TIPS Annual Forum 2008 “The Sustainability of South Africa’s Energy Resources: The Impact of International Trade” … Marcel Kohler

TIPSTIPSAnnual Forum 2008Annual Forum 2008

““The Sustainability of South Africa’s Energy The Sustainability of South Africa’s Energy Resources: The Impact of International Resources: The Impact of International

Trade”Trade”

… Marcel Kohler

Research Funded By: ERSA/DME

Research Motivation:Research Motivation:

• SA’s competitiveness is largely dependent on SA’s competitiveness is largely dependent on country’s abundant natural resources.country’s abundant natural resources.

• Mining and resource based industries have Mining and resource based industries have benefited from SA’s policy of subsidising benefited from SA’s policy of subsidising industrial energy prices.industrial energy prices.

• Reason to believe that SA’s trade has a Reason to believe that SA’s trade has a significant impact on the country’s energy significant impact on the country’s energy resources.resources.


Four Questions:Four Questions:

HHow ow do do trade patterns effect energy usetrade patterns effect energy use: : what what does does this imply for Sthis imply for SAA? ?

How do SA’s How do SA’s energy prices impact on the energy prices impact on the competitiveness of competitiveness of industrial industrial goodsgoods??

What is What is the value of energy services embodied the value of energy services embodied in Sin SAA’s exports and imports’s exports and imports? Doe? Does s this this impact impact on the country’s energy resourceson the country’s energy resources??

What factors are responsible for the changes What factors are responsible for the changes in the energy intensity of in the energy intensity of SA SA exports and exports and imports? imports?


Question 1:Question 1:HHow ow do do trade patterns effect energy trade patterns effect energy

use?use?

Trade theory suggests TWO alternatives:Trade theory suggests TWO alternatives:

Factor Endowments HypothesisFactor Endowments Hypothesis (FEH)...(FEH)...energy use is influenced by energy use is influenced by competitiveness based on resource competitiveness based on resource endowmentsendowments

Pollution Havens Hypothesis Pollution Havens Hypothesis (PHH)...(PHH)...energy use is influenced by energy use is influenced by competitiveness based on government policy competitiveness based on government policy (“intervention”)(“intervention”)


Energy use effects?Energy use effects?

FEH:FEH: DCs rich in capital (energy) and hence export energy-DCs rich in capital (energy) and hence export energy-

intensive productsintensive products

LDCs rich in labour and hence import energy-intensive LDCs rich in labour and hence import energy-intensive productsproducts

PHH:PHH: DCs have strict environmental standards (eg: energy taxes) DCs have strict environmental standards (eg: energy taxes)

and hence import (dirty) energy-intensive productsand hence import (dirty) energy-intensive products

LDCs have lax environmental standards (eg: energy LDCs have lax environmental standards (eg: energy subsidies) and hence export (dirty) energy-intensive subsidies) and hence export (dirty) energy-intensive productsproducts


Implications for South Africa?Implications for South Africa?

FEH:FEH: SAs trade should SAs trade should SAVESAVE energy resources?? energy resources??

ie: as a LDC, should: ie: as a LDC, should: export export labour-intensive products & labour-intensive products & import capital import capital (& energy) –intensive products(& energy) –intensive products

PHH:PHH: SAs trade should increase SAs trade should increase USEUSE of energy resources?? of energy resources??

ie:ie: as a LDC, should: as a LDC, should: export dirty (energy-intensive) products & export dirty (energy-intensive) products & import import clean (energy-saving) productsclean (energy-saving) products

RESULT? RESULT? ...depends on ...depends on sourcesource of SA’s competitiveness. of SA’s competitiveness.an empirical issue!!


Question 2:Question 2:How do SA’s industrial energy prices How do SA’s industrial energy prices compare Internationally compare Internationally ??

Heavy Fuel Oil Natural Gas Steam Coal Electricity for industry for industry for industry for industry

Country (tons) (107 Kcal GCV) (ton) (kWh)

China n.a. n.a. 27.28 n.a.Germany 167.28 187.90 n.a. 0.045India 280.96 n.a. 24.38 0.080Japan 156.10 315.00 25.31 0.100South Africa 203.84 237.06 14.21 0.017South Korea 413.80 n.a. 82.60 0.077United Kingdom 200.10 109.30 55.50 0.058United States 168.80 171.00 34.97 0.046

Industrial Energy Prices in South Africa and trading partnersIndustrial Energy Prices in South Africa and trading partners (in 2000 in US$ using PPPs)(in 2000 in US$ using PPPs)

Source: IEA(2006)

these are very cheap in these are very cheap in comparison!!comparison!!


Coal Prices: Bituminous & AnthraciteSouth Africa

0

20

40

60

80

100

1970

1975

1980

1985

1990

1995

2000

2005

BituminousZA R/ton

0

100

200

300

400

500

600

AnthraciteZA R/ton

nom bitcoal real bitcoal (1995) nom antcoal real antcoal (1995)

SA Local Coal Prices:SA Local Coal Prices:“Real prices remained very stable particularly in the case of bituminous coal”

Source: DME (2005) & Xavier Prevost,

DME


Industrial Electricity Prices:South Africa

0

5

10

15

20

1970

1975

1980

1985

1990

1995

2000

2005

ZA c/KWh

nom elec real elec (1995)

SA Electricity Prices:SA Electricity Prices:“ SA electricity prices amongst cheapest in

the world ”

Source: DME (2005)

Real prices rel. Real prices rel. unchanged since unchanged since

1995 !1995 !

Nominal prices Nominal prices remained remained

artificially low !artificially low !


Energy Intensity ComparisonsEnergy Intensity Comparisons

SA is energy intensive by international standards SA is energy intensive by international standards (IEA):(IEA):

Selected Energy Indicators: 2004

Region TPES/Pop TPES/GDP TPES/GDP(PPP) Elec Cons/Pop(toe/ capita) (toe/000 (toe/000 (kWh/capita)

2000$) 2000$ PPP)

World 1.77 0.32 0.21 2515OECD 4.73 0.20 0.19 8204Africa 0.67 0.86 0.29 547

China 1.25 0.85 0.23 1607India 0.53 0.99 0.18 457Brazil 1.11 0.31 0.15 1.58SA 2.88 0.87 0.28 4976Thailand 1.52 0.65 0.20 1865

Source: IEA(2006)


SA’s rising Industrial Energy PricesSA’s rising Industrial Energy Prices

Source: Author’s own calculationsSource: Author’s own calculations

Industiral Energy Price Deflator Relative to Industrial Output Deflator

(2000=100)

0

25

50

75

100

125

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

weighted coal, oil, gas & electicity ppi rel to

manufacturing and mining ppi


Implications for SA’s Implications for SA’s competitiveness?competitiveness?

SA’s energy policies have lowered the cost of industrial SA’s energy policies have lowered the cost of industrial energy inputs substantially in particular coal and energy inputs substantially in particular coal and electicity costs (IEA, 2006)electicity costs (IEA, 2006)

Coal is responsible for 75% of SA’s industrial energy Coal is responsible for 75% of SA’s industrial energy requirements (DME, 2006)requirements (DME, 2006)

Globally viewed, SA industrial activities are uniquely Globally viewed, SA industrial activities are uniquely dependent on electicity derived from coal (Fine, 1996)dependent on electicity derived from coal (Fine, 1996)

This includes: mining & minerals processing and This includes: mining & minerals processing and manufacturing activities closely related to MEC such as manufacturing activities closely related to MEC such as iron&steel, base metals and chemicals (Fine, 1996)iron&steel, base metals and chemicals (Fine, 1996)

SA’s rising energy prices should act as a catalyst for SA’s rising energy prices should act as a catalyst for implementing energy-saving technologies.implementing energy-saving technologies.


Question 3:Question 3:How much energy is embodied in How much energy is embodied in SA’s exports and importsSA’s exports and imports??

Methodology:

Study adopts a “structural input-output” Study adopts a “structural input-output” approach in order to quantify the energy approach in order to quantify the energy embodied in SA’s trade in industrial goodsembodied in SA’s trade in industrial goods

Study then applies “shift-share” analysis to Study then applies “shift-share” analysis to energy use patterns in energy use patterns in SASA traded industrial traded industrial goodgoods, s, to decompose the to decompose the factors driving factors driving changes?changes? ....ie, are these ....ie, are these structural, structural, technological or input-output factors?technological or input-output factors?


Methodology: “The Mathematics”Methodology: “The Mathematics”

The decomposition relies on the standard The decomposition relies on the standard Leontief Leontief I/O identity:I/O identity:

Given certain assumptions:Given certain assumptions:


Industy output: Industy output:

X = AX = A..X + F or X + F or X = (1-A)X = (1-A)-1-1.F,.F, where: where: X is vector of outputs of industryX is vector of outputs of industry A is matrix of intermediate purchases of industryA is matrix of intermediate purchases of industry F is vector of industry final demands, allocated to F is vector of industry final demands, allocated to

households, buss inv, government & foreign tradehouseholds, buss inv, government & foreign trade

Energy use by industry:Energy use by industry:

E = CE = C..XX , where: , where: C is a vector of energy intensities of industryC is a vector of energy intensities of industry

IInter-industry energy use isnter-industry energy use is thus thus::

E = C(1-A)E = C(1-A)-1-1.F.F

““the value of the value of output = value of output = value of all inputs plus all inputs plus value added”value added”


Energy Content of SA Energy Content of SA IndustrialIndustrial Trade: 1993-2005Trade: 1993-2005

Figure 2: Embodied Energy of SA Industry Exports, Imports and Domestically Goods, 1993-2005

0

5,000

10,000

15,000

1993 1998 2002 2005

Em

bodied E

ner

gy (m

illio

ns R20

00)

exports imports dom cons goods



Figure 3: Real Value of SA Industry Exports, Imports and Domestically Consumed Goods: 1993-2005

0100,000200,000300,000400,000500,000600,000700,000800,000900,000

1,000,0001,100,000

1993 1994 1995 1996 1997 1998 19992000 2001 2002 2003 2004 2005

Agg

rega

te M

inin

g an

d M

anuf

actu

ring

Goo

ds (m

illio

ns R

2000

)




Embodied Energy per Rands of Embodied Energy per Rands of SA SA Industrial Goods:Industrial Goods:

The energy intensity of exports exceeds that of importsThe energy intensity of exports exceeds that of imports

Figure 4: Embodied Energy Intensity of SA Industry Exports, Imports and Domestically Consumed Goods, 1993-2005

0.000.01

0.020.030.04

0.050.060.07

0.080.09

1993 1998 2002 2005

Rea

l Ran

ds (2

000)




Embodied Energy per Rands of Embodied Energy per Rands of SA SA IndustrialIndustrial GoodGoods:s:


The energy embodied in traded goods exceeds that of The energy embodied in traded goods exceeds that of domestically consumed goodsdomestically consumed goods

The energy intensity of exports and imports falls by The energy intensity of exports and imports falls by approx. 2c/Rand over the period 1993-2005 approx. 2c/Rand over the period 1993-2005


Energy Intensities of SA Energy Intensities of SA IndustriesIndustries::


Non-ferrous metals and iron & steel are by far the most Non-ferrous metals and iron & steel are by far the most energy-intensive SA industrial sectors energy-intensive SA industrial sectors


Industrial shares of Embodied Industrial shares of Embodied Energy Exported (%): 1993-2005Energy Exported (%): 1993-2005

Industry Share of Exported Embodied Energy [(ext/e

x) x

100]

1993 1998 2002 2003 2005

Non-ferrous metals 13.24 13.75 13.29 14.60 11.25

Iron & steel 21.77 24.50 29.91 27.47 34.61

Metals products 1.11 1.29 1.88 1.94 1.36

Mining 47.78 41.56 27.91 29.61 33.27

Non metals 1.10 1.05 0.57 0.55 0.69

Chemicals 7.35 9.74 16.18 15.95 10.71

Electrical machinery 0.44 0.47 0.60 0.59 0.44

All other manufactures

7.22 7.63 9.67 9.29 7.68

Exports of Exports of iron & steeliron & steel industry are responsible for a industry are responsible for a significant significant increaseincrease in demand on SA’s energy resources. in demand on SA’s energy resources.

Exports of Exports of miningmining industries are responsible for a significant industries are responsible for a significant decrease in demand on SA’s energy resources.decrease in demand on SA’s energy resources.



Industrial shares of Embodied Industrial shares of Embodied Energy Imported (%): 1993-2005Energy Imported (%): 1993-2005

Industry Share of Imported Embodied Energy [(ext/e

x) x

100]

1993 1998 2002 2003 2005

Non-ferrous metals 8.83 12.37 14.21 15.12 11.43

Iron & steel 14.89 14.36 16.53 11.26 14.81

Metals products 1.32 1.79 2.41 2.31 1.86

Mining 30.08 19.84 11.53 12.14 19.13

Non metals 2.29 2.64 1.18 1.14 1.70

Chemicals 20.50 24.00 31.34 31.51 24.16

Electrical machinery 2.75 2.59 1.94 2.40 2.03

All other manufactures

19.35 22.41 20.86 24.12 24.88

Imports of Imports of chemicalschemicals sector and sector and ‘other manufacturing’‘other manufacturing’ sectors help sectors help savesave a significant proportion of SA’s energy a significant proportion of SA’s energy resources through the implicit importation of embodied resources through the implicit importation of embodied energy services from abroad.energy services from abroad.



Changes in industry energy use are decomposedChanges in industry energy use are decomposed as followsas follows::

E E = = [[C(1-A)C(1-A)-1-1.F].F] = = (C.L.F)(C.L.F) = = C(L.F) + C(C(L.F) + C(L)F + (C.L)L)F + (C.L)F + interaction F + interaction

termsterms wherewhere:: C = change in energy intensity (“technology C = change in energy intensity (“technology

effect”)effect”) L = change in inter-industry structure (“i-o L = change in inter-industry structure (“i-o

effect”)effect”) F = change in final demands (“composition effect”)F = change in final demands (“composition effect”)

Question 4:Question 4:What factors are responsible for the changes in What factors are responsible for the changes in the energy intensity of the energy intensity of SA SA exports and exports and imports? imports?


The decomposition is then applied to The decomposition is then applied to trade components:trade components:

E = E = [[C.L(X)C.L(X)] ...equation (1) and] ...equation (1) and

E = E = [[C.L(M)C.L(M)] ...equation (2)] ...equation (2)

where:where: X or M is a vector of industry exports or imports and X or M is a vector of industry exports or imports and

replaces the final demandreplaces the final demand..


Decomposition Results of Embodied Energy Intensity of Decomposition Results of Embodied Energy Intensity of South African Industry South African Industry Trade Components: 1993-2005Trade Components: 1993-2005

EXPORTS

Energy Intensity Input-Output Composition-0.0250

-0.0200

-0.0150

-0.0100

-0.0050

0.0000

0.0050Change Components of Change

IMPORTS

Energy Intensity Input-Output Composition-0.0250

-0.0200

-0.0150

-0.0100

-0.0050

0.0000

0.0050Change Components of Change

the the technologytechnology or intensity effect is the main driver or intensity effect is the main driver of the approx. 2c decrease in energy expenditure of the approx. 2c decrease in energy expenditure per Rands worth of industrial exports and imports.per Rands worth of industrial exports and imports.

A change in the A change in the composition of composition of

imports is resp for a imports is resp for a 0.5c/Rand decrease 0.5c/Rand decrease

in energy in energy expenditureexpenditure



Findings of Research:Findings of Research:

SA industrial exports are on average more energy SA industrial exports are on average more energy intensive than her imports for the period 1993-2005.intensive than her imports for the period 1993-2005.

SA is adding significantly to her domestic energy SA is adding significantly to her domestic energy requirements by being a requirements by being a net exporter of energy servicesnet exporter of energy services embodied in industrial traded goods. embodied in industrial traded goods.

Energy resources along with other natural resources are a Energy resources along with other natural resources are a significant source of SA‘s industrial competitiveness.significant source of SA‘s industrial competitiveness.

In the decomposition of changes in energy intensity in SA‘s In the decomposition of changes in energy intensity in SA‘s traded goods: the traded goods: the technologytechnology or intensity effect is the or intensity effect is the main driver of the decreases in energy intensity recorded. main driver of the decreases in energy intensity recorded.


Policy Suggestions?Policy Suggestions?

SA can decrease demand on her domestic energy resources by:– exporting industrial goods that are less energy-

intensive (e.g.: higher value added goods which are less materials intensive)

– importing industrial goods that are more energy-intensive

This will require a significant change in the composition of the goods traded

An increase in the price of SA’s energy inputs can result in signif. investments in energy-saving technologies which will help conserve her domestic energy resources.


Thank You

Documents

TIPS Annual Forum 2008 “The Sustainability of South Africa’s Energy Resources: The Impact of International Trade” … Marcel Kohler