4.2% decrease in SO₂ emissions, lowering them from 1,605kt [kilotonnes] to 1,538kt in FY2027,” the report reads.
“However, this more pronounced environmental benefit comes at a considerable economic cost, as the annual average system marginal price (SMP) rises sharply by 31%, from R188/MWh to R246/MWh. This substantial increase in the energy market price highlights the trade-off between achieving meaningful emissions reductions and maintaining affordable electricity prices.”
The power utility will now make a case to the ministry of forestry, fisheries & the environment to pursue the cap-and-trade system, which allows the government to cap the maximum emissions level and create permits, or allowances, for each unit of emissions allowed under the cap.
“The cap-and-trade system has produced positive results in emission reduction in the US as well as the EU. The cap-and-trade becomes a secondary market governed by an established body, or it can be incorporated into existing market structures.
“It will provide much greater flexibility to achieve any given emission standard, since generators that face high marginal abatement costs may purchase SO₂ permits from other generators that face lower marginal abatement costs.
“The revenue generated through the cap-and-trade mechanism is allocated to programmes and initiatives designed to achieve SO₂ emission reductions.”
The cap-and-trade system has produced positive results in emission reduction in the US as well as the EU. The cap-and-trade becomes a secondary market governed by an established body, or it can be incorporated into existing market structures.
— Eskom
South Africa’s carbon intensity remains high, but its domestic carbon price is low compared with its major trading partners in advanced economies. This exposes the country’s exports to climate-related trade restrictions such as the EU’s carbon border adjustment mechanism (EU CBAM)
Eskom has proposed four phases to implement the cap-and-trade system, should the government agree to its recommendation.
The first phase, according to Eskom, could comprise a pilot phase designed to prepare entities and stakeholders, develop the rules and regulations to manage the cap-and-trade market, and set a national emission cap based on historical emission data.
The first phase would also include free allocation of emission allowances to the generators based on historical emission data and establish or set a penalty for non-compliance with the emissions allowances.
Eskom has proposed that the second phase include a single national emission cap with a declining trend from the first phase and start auctioning allowances to generators.
The third and fourth phases will include other economic sectors that contribute to SO₂ emissions and implement tighter emissions caps.
“At this stage, no recommendations are made in terms of the starting cap allowance. This will be dictated by the implementation of the cap-and-trade system and starting period.
“Actual SO₂ emissions will have to be used as the basis for setting the starting point of the cap allowance and establishing an acceptable declining trend over time in a way that does not negatively impact the national electricity supply or any CO₂ constraints.”
The department is facing a legal challenge from environmental justice organisations that have dragged it to court to challenge the exemptions granted to Eskom, allowing it to bypass compliance with air pollution laws at the eight power stations.
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