Business / Climate Change: The Potential Impact On The It Industry In South Africa

Climate Change: The Potential Impact On The It Industry In South Africa

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Autor:  anton  25 December 2010
Tags:  Climate,  Change,  Potential,  Impact,  Industry
Words: 2288   |   Pages: 10
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1. Introduction:

The purpose of this document is to investigate the impact of climate change on the Information Technology (IT) industry in South Africa. Initial investigation will be into what is happening to the global and South African climate based on recent studies and academic papers. By then examining the impact of climate change on each sector, and by examining the percentage of IT spend per sector, the impact on IT during our lifetimes can be extrapolated.

2. Global Climate Change; South African Impact

2.1. The average global temperature has historically varied significantly creating periods of cooling (ЎҐice-agesЎ¦) and warming. Evidence shows that the worldЎ¦s climate is warming. AfricaЎ¦s climate has warmed by about 0.5„aC during the 20th century (Nkomo, Nyong & Lulindwa, 2006). The debate over if climate change is caused by humans or not is beyond the scope of this document, however it has been shown historically that there is a direct correlation between CO2 levels and global temperature (see Appendix 1). The Stern Review on the Economics of Climate Change (2006) argues that urgent action needs to be taken to stabilise the CO2 levels in the atmosphere. At current CO2 output, this could result in a 2„aC increase in average global temperature by 2050.

2.2. Global warming is expected to have a generally warming and drying effect on most of Southern Africa (Fairbanks & Scholes, 1999), with a decrease in precipitation of 5 to 10% (IPCC HadCM2 General Circulation Model).

2.3. Logically agriculture, forestry and related industries such as alcoholic beverages, foodstuff exports and pulp and paper will be most affected. Even taking into account the expected fertilisation effect of increased CO2 levels, it is expected that forestry output will decline by 48% (Fairbanks and Scholes, 1999). Maize production, a Southern African staple, is predicted to be reduced by between 10 and 20% depending on geographic location (Kiker, 2000). As warming will allow northern countries to increase food production, it is not anticipated that there will be a global shortage of food. South Africa may become a net importer of food.

2.4. Gauteng accounts for 34% of South AfricaЎ¦s GDP (Johannesburg News Agency, 2007). Manufacturing and electricity generation require vast amounts of water.

2.5. Sea levels are expected to rise by up to 1 meter (Nicholls, 2003)

2.6. An increase in the severity and impact of extreme weather is predicted.

2.7. Tourism is expected to be affected negatively by up to 36% or an estimated 3% of GDP due to loss of biodiversity (Turpie, Winkler, Spalding-Fecher & Mingle, 2002).

2.8. Warmer temperatures will increase the risk of vector-borne disease such as malaria by up to four times in South Africa (Turpie et al, 2002). Githeko and Ndegwa (2001) found a five-fold reduction in GDP in areas where malaria is prevalent which could be attributed to the loss of production by factors of production from illness and death. The private healthcare sector may benefit from increased patient numbers.

2.9. Climate change may result in an influx of climate refugees into South Africa.

3. Mitigation of Climate Change:

3.1. The Kyoto protocol identified CO2 as the major contributor to climate change and seeks to reduce carbon and other emission levels of industrialised countries by 29% overall by 2010 (UNEP Press Release, 1998).

3.2. If emission reduction is required by legislation in South Africa, this may have negative impacts on electricity, manufacturing and transport industries.

3.2.1. The majority of South AfricaЎ¦s electricity production is from coal-fired power stations which have high emissions levels and use huge amounts of water. However there are business opportunities: The Department of Trade and Industry announced that the construction of a second conventional nuclear power plant has been approved (DTI press release, 2007). China is building 30 new conventional nuclear power stations, providing opportunity for mining and beneficiation due to large uranium reserves. Clean, renewable energy such as solar and wind energy are viable and potentially profitable industries, for example by developing new markets for households to have their own solar panels for their own use and to sell excess back into the national grid.

3.2.2. Government has approved a draft biofuels strategy which aims to produce 6.3 million barrels of biofuels per annum by 2013. (Brink, Biofuels Industry Development press release, 2007). A US$ 1 billion biofuel plant is to be constructed in the Free State as a prototype and is expected to have a turnover of R550 million per annum contributing up to 0.05% of South AfricaЎ¦s GDP. Another 7 plants are planned. There are further benefits to the economy such as reduced imports of petroleum products, export opportunities and insulation from the effects of volatile oil prices.

3.2.3. Global car-companies are developing hydrogen-powered and electric-hybrid vehicles. The introduction of H2 vehicles will create opportunities in the conversion of facilities from petroleum to H2 product.

3.2.4. Emissions reduction in manufacturing will require capital investment for conversion of plant and machinery.

3.3. Carbon Capture and Storage (CCS)

3.3.1. Carbon Capture has the potential to significantly reduce the emissions of CO2 into the atmosphere, which needs to be stored. This is capital-intensive and is not likely to be implemented in South Africa in the near future. However this process does provide potential opportunities for new businesses.

4. IT and Climate Change Mitigation:

4.1. IT companies need to take an active role in mitigation of climate change, for example Xerox has developed new chemical ingredients for printer toners that has reduced energy consumption by 22%. (Groenendaal, ITWeb, 2006)

4.2. A 2006 ETNO and WWF report concludes that IT can directly assist in mitigation of climate change by increasing the prevalence of video conferencing, audio conferencing, flexi-work, online billing and web-based tax returns. The estimated total saving could be 47 million tonnes of CO2 per annum.

5. Adaptation to Climate Change

5.1. Due to potential negative impacts on agriculture, it is entirely possible that South Africa will need to import food.

5.2. Water:

5.2.1. It has been identified that rainfall in tropical and east Africa will increase but will decrease in Southern Africa (Nkomo, at al. 2006).This provides opportunities for the construction industry to build new dams and pipelines to transport water to Gauteng.

5.2.2. Industry will need to develop ways of reducing water consumption.

5.3. Adaptation to higher sea levels will require modifications to harbours and construction of protective measures. Durban could cope with a sea-level rise of 20cm, however a rise of 50cm would require protective walls of up to 6m in height, and a 1m rise could require walls of up to 9m (Turpie et al. 2002). Frankenhauser (2006) predicted that adaptation of infrastructure to coastal cities in Africa can reduce the risk of displacement of populations by almost 90% at a cost of 0.6% of GDP. This represents a potential spend of US$ 10 billion on construction in Africa.

5.4. New markets will be created for malaria prevention.

5.5. Although there is potential for huge job-losses of unskilled labour in the forestry and agriculture sectors, this labour may be absorbed by increased construction activity.

5.6. As South Africa could potentially lose a significant proportion of the contribution to GDP from tourism, agriculture and forestry, jobs will need to be created and other sectors of the economy such as services will need to grow.

6. Growth or Contraction by Vertical Market Sector:

6.1. Construction: Significant growth due to climate adaptation and mitigation projects.

6.2. Resources:

6.2.1. Forestry: Projected contraction of sector by up to 40% (Fairbanks et al 1999).

6.2.2. Agriculture: Projected contraction of 10 to 20% (Turpie et al, 2002).

6.2.3. Mining: Coal mining may be negatively impacted due to decreased demand, however there will be increased demand for uranium products. Strong possibility of growth.

6.2.4. Fuel extraction: Projected growth as new biofuels plants are built and new cleaner technologies are researched for existing fuel sources.

6.3. Finance:

6.3.1. Insurance: Expected impact on risk capital is 5% in Europe and 90% in the USA (Association of British Insurers, 2005). Should there be the projected increase in frequency and severity of extreme weather events, more households will require insurance, although at higher prices. This could lead to growth of the industry, although those insurers who do not adapt may face bankruptcy.

6.3.2. Banking: The banking sector may be vulnerable to climate change but in many cases the banking sector transfers its risk back to the insurers who purchase debt products. (IPCC Working Group II, 2001). New loans for capital spending on infrastructure will be required, resulting in growth in the sector.

6.4. Utilities:

6.4.1. Electricity: increased spending will be required on new nuclear and renewable energy power stations.

6.4.2. Water: Large capital spending will be required to ensure supply.

6.5. Transport: growth could be experienced due to increased global trade. The industry will also need to invest in new technologies.

6.6. Distribution (retail and wholesale): No direct impact is expected.

6.7. Manufacturing (discreet and process): Growth expected due to new product manufacturing opportunities and increased exports.

6.8. Government (provincial, local and national): expected increase in spending to mitigate direct impacts of climate change.

6.9. Healthcare: Growth expected in the private sector as malaria spreads to new areas leading to increase in the number of beds required.

6.10. Education: growth in this sector will be in line with government spending policy.

6.11. Business and Legal services: businesses service will generally track overall GDP growth or contraction.

6.12. Consumers and other:

6.12.1. Tourism: contraction of up to 36% is expected (Turpie et al. 2002)

6.12.2. Consumer: growth will continue as the incomes of factors of production increase in line with GDP growth.

7. Government Policy and Macroeconomic Objectives

7.1. Fiscal Policy will need to continue to be managed carefully as the economy changes:

7.1.1. Increased spending on adaptation-related projects.

7.1.2. As more of the countryЎ¦s GDP comes from the secondary and tertiary sectors where salaries are generally higher, tax revenue should increase.

7.1.3. Should climate change have a severe negative impact, government could adopt a Keynesian approach by ЎҐspending the economy out of a (climate-change) recessionЎ¦.

7.1.4. Government may be required to allocate additional funding to social spending, depending on the impact of local and foreign climate refugees.

7.2. Monetary policy will continue as usual, unless urgent intervention is required in supporting severely affected industries.

7.3. Balance of payments policy will need to be carefully managed:

7.3.1. There will be a reduction in agricultural exports with an increase in food imports.

7.3.2. Increased production of biofuels will require less importation of oil.

7.3.3. New technological innovations will provide manufacturing opportunities for export and direct foreign investment opportunities.

7.3.4. The net impact should be beneficial for both the current account and financial account.

7.4. Prices and incomes policy may need to be applied to more products, should the price of basic foodstuffs become unaffordable for the poor.

7.5. Economic growth will need to be stimulated, possibly by increasing government infrastructure spending, to compensate from the anticipated losses from agriculture, forestry and tourism.

7.6. In order to compensate for job-losses, the economy will have to become more services based. This may be difficult due to a lack of skills, which is already a problem. Policies will need to address this with improved tertiary education and by importing foreign skills, particularly in technology and engineering.

7.7. Price stability may be negatively affected if there is a dramatic impact on the price of food.

7.8. Income distribution may become even more difficult to address if there is an influx of very poor climate refugees.

8. Climate Change impact on the Information Technology Industry:

8.1. As almost every business in the economy relies on IT to some extent, it could be argued that IT is dependent on all sectors of the economy and is dependant on the state of the economy as a whole. However, IT is not equally dependant on all sectors of the economy and therefore IT sector growth may not necessarily track economic growth. As an example from 1991 to 1995, the sector grew by an annual average real rate of 10.9%, while GDP grew at 1.1% (Cogburn & Adeya, 2002). In this discussion, although forestry, agriculture and tourism are expected to be severely impacted by climate change, their combined contribution to IT spend is very small. Mining, agriculture, consumer, tourism and other spending combined contributes only an estimated 5.4% to IT spend (estimation based on figures from BMI-T, 2006). Appendix 2 Shows the full breakdown of vertical market spend on IT.

8.2. Determining the exact impact on each sector is beyond the scope of this document, however it extrapolated from arguments in this document and other sources as to which sectors are expected to grow and which will contract.

8.3. As a worst-case scenario, sectors that could be impacted negatively are insurance, agriculture, forestry and tourism:

8.3.1. Agriculture and forestry make up less than 1% of IT spend (BMI-T, 2006); even in a worst-case 40% contraction, this represents 0.4% reduction in IT spend

8.3.2. Tourism also accounts for less than 1% of IT spend, representing a 0.36% reduction in spending.

8.3.3. Insurance accounts for 7.3% of IT spend (BMI-T, 2006). Assuming worst case is the industry contracts by 20%; although it may well expand. This represents a 1.46% loss in total IT spend.

8.3.4. Therefore the total estimated direct loss to the industry due to climate change is around 2.22%.

8.4. Sectors that will grow or increase IT spend as a result of mitigation or adaptation to climate change are manufacturing and fuel extraction, construction, government and utilities. These together make up 37.3% of total IT spend. These industries combined would therefore need to increase their combined spend on IT by approximately 5.95% to negate the losses.

9. Conclusion

9.1. Although climate change will have a generally negative impact on economies, IT may actually benefit from global warming.

9.2. Industries that will be negatively impacted account for a small percentage of IT spend.

9.3. Other sectors that may benefit from warming contribute more than a third of IT spend. Although the required growth of these industries is high at almost 5%, it is achievable.

9.4. As an innovative industry, IT should continue to develop and grow at a rate that outpaces overall GDP growth.

9.5. The Stern report of 2006 predicts a 5 to 20% loss of GDP due to climate change. If the worst-case scenario occurs, and many economists disagree with the conclusions of the report, then IT may experience contraction but probably not to the same extent as the rest of the economy.

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