Investment, growth and development in South Africa

2. Economic analysis of enhanced NDC implementation in South Africa

2.1. South Africa's current situation and goals

2.1.1. Emissions and drivers

South Africa's greenhouse gas (GHG) emissions peaked in 2008 at 528 Mt CO₂-eq and had declined to 444 Mt CO₂-eq by 2024 (DFFE, 2026[14]). Emissions excluding land use stood at 478 Mt CO₂-eq in 2024, with the energy sector accounting for approximately 79% of the total (DFFE, 2026[14]) and electricity generation alone responsible for close to half of the national inventory in recent years (DFFE, 2025[15]; Republic of South Africa, 2020[16]). While increasing mitigation action has contributed to the country’s progress in decoupling emissions from economic output, with a 73% increase in economic output per unit of GHG emission between 2000 and 2022 (DFFE, 2025[15]), emissions reductions are partly attributable to persistently weak economic growth (OECD, 2025[6]) and structural changes in the economy, namely servitisation and deindustrialisation (Marquard et al., 2025[17]).

South Africa’s emissions reductions were driven by structural changes combined with weak economic growth and crisis-induced reductions in the economy’s energy intensity rather than by a cleaner energy mix which remains dominated by coal. Between 2014 and 2024, non-LULUCF GHG emissions sank by 6.5%, as a roughly 7% fall in real GDP per capita and a decline in the energy used per unit of output outweighed the upward pressure from continued population growth (Figure 1, Panel A). Part of this decline in energy intensity reflects a long-term process of deindustrialisation, whereby economic activity has shifted away from energy-intensive manufacturing and mining towards less energy-intensive sectors. Manufacturing's share of both output and employment has declined substantially since 2000, partly owing to the relocation of energy-intensive activities such as chrome smelting abroad (Robb et al., 2026[18]). A technical analysis underpinning the NDC2 also points to declining electricity demand and load-shedding and the COVID-19 pandemic contributing to the historical downward trend (Marquard et al., 2025[17]).

Changes in the energy system have contributed little to declining emissions, so far. Fossil fuels accounted for 93% of South Africa’s primary energy supply in 2024, slightly above their 92.5% share in 2014, with the energy system and electricity generation remaining heavily dominated by coal (Figure 1, Panel C) (IEA, 2025[19]). A partial substitution of coal with less emissions-intensive oil (coal falling from 75% to 72% of primary energy supply and oil rising from 14% to 18%) slightly lowered the carbon intensity of South Africa’s fossil mix and made a small downward contribution to emissions reductions. In recent years, investment in low-carbon electricity generation has driven a rapid expansion of solar and wind, in relative terms (0.2% of total energy mix in 2014 to 1.5% in 2024 (IEA, 2025[19])). Citizen-led rooftop solar deployment has also accelerated, with an estimated 6 GW of installed capacity that is not fully captured in official generation statistics (OECD, forthcoming[20]). Overall, the share of low-carbon energy (next to solar and wind including energy from nuclear, biofuels and waste and hydro) in South Africa’s primary energy supply mix stagnated between 2014 and 2024 at around 7% (Marquard et al., 2025[17]; IEA, 2025[19]), leaving South Africa among the most emissions-intensive economies in the world at approximately 0.7 kg CO₂e per USD of GDP (PPP) (Figure 1, Panel B).

Figure 1. South Africa’s stagnant economic growth has contributed to avoiding emissions increases in the past decade

Note: The graph presents a Kaya decomposition of South Africa’s greenhouse gas emissions (excluding LULUCF) in ten-year periods. Each bar shows the contribution of individual Kaya drivers (population, GDP per capita, energy intensity, fossil fuel share and carbon intensity) to total changes in emissions relative to the base period. Positive values indicate upward pressure on emissions, while negative values reflect emission reductions. For example, the reductions in the energy intensity of South Africa’s economy contributed -11% of the -6.5% change in emissions between 2014 and 2024. The decomposition methodology is outlined in Annex A.

Source: Authors using historical data from EDGAR dataset of GHG emissions (Crippa et al., 2025[21]), IEA World Energy Balances (IEA, 2025[19]) and World Development Indicators (World Bank, 2025[22]).

In 2019, the emissions intensity of South Africa's economy was 3.2 times higher than the global average (CSIR Energy Centre, 2022[5]; World Bank Group, 2022[8]). The country’s manufacturing exports are among the most carbon-intensive globally and six of its key export markets have set net zero targets (NBI, 2022[23]; Monaisa and Maimele, 2023[24]), placing South Africa’s manufacturing exports particularly at risk of climate change policies worldwide. With the EU's Carbon Border Adjustment Mechanism (CBAM) operational from 2026, the iron and steel sector faces particular exposure, given emissions intensities approximately twice the global average driven largely by coal-based electricity (OECD, 2025[25]).

Infrastructure challenges, persistent inequality, high unemployment rates and subdued investment have limited South Africa’s economic growth over the past decade (OECD, 2025[6]). Limited public and private investment, the high cost of doing business and corruption have also reduced growth over the past decade. GDP growth is forecast to remain below 1.6% in the near term (OECD, 2026[26]), public debt is projected at approximately 77% of GDP in 2025 and unemployment averaged around 32% in 2023/24 (OECD, 2025[6]). Debt-servicing costs are projected to exceed spending on health, basic education, or social development over the medium term, narrowing the fiscal space available for public climate investment (National Treasury, 2025[27]).

Load-shedding and persistent electricity undersupply imposed large economic costs in South Africa until 2024. The deterioration of Eskom’s generation capacity resulted in load-shedding reaching record levels between 2021 and 2023 (OECD, forthcoming[20]). The estimated economic cost of load-shedding was ZAR 59 to 118 billion (USD 4.1 to 8.2 billion) in 2019 alone (Hermanus and Montmasson-Clair, 2021[28]) and frequent outages in 2023 are estimated to have cut roughly 1.5 percentage points from GDP growth in that year (SARB, 2024[29]; OECD, 2025[6]). Small-scale enterprises have been particularly exposed to load-shedding, with 40% reporting income losses in an OECD survey (OECD, forthcoming[20]). Electricity supply has gradually improved since April 2024 (OECD, forthcoming[20]), but electricity supply security concerns persist and continue to defer the scheduled retirements of Eskom's ageing coal plants (CSIR Energy Centre, 2022[5]; Xaba, 2025[30]). The latest electricity plans thus retain coal capacity aimed to provide reliable baseload power during the transition (DEE, 2025[31]). Maintaining reliable and affordable electricity supply is a central consideration in sequencing changes to the generation mix. Modelling analysis indicates that adding wind and solar capacity to the distressed system could substantially lower system costs for Eskom (Meridian Economics, 2022[32]); assessing retirement schedules also requires consideration of replacement capacity, network readiness and system reliability.

2.1.2. Economic and climate agenda

The government has begun to implement structural reforms to revive growth, with the power sector at the centre of it. National energy planning treats a cleaner and more diversified power generation system as a lever to achieve long-term growth targets. The 2022 Energy Action Plan, launched as an emergency response to load-shedding, opens electricity generation to private investment and accelerates the procurement of renewables, gas and storage (OECD, 2025[6]). A parallel presidential investment drive, initiated in 2018, has already mobilised over ZAR 1.5 trillion in pledges, surpassing its initial ZAR 1.2 trillion target and now seeks a further ZAR 2 trillion by 2028 for key areas such as renewable energy and infrastructure (The Presidency, 2025[33]). These efforts have started to show results, with measures enabling private participation helping to stabilise supply and the share of renewable generation rising, even if it remains low and held back by barriers to entry in generation and distribution (OECD, 2026[34]). The Electricity Regulation Amendment Act, effective since January 2025, formally opened electricity generation to competition beyond Eskom and established a framework for a competitive electricity market. In addition, Operation Vulindlela, established in 2020 by the Presidency and National Treasury, implemented structural reforms with supporting electricity supply as one of its priorities (OECD, 2025[6]).

South Africa submitted its NDC2 in October 2025, setting an economy-wide target of 320 to 380 Mt CO₂-eq by 2035, which represents a progression from the first NDC (350 to 420 Mt CO₂-eq by 2030) (Government of South Africa, 2025[9]) (Figure 2). Excluding LULUCF, this translates into a target of 337-397 MtCO₂-eq in 2035 (Climate Action Tracker, 2025[35]).1 The NDC2 sets out a sequenced pathway, with the electricity sector leading decarbonisation through the 2020s, a deeper power-sector transition in the 2030s coupled with a shift to low-emission vehicles in transport and the hard-to-abate sectors following from 2040. Technical analysis by the University of Cape Town indicates that measures and policies already in place would bring emissions to approximately 359 Mt by 2035 under medium growth assumptions, which would be sufficient to meet the country’s NDC 2035 target (Marquard et al., 2025[17]). Additionally, full implementation of current policies and plans such as the 2025 Integrated Resource Plan (IRP), the country’s national electricity plan and the South African Renewable Energy Masterplan (SAREM), approved in 2025, could already reduce emissions to 289Mt CO₂-eq, well below the NDC2 lower bound of 320Mt CO₂-eq (ibid). Based on these estimates, the NDC2 target adds little ambition beyond the trajectory implied by South Africa's existing policies and plans, although implementing those policies and plans in full remains a substantial challenge in itself (Section 3).

Beyond 2035, the NDC2 reaffirms the intention to reach net zero emissions by 2050, in line with the 2020 Long-Term Low Emission Development Strategy (Republic of South Africa, 2020[16]). The 2035 target range, however, backloads emission reductions and leaves a steep decline to be achieved in the fifteen years to 2050 (Figure 2). The Presidential Climate Commission (PCC) estimates that emissions near the top of the adopted range would require unprecedented annual reductions of 20 to 30 Mt CO₂-eq in the 2045 to 2050 period to reach net zero (Presidential Climate Commission, 2025[36]). In its advice to government prior to the NDC2 submission, the PCC had recommended a lower target range of 248-329 Mt CO₂-eq to align the target with South Africa's long-term net-zero objective (Presidential Climate Commission, 2025[36]). A more ambitious near-term pathway could reduce the scale of the adjustment required later and support a more gradual and cost-effective transition to net zero.

Figure 2. South Africa’s historical greenhouse gas emissions and mitigation targets

GHG emissions by source and national GHG emission reduction targets

Note: The figure shows total GHG (CO₂-equivalent, AR5 GWP100) emissions by source category for the period 1990-2024. The right side of the figure shows South Africa’s mitigation targets stated in its updated first NDC submitted in 2021 (upper and lower range), in its second NDC submitted in 2025 (upper range and lower range) and its net-zero target stated in the Long-term Low-emissions Development Strategy (LT-LEDS), submitted in 2020.

Source: South Africa’s National GHG Inventory (DFFE, 2026[14]).

South Africa is by far the largest emitter on the African continent, accounting for roughly one-quarter of Africa's CO₂ emissions. It is therefore encouraging that the country has established a relatively strong climate policy framework and has taken significant steps to advance action (Section 3.1) including through its Just Energy Transition Partnership (JETP), renewable energy deployment and carbon pricing.

South Africa's climate action, as measured by the adoption and stringency of mitigation policies, ranks highest among African countries and has been increasing over the years, but remains below the OECD average (Nachtigall et al., 2022[37]) (Figure 3). The Climate Actions and Policies Measurement Framework (CAPMF) has traced South Africa's recent increases in policy stringency to targets, governance and regulation rather than to market-based instruments (OECD, 2025[6]).

South Africa is the only African country that has implemented a carbon pricing system. The country has committed to a phased increase in carbon tax rates to 2030. The carbon tax, introduced in 2019 at ZAR 120 per tonne of CO₂-eq, entered its second phase in January 2026 with a headline rate of ZAR 308 per tonne. It is planned to reach ZAR 462 per tonne in 2030. However, tax-free allowances of up to 95% for process emissions and 90% for combustion emissions continue to produce effective carbon prices2 too low to drive significant behavioural change (Republic of South Africa, 2019[38]; Republic of South Africa, 2024[39]; Republic of South Africa, 2025[40]).

Given the dominant contribution of coal-fired power generation to South Africa's emissions and the economic costs associated with an ageing and unreliable power fleet, decarbonising the electricity sector represents the most important opportunity to simultaneously reduce emissions, improve energy security and support economic development over the next decade (Marquard et al., 2025[17]). South Africa's 2025 Integrated Resource Plan (IRP) (DEE, 2025[31]), the country’s national electricity plan, commits to no new coal capacity but also allows for "clean coal" technology demonstration that could extend plant lifetimes, leaving investors with limited certainty on the future generation mix. The plan nonetheless targets substantial renewable energy deployment, including approximately 29 GW of solar PV and 43 GW of wind by 2039, with renewables reaching 40% of electricity generation and coal’s share falling to below 45% by 2030 (DEE, 2025[31]). The IRP estimates that ZAR 2.23 trillion (~USD 125 billion3) of investment in generation and grid expansion is needed to implement it by 2039.

Figure 3. South Africa’s climate policy effort has strengthened steadily since 1990

Climate Action index (0-10)

Note: The African range includes Angola, Benin, Burkina Faso, Botswana, Cabo Verde, Cameroon, Côte d'Ivoire, Egypt, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Liberia, Mali, Mauritius, Morocco, Mozambique, Niger, Nigeria, Rwanda, Senegal, Sierra Leone, South Africa, Togo, Uganda, United Republic of Tanzania and Zambia. The climate action scores are derived from the Climate Actions and Policies Measurement Framework (CAPMF), a harmonised database tracking countries’ climate mitigation policies. Climate policy action is measured as a combination of policy adoption and policy stringency. The measures reflect the adoption and relative stringency of climate policies but do not assess their effectiveness. Scores (0-10) were calculated by normalising policy instruments based on their in-sample distribution across countries and years, where a score of 0 indicates the absence of the instrument and a score of 10 represents the highest observed stringency for that instrument. The shaded range indicates the minimum and maximum climate action scores across all included African countries.

Source: Based on Nachtigall et al. (2022[37]) and the OECD Climate actions and policies measurement framework database, https://oe.cd/dx/capmf.

South Africa is well placed to act on the energy transition, both in natural resources and in supply chain capacity. Its natural endowment is exceptional, with more than 2 500 hours of sunshine per year, solar radiation of 4.5 to 6.5 kWh per square metre daily (Anekwe et al., 2024[41]). Technical generation potential in renewable energy development zones approved by the government is estimated at 924 TWh for wind energy and 632TWh for solar (CSP and PV) energy (IRENA, 2020[42]). At the same time, the country ranks as the second-best location in Africa for renewables manufacturing, including solar PV and battery-material refining, owing to high manufacturing value added, available infrastructure and low import costs (SEforALL, 2023[43]). South Africa's critical mineral endowments, including platinum group metals (72% of global supply), also position the country to capture value from the global energy transition (Department of Science and Innovation, 2022[44]).

2.2. A policy action scenario analysis for South Africa

2.2.1. Current Policies and Enhanced Policies scenarios

This section compares, for South Africa and for the period 2022 to 2035, the economic consequences of a more ambitious global energy transition scenario (the Enhanced Policies scenario) against a reference scenario (the Current Policies scenario) in which policy action remains at current effort levels.4 The scenario set up includes global action: all countries are assumed to fully meet the climate-related commitments they have announced, including longer term net zero emissions and NDC targets. The Enhanced Policies scenario therefore represents not just stronger domestic action but a world in which South Africa's trading partners also pursue higher climate ambition, with corresponding effects on global commodity prices, technology costs and demand for South Africa’s exports. The results presented in this section depend on key assumptions, including successful mobilisation of additional public and private investment, limited crowding-out of other productive investment5 and co-ordinated global climate action consistent with announced pledges. Furthermore, they reflect results from specific modelling tools and assumptions. Results should be interpreted as projections and not forecasts.

The analysis relies on an integrated climate-economy modelling framework (Box A A.1 in Annex A) that couples the OECD’s ENV-Linkages computable general equilibrium model (Château, Dellink and Lanzi, 2014[45])6 with NiGEM (Hantzsche, Lopresto and Young, 2018[46]), a structural macroeconometric model. The integration allows the modelling framework to capture both the longer-term structural effects of climate policies and the short-term effects of climate-related investment on the South African economy. The scenarios are designed and calibrated based on inputs from the OECD Long Term Model (Guillemette and Château, 2023[47]) and the IEA Global Energy and Climate model (IEA, 2023[48]; IEA, 2025[49]). The two analysed scenarios differ primarily in the ambition of emissions reductions and the associated scale-up in energy-related investment and clean energy technology deployment:

• Current Policies scenario: Aligned with IEA’s Stated Policies Scenario (STEPS), this scenario reflects policies already implemented or legislated in South Africa and worldwide. South Africa's GHG emissions (excluding LULUCF) decline by 33% by 2035 relative to 2022, reaching 392 MtCO₂-eq. Globally, emissions decline by 6% by 2035 relative to 2022, consistent with a projected end-of-century temperature increase of around 2.4°C.7 Baseline economic growth in the Current Policies scenario follows OECD long-term projections (Guillemette and Château, 2023[47]) and South Africa’s real GDP growth is assumed to pick up to a compound average annual rate of around 1.8%, in line with current projections.

• Enhanced Policies scenario: Aligned with the IEA's Announced Pledges Scenario (APS), this scenario assumes accelerated climate policies and investment in South Africa and worldwide and implies that South Africa achieves its net-zero by 2050 target. South Africa's GHG emissions (excluding LULUCF) decline by 49% by 2035 relative to 2022, reaching 298 MtCO₂-eq. Globally, emissions decline by 27% by 2035 relative to 2022, consistent with a projected end-of-century temperature increase of around 1.7°C.

The scenario comparison examines the economic implications of an illustrative policy and investment package within the modelling framework used. It does not establish that a particular carbon tax trajectory or coal retirement schedule is necessary for economic growth, nor does it identify a uniquely preferred policy mix. The Enhanced Policies scenario provides an illustrative and internationally consistent pathway for an accelerated energy transition in South Africa rather than an exact simulation of its Second NDC delivery. Following the IEA, the scenario assumes emission reductions for 2035 that are slightly more ambitious (“Enhanced”) than the lower end of the target range in South Africa’s Second NDC, on a pathway that is consistent with the country’s net-zero target for 2050. This pathway is close to what South Africa’s existing and planned policies would deliver if they were fully implemented: independent modelling prepared for the Second NDC estimates that these policies, notably the draft of what became the IRP 2025, the Renewable Energy Masterplan and the second phase of the carbon tax, would bring 2035 emissions to 359 Mt CO₂-eq with limited or delayed implementation and 289 Mt CO₂-eq with full implementation (Marquard et al., 2025[17]). The Current Policies scenario, by contrast, assumes no strengthening of mitigation policy beyond what was legislated as of 2023 but assumes the implementation of plans in place at that time. As such, the Current Policies scenario already reflects major changes to South Africa’s energy system rather than a continuation of past trends (Section 2). The Enhanced Policies emissions pathway lies close to that full implementation outcome. The two scenarios thus differ in the pace of the transition and their comparison captures the economic implications of accelerating its implementation, rather than of action versus inaction. In both cases, the modelled policies are stylised instruments, rather than the specific policy mix set out in South Africa’s national plans.

The Enhanced Policies scenario assumes a climate policy package mainly focused on the accelerated decarbonisation of South Africa’s power generation sector, with most of the additional GHG abatement assumed to come from CO₂ emission reductions in the energy sector (Figure 4, Panel A). The Current Policies scenario reflects implemented and legislated climate policies as of 2023, including substantial increases in renewable energy generation capacity and reduced coal-fired capacity under the 2019 IRP. In comparison, the modelled policy package in the Enhanced Policies scenario includes a stronger carbon pricing signal and a range of implicit energy sector-specific measures such as accelerated renewable deployment and end-use electrification.8 The Enhanced Policies scenario implies a significant strengthening of the effective carbon price relative to current levels (Figure 4, Panel C).9 Section 3 3 discusses the institutional and political-economy context that has constrained the effective carbon price to near zero for most industrial sectors.

The Enhanced Policies scenario implies a substantial scale-up of energy-system investment in South Africa. The energy-system projections underpinning the Enhanced Policies scenario assume a significant policy-driven shift in South Africa’s energy mix relative to Current Policies, with accelerated end-use electrification, efficiency gains and a partial displacement of coal by renewables in power generation, requiring a significant scale-up of investments into the energy system. Total annual investment across the energy supply, power generation and energy end-use sectors (including both low-carbon and fossil energy) is assumed to reach USD 21.8 billion by 2030 and USD 25.8 billion by 2035 (in 2022 prices),10 3 times the 2022 level of USD 8.5 billion. This is around USD 5 billion a year more than under Current Policies by 2030 and USD 11 billion more by 2035 or around USD 77 billion cumulatively over 2022-2035 (Figure 4, Panel B). The large investment shock reflects South Africa's high transition investment needs, including because of its ageing and heavily coal-dependent power generation fleet, weak grids and a prolonged period of underinvestment that has resulted in severe load shedding and low power production capacity. The scenario assumes i) that the additional investment is in fact mobilised, financed in equal parts by the public and private sector11 and ii) that public investment in energy, transport and industrial infrastructure partially crowds in private investment, by generating new opportunities for private actors and alongside the broader policy package, providing the certainty needed to mobilise private capital.12 The validity of these assumptions depends on the institutional and policy conditions examined in Section 3.

Figure 4. Scenario assumptions

Note: Assumptions on emission reductions and energy-system investment figures are from the IEA World Energy Outlook 2023’s Stated Policies (STEPS) and Announced Pledges Scenario (APS), on which the Current Policies and Enhanced Policies scenarios are calibrated. The IEA's bottom-up energy model takes each scenario's policy assumptions, technology costs and socioeconomic assumptions as inputs, then determines the energy infrastructure (generation capacity, grids, end-use equipment) required to meet projected demand under those regional constraints. Investment figures reflect the total capital expenditure per year implied by the resulting capacity additions and infrastructure buildout.

Source: IEA World Energy Outlook 2023 (IEA, 2023[48]).

2.2.2. The macroeconomic impacts of Enhanced Policies in South Africa

The macroeconomic impact of the Enhanced Policies scenario is the result of a combination of key effects triggered by climate policies. Figure 5 illustrates these mechanisms. When countries initially implement and scale up climate mitigation policies, production and consumption patterns are constrained to adjust to pricing mechanisms and regulations, driving GDP down. Recycling carbon revenues can partially offset some costs, while helping to limit distributive impacts and increasing the acceptability of climate policies (Climate policies & revenue recycling effect). At the same time, the large-scale deployment of energy efficiency technologies partly counterbalances these costs, reducing energy expenditures and thereby facilitating consumption and production (Energy transition effect). Furthermore, accelerated investment in energy and clean technologies can stimulate aggregate demand in the short term and increase the productive capacity of economies and aggregate supply in the longer term (Increased investment effect).

Figure 5. Three main mechanisms connect policy action to economic growth

Source: Authors, based on OECD/UNDP (2025[1]).

Cumulatively, an accelerated energy transition under the Enhanced Policies scenario in South Africa is projected to have a positive net effect on its GDP in the next 10 years (Figure 6, Panel A). Under Enhanced Policies, South Africa’s real GDP is projected to grow by 27.9% above 2022 levels by 2035, reaching USD 1.10 trillion (constant 2021 USD at PPP), compared with a 26.0% increase to USD 1.08 trillion under Current Policies. This represents a 1.5% GDP gain under Enhanced Policies compared with Current Policies, even before accounting for reduced climate damages. In level terms, the Enhanced Policies scenario is projected to raise South Africa’s real GDP in 2035 by around USD 16 billion relative to Current Policies (Figure 6, Panel B).

Mitigation policies are projected to constrain South Africa’s economy, resulting in a negative but modest effect on total GDP. Taken in isolation, more ambitious carbon pricing and the implementation of other climate policies are expected to result in -0.06% GDP by 2030 and -0.09% by 2035 (Figure 6). This also assumes that additional fiscal revenues generated from carbon pricing are partly used to alleviate potential distributional effects for households in the form of reduced labour tax rates, thereby supporting employment. The relatively low impact of climate policies overall can be explained by several factors. The cost of solar energy in South Africa, which also has very large solar energy potential (Anekwe et al., 2024[41]), is relatively low,13 while Eskom’s coal plant fleet is nearing the end of its lifespan, with high inefficiencies and costs. From an economic perspective, replacing coal with renewable energy is hence relatively cost-effective for South Africa. Internationally, as major economies strengthen their climate efforts, global demand for fossil fuels declines, putting downward pressure on international prices. Although South Africa continues to import oil, gas and petroleum products under this scenario, import volumes are lower than under Current Policies (see Section 2.2.4 on fossil fuel import dependence) and the country benefits from reduced prices on these remaining imports.

Figure 6. The increase in climate-related investment has positive impacts for economic growth in South Africa

Disaggregation of changes in South Africa’s GDP between the Current Policies and Enhanced Policies scenarios, in 2021 trillion USD (PPP) 

Note: Panel A presents projected differences in real GDP (in trillion constant 2021 USD at Purchasing Power Parity (PPP)) between the Enhanced Policies and the Current Policies scenarios, for the year 2035. The Current Policies and Enhanced NDC bars show South Africa’s total projected GDP in 2035, while the intermediate bars show the contribution of each key mechanism to the GDP difference between the two scenarios (in trillion 2021 USD PPP). Panel B shows the accumulative real GDP (billion constant 2021 USD PPP) generated by each main mechanism in Enhanced Policies relative to Current Policies as a cumulative path over 2022–2035.

Source: NIESR’s NiGEM model with input from the IEA’s GCEM model and the OECD’s Long-Term Model.

At the same time, the accelerated energy transition under Enhanced Policies is projected to result in an additional 0.13% increase in GDP by 2035 compared with Current Policies (Figure 6). Energy efficiency gains under the Enhanced Policies scenario are projected to increase the productivity of South Africa with respect to energy use and reduce household energy spending over time. In 2035, this effect is projected to compensate for the negative effect of mitigation policies on South Africa’s GDP.

Finally, the largest contribution to GDP growth in the short term under the Enhanced Policies scenario stems from increased energy system investments (Figure 6). Increased investment in the energy system in line with assumptions presented in Section 2.2.1 would result in a 0.65% increase in the level of real GDP by 2030 and 1.46% by 2035 compared to the Current Policies scenario. In the short term, higher investment spending raises overall demand in the economy as firms hire workers, purchase materials and contract services to build new capacity, generating income and activity across sectors. Over the medium term, the resulting infrastructure, such as electricity grids and industrial equipment, adds to the economy's productive capital stock, expanding potential output. This large investment effect on GDP reflects South Africa’s large investment needs for the transition but also depends on modelling assumptions. First, the investment needed for the transition is assumed to be mobilised at full scale, with annual energy system investment roughly tripling from its 2022 level by 2035. Second, the additional public investment is assumed not to fully displace other productive investment in the economy. The projected GDP gains are therefore conditional on successfully mobilising investment at this scale, rather than an automatic consequence of higher climate ambition. Whether these conditions can be met in practice depends on the institutional and financing environment in South Africa, including the characteristics examined in Section 3.

Figure 7. Scaled up energy sector action and cleaner electricity generation with Enhanced Policies would intensify absolute decoupling of emissions in South Africa

Note: Panel A shows South Africa's GHG emissions, GDP (constant 2021 international dollars at PPP) and GHG intensity of GDP, each indexed to its 1990 level (1990 = 1). Emissions cover all sources excluding LULUCF. Panel B presents a Kaya decomposition of the average annual change of South Africa’s greenhouse gas emissions (excluding LULUCF) between 2025 and 2035. Each bar shows the contribution of individual Kaya drivers (population, GDP per capita, energy intensity, fossil fuel share and carbon intensity) to the average annual change in emissions, expressed in per cent per year. The black dot marks the average annual change in total emissions. The decomposition methodology is outlined in the Annex. Panel C shows the electricity generation by source in TWh per year, in 2022 and in 2035 under the Current Policies and Enhanced Policies scenarios.

Source: authors, using the World Bank’s GDP PPP (constant 2021 international $) indicator dataset (World Bank, 2025[22]) and the EDGAR dataset of GHG emissions for historical data in Panel A (Crippa et al., 2025[21]). Current Policies and Enhanced Policies projections: OECD ENV-Linkages model, with inputs from NIESR’s NiGEM and IEA’s GCEM models.

By increasing GDP and accelerating emissions reductions, Enhanced Policies would accelerate the absolute decoupling of GHG emissions from economic growth in South Africa. Both policies currently in place and more ambitious climate policies are projected to result in robust economic growth with absolute GHG emissions decreasing. However, the pace and magnitude of the absolute decoupling are projected to be higher under Enhanced Policies (Figure 7, Panel A). Emissions are projected to decrease by around 4.6% per year between 2025 and 2035 with Enhanced Policies, versus 2.7% under Current Policies. By 2035, GHG emissions would be 40% lower than 1990 levels, compared to 17% lower under Current Policies.

Achieving higher GDP with lower emissions by 2035 under Enhanced Policies results from a lower emissions intensity of the economy, which more than offsets additional pressures from slightly higher economic growth. The decline in emissions intensity reflects changes in South Africa’s energy mix combined with energy efficiency gains. Compared to Current Policies the Enhanced Policies scenario sees accelerated reductions in the emissions intensity of fossil fuels used in the energy mix, as well as accelerated reductions in the energy intensity of South Africa’s economy and higher low-carbon energy deployment by 2035 (Figure 7, Panel B). The shift towards low-carbon energy sources is more pronounced with Enhanced Policies (Figure 7, Panel C), with solar accounting for 35.5% of the electricity generation mix by 2035 versus 24.3% in Current Policies, up from 2.7% in 2022. Wind power is also significantly scaled up, reaching 31.6% of electricity generation under Enhanced Policies versus 23.6% in Current Policies by 2035. Meanwhile, coal’s share in electricity generation falls from 85.6% in 2022 to 20.4% in 2035 with Enhanced Policies, versus 39.6% with Current Policies (Figure 7, Panel C). Coal nonetheless still provides around a fifth of electricity generation in 2035 and the scenario does not assume a coal phase-out schedule.

2.2.3. Structural changes in South Africa’s economy and employment 

The aggregate GDP effect of the Enhanced Policies scenario is a result of structural shifts across the South African economy, with the most pronounced changes occurring in energy production sectors (Figure 8). Between 2022 and 2035, Enhanced Policies results in a USD 18 billion contraction of output in the fossil fuel-based electricity production sector, while renewable electricity production is projected to increase by USD 52 billion through targeted investment and policy-induced substitution away from fossil fuels. The increase is largest for solar-powered electricity. Compared to Current Policies, this represents a 27.6% increase in renewable electricity production and a 43.9% fall in fossil fuel electricity production in 2035 (in monetary terms). Construction output is projected to be 27.1% higher, reflecting the new infrastructure required to modernise power generation and distribution. Structural change across other sectors is projected to be limited, reflecting the current focus of climate policies on the energy sector and assumptions from the IEA’s World Energy Outlook. Different sectoral effort allocations would produce different results.

Figure 8. Changes in sectoral production in the Current Policies and Enhanced Policies scenarios

Gross sectoral output in USD billion (real 2021 intl. USD at PPP) (primary axis) and % change in gross sectoral output compared to Current Policies in 2035 (secondary axis), aggregate sectors

Note: The aggregation of model sectors is detailed in Annex A. EITE industries refer to emission-intensive and trade exposed industries.

Source: OECD ENV-Linkages model, with inputs from NIESR’s NiGEM and IEA’s GCEM models.

The structural shifts in South Africa’s economy in the Enhanced Policies scenario are projected to result in a net increase in energy sector employment of approximately 84 000 jobs in 2035, compared to Current Policies (Figure 9). This is equivalent to ca 0.35% of the projected labour force in 2035. Job creations in the renewable sector are projected to more than compensate for job losses in fossil fuel sectors. Most of the additional jobs are projected to be created in solar generation, with around 100 000 more by 2035 than under Current Policies, followed by wind generation at around 50 000. At the same time, a faster energy transition would accelerate the contraction of coal-dependent sectors, with employment in coal mining and coal-fired power generation projected to be around 70 000 lower than under Current Policies (Figure 9). These figures cover operating jobs in energy sectors only and exclude indirect job effects in supplying sectors such as manufacturing and construction and the model assumes that workers move between sectors and regions without frictions. However, reallocating workers from contracting sectors to expanding sectors poses geographical and skills challenges, not captured in the modelling framework. Whether the potential employment gains materialise depends on how effectively these frictions can be addressed.14

Figure 9. By 2035, job creation in the renewable electricity sector could offset job losses in fossil fuel energy production

Cumulative employment gains or losses in the energy sector, by subsector (in millions of workers) in the Enhanced Policies scenario compared to the Current Policies scenario, 2022-2035, South Africa

Source: OECD ENV-Linkages model, with inputs from NIESR’s NiGEM and IEA’s GCEM models.

Projected job losses fall mainly on coal-extraction and coal-fired power generation, sectors in which existing employment is highly geographically concentrated. The region of Mpumalanga, where a large majority of coal mining jobs are located, therefore faces the sharpest exposure to future job losses. Employment gains arise in solar and wind generation, where natural resource potential is concentrated primarily in the Northern Cape, Eastern Cape and Western Cape regions. Since losses and gains fall in different places, achieving the potential employment gains requires workers’ mobility across regions, which is constrained in practice (e.g. by housing costs, transport costs, access to public services). Beyond location, jobs in renewable energy sectors and fossil fuel sectors differ in the skills they require. South Africa already faces an urgent shortage of sector‑specific expertise needed for a low‑carbon transition and skills gaps are growing in the clean energy and energy efficiency sectors (OECD, forthcoming[20]). Regions with fast solar energy growth such as the Western Cape already report technical skills shortages across the solar PV value chain (ibid). Closing these gaps is not straightforward, since capacity to reskill varies with age, prior qualification and geography. The region of Mpumalanga has a low base of clean-energy skills development programmes and within the coal workforce itself, the mid- and low-skilled majority are likely to face the greatest retraining barriers (ibid). Managing the transition therefore requires targeted regional support in coal dependent areas alongside up- and re-skilling programmes (See Challenge 6 in Section 3).

2.2.4. Potential impacts of Enhanced Policies on fossil fuel import dependence 

More ambitious mitigation policies can address South Africa’s exposure to fossil fuel import costs, which is growing despite its large coal reserves. South Africa is heavily dependent on imports for its oil and gas supply. It imports 100% of its gas supply (IEA, 2025[19]), almost entirely from Mozambique (WTIS, 2024[50]). Oil represents a large share of South Africa’s energy supply [21% in 2023, (IEA, 2025[19])] and is used primarily in the transport and agriculture sectors, but also in its power sector in periods of load-shedding. South Africa imported 79% of its total oil products supply in 2023 (IEA, 2025[19]). 54% of the country’s oil import volumes originate from the Middle East (IEA, 2026[51]), a share that has risen from 42% in 2017. Rising oil imports have made the country increasingly exposed to international price volatility. In 2026, the price of petrol and even more so that of diesel spiked markedly as a result of the closure of the Strait of Hormuz, by 38% and 59% respectively by mid-June 2026.15 In April 2026, the government introduced temporary fuel tax relief to address fuel price increases, costing South Africa ZAR 17 billion (USD 1 billion) in forgone tax revenue between April and June according to some estimates (National Treasury, 2026[52]).

The Enhanced Policies scenario reshapes South Africa's fossil fuel trade, reducing the fuel import bill and strengthening energy security, but also lowering coal export revenues as global demand contracts. The shift in South Africa's energy mix implied by the Enhanced Policies scenario (driven by energy efficiency gains, electrification and the displacement of fossil fuels by renewables) lowers South Africa's dependence on imported fossil fuels. In 2035, under the Enhanced Policies scenario, oil imports (in physical volumes) are projected to be 18.3% lower and natural gas imports 5.4% lower relative to Current Policies. On the export side, however, South Africa's coal export revenues are projected to decline, as all countries are assumed to deliver on their announced climate pledges, which leads to a faster decline in the global coal market. By 2035, South Africa's coal exports fall by around 22% relative to Current Policies, driven primarily by reduced import demand from major trading partners. The lower import dependence projected under the Enhanced Policies scenario is also conditional on the power system delivering higher generation and thus partly shifts energy security risks from import exposure towards ensuring a reliable and accessible domestic power supply (See Challenge 4).

2.2.5. Benefits extend beyond GDP gains

The bulk of economic benefits from accelerated policy action would be realised in the long term, through avoided climate damages. South Africa is a semi-arid country and highly vulnerable to climate-related risks, with parts of it having warmed at twice the global average rate since the 1930s (DFFE, 2024[53]). Droughts, wildfires and rainfall variability are expected to intensify water scarcity and impose growing economic costs (ibid), while rising temperatures threaten crop yields and food security, raise heat-related mortality and erode labour productivity in exposed sectors such as mining, agriculture and construction (Costa et al., 2024[54]; Somanathan et al., 2021[55]).

If the Enhanced Policies trends continued beyond 2035, collective global emission reductions would limit warming to 1.75°C above pre-industrial levels by 2100, compared to 2.45°C under Current Policies, reducing the expected physical and economic damages from climate change. While their precise scale is uncertain, avoided climate damages in the Enhanced Policies scenario relative to Current Policies are estimated at 0.4%-3.1% of South Africa’s potential GDP in 2050 and at 2.1%-15.1% of GDP by 2100 (Figure 10), based on three prominent damage functions (Barrage and Nordhaus, 2024[56]; Howard and Sterner, 2017[57]; Bilal and Känzig, 2026[58]) (see Annex A for more methodological details).

Figure 10. Accelerated policy action can lead to substantial economic benefits from reduced climate damages in South Africa, with estimates varying depending on the damage function used

Estimated GDP loss from climate damages for South Africa by scenario, % of potential GDP

Note: Damages per scenario are shown as percentage losses in South Africa’s potential GDP relative to a no-warming counterfactual. The damage assessment assumes that trends in global energy sector transformation continue beyond 2035 in line with the IEA scenarios. Bars indicate the range of estimates across three damage functions. Avoided damages are assessed by comparing scenarios using the same damage function. See Annex A for methodological details.

Source: Authors, based on three damage functions (Howard and Sterner (2017[57]); Bilal and Känzig (2026[58]); Barrage and Nordhaus (2024[56])) as well as inputs from IEA’s GCEM model and the 2024 NGFS climate scenarios (NGFS, 2024[59]).

An accelerated energy transition would bring significant additional environmental and social benefits for South Africa already in the short term, the largest being improved air quality. Mean population exposure to fine particulates (PM2.5), which raises the risk of heart and respiratory diseases and stroke, was the fourth highest amongst G20 countries in 2019 (OECD, 2025[6]). Fossil energy production is the single largest contributor to ambient PM2.5 pollution in South Africa (McDuffie et al., 2021[60]; HEI, 2022[61]), with Eskom's coal fleet being the dominant source, estimated to have emitted more SO2 (a precursor to PM2.5) in 2019 than the entire power sectors of the European Union, the United States or China (Myllyvirta, 2021[62]). Because air pollution and GHG emissions largely stem from the same combustion processes, clean energy deployment and electrification of industry and transport could lower emissions of harmful air pollutants and deliver immediate public health benefits, while avoiding fiscal costs of retrofitting ageing plants to comply with minimum emission standards (World Bank Group, 2022[8]). Faster renewable energy deployment could also ease pressure on scarce water resources, as wind and solar require negligible water compared with the wet-cooled coal fleet (Thopil and Pouris, 2016[63]).

Notes

← 1.  The headline target range can be read alongside the LULUCF accounting approach used to track progress. The NDC2 targets exclude the emissions effects of natural disturbances, which raises the emissions level consistent with the target, which effectively raises the level of emissions consistent with the target and so reduces its stringency relative to the headline figures.

← 2.  In 2023 the net effective carbon rate in South Africa averaged only EUR 16.01 per tonne of CO₂-eq, resting almost entirely on fuel excise taxes, with the explicit carbon price averaging just EUR 0.95 per tonne across all greenhouse-gas emissions (OECD, 2026[119]).

← 3.  USD values are converted at the 2025 annual average exchange rate of 17.89 (OECD, 2026[118]).

← 4.  The modelling analysis focuses primarily on mitigation and the energy transition. Adaptation, which is also part of South Africa’s NDC, is outside its scope.

← 5.  At the global level, stylised sensitivity analysis shows that the growth effects of investment depend on the degree to which additional public investment crowds in or crowds out other private investment. Stronger crowding in can raise GDP further, while crowding out can reduce the investment stimulus (OECD/UNDP, 2025[1]). These sensitivities were not assessed for South Africa specifically.

← 6.  This analysis builds on a large amount of work by OECD on climate-economic modelling, including notably the modelling analysis developed to analyse the economic benefits of Enhanced Policies (OECD/UNDP, 2025[1]) and the modelling work developed in the context of the Inclusive Forum for Carbon Mitigation Approaches (IFCMA) (OECD, 2026[34]).

← 7.  Following the IEA (2023[48]), changes in temperatures are relative to pre-industrial levels (average throughout 1850-1900) by 2100 in the APS scenario and correspond to the median (50th) percentile of the temperature distributions derived using the Model for the Assessment of Greenhouse Gas Induced Climate Change (MAGICC) for both APS and STEPS scenarios.

← 8.  These modelling assumptions reflect a possible pathway for NDC implementation but other policy mixes could be chosen. One of the key components is the transformation of the energy system. In the ENV-Linkages, the economy-wide average carbon price on all greenhouse gas emissions from production activities in South Africa rises from USD 3 per tCO₂e in 2022 to USD 8 by 2035 under Current Policies and USD 28 under Enhanced Policies (2021 USD, PPP, nominal). The projected energy system transformation in the Enhanced Policies scenario is calibrated on national policy packages that go beyond carbon pricing alone, as captured by the IEA. The effects of these policies enter the analysis through the calibration of energy-system inputs (projected technology stock, energy flows by fuel, energy price trajectories by fuel and investment needs and costs). Emission reduction assumptions in the Enhanced Policies scenario also partly rely on the deployment of carbon dioxide removal technologies including carbon capture, utilisation and storage (CCUS), bioenergy with carbon capture and storage (BECCS) and direct air capture (DAC), all of which are not yet deployed at commercial scale but are included in the IEA modelling framework (IEA, 2023[48]). Under the IEA WEO projections, total CO₂ captured in South Africa is assumed to reach 2.1 Mt CO₂ by 2035 under the Enhanced Policies scenario.

← 9.  The Enhanced Policies scenario assumes that revenues from carbon pricing are allocated as follows: 50% enter the general government budget, while the remaining 50% are recycled, equally split between additional public investment and reducing labour income tax. The split is a modelling assumption and does not reflect current practice, as the national Treasury does not formally earmark carbon tax revenue, although National Treasury has indicated that part of it may be recycled toward programs that support the energy transition and mitigate adverse socioeconomic effects (Lartey, 2026[120]; National Treasury, 2024[121]). The modelled allocation reflects this intent in stylised form.

← 10.  The modelled figures come from the IEA’s (2023[48]) projections in 2022 prices, not from South Africa’s own plans, so they are not directly comparable with the NDC2 and IRP 2025 estimates. The Government of South Africa estimates mitigation investment needs of ZAR 3.47 trillion (USD 193 billion) and adaptation needs of ZAR 250 billion (USD 14 billion) over 2026 to 2035, equivalent to around ZAR 372 billion (USD 20.7 billion) per year (Government of South Africa, 2025[9]). Total modelled investment in 2035 exceeds the NDC2 annual average for mitigation, partly because it includes fossil fuel investment. Cumulatively, additional investment relative to Current Policies amounts to around USD 77 billion over 2022-2035 (2022 prices, market exchange rates), compared with the NDC2’s estimate of USD 194 billion in mitigation needs over 2026–2035. The NDC2 and IRP figures cover total investment needs, whereas the modelled figure is additional to Current Policies.

← 11.  The equal split is a stylised modelling assumption. In 2022-2023 public sources provided about 41% of tracked climate finance in South Africa, out of which the majority came from international sources (de Aragao Fernandes et al., 2025[72]). This share is only indicative, since tracked climate finance excludes municipal budgets and only partly counts grid investment, which the modelled investment includes in full. ENV-Linkages represents the government as a single actor, so the public investment share does not distinguish between the national budget and state-owned enterprises such as Eskom and development finance institutions. Under the model’s fiscal closure rule, the public share of additional investment is tax-financed, with the household income tax rate adjusting endogenously to satisfy the government budget constraint.

← 12.  South Africa's experience with the REIPPPP, which has attracted strong private participation across bidding windows (IEA, 2024[117]), suggests the crowding-in dynamic is already observable where procurement frameworks were clear and predictable.

← 13.  Solar PV was estimated to be around 40% cheaper than new baseload coal in 2016 in South Africa based on LCOE (Bofinger and Stander, 2016[115]; IRENA, 2020[42]). The LCOE of utility-scale solar was 0.046 USD/kWh in 2026 (Enga Energy, 2026[116]).

← 14.  The employment reported here covers operation of energy sector activities as represented in the model's sectoral production structure (see Annex A). The model also abstracts from labour market frictions. Workers are assumed to reallocate across sectors and regions without search costs, retraining lags or mobility constraints within a country. The assumed energy-system investment covers capital spending on energy assets only (IEA, 2023[48]) and excludes the costs associated with reskilling, worker relocation and regional diversification. The employment projections therefore indicate the scale of and direction of the job reallocations under the scenario assumptions, rather than implying that the net gains will appear automatically.

← 15.  Authors’ calculations based on (Global Petrol Prices, 2026[113]) and (Global Petrol Prices, 2026[114]).