Holding the UN climate change conference in Durban is appropriate: climate change matters more to Africa than anywhere else. The African climate is set to become hotter and more volatile, exposing the region’s poor to heightened risk due to heavy dependence upon rain-fed agriculture. This alone would incline Africa to be at the forefront of green energy, but it is reinforced by some evident advantages of natural endowment that Africa has over other regions. While having only 2.4 percent of world income, Africa has 12 percent of the world’s potential in hydropower. It has a huge sunlight-catching landmass, with the light more intense and more evenly spread throughout the year than in Northern regions. It is well endowed with underutilized arable land which could be used for bio-fuels. It has a massive area of tropical rain forest which could be credited with carbon capture. In addition to these advantages of natural endowment, Africa has the investor advantage of being a latecomer to energy generation and usage. Developed regions of the world have sunk capital in irreversible investments in their power supply, transport networks and urban structures. Africa has yet to do so and so has a potential latecomer advantage: green energy is cheaper if installed from scratch than retrofitted.
But before African governments encourage a green future, important offsetting costs need to be taken into account. Energy generation requires not just natural endowments such as water and sunlight, but capital endowments. Capital here includes not just the accumulated stocks of physical capital and the financial capital needed to fund investment, but the levels of human capital and skills, and the institutional and governance capacity required to implement and regulate economic activity. Energy generation is very intensive in all these types of capital. Unfortunately, Africa is poorly endowed with them and this nullifies the advantage conferred by its natural endowments. Hydropower is an example: the technology is standard but it requires enormous irreversible investments and a regulatory environment that investors trust. Because the disadvantages of capital endowment offset its natural advantage, Africa is currently generating only 2.5 percent of world hydropower: around a fifth of its potential. Similarly, solar panels are currently very expensive per kilowatt generated, especially if maintenance is deficient. Carbon capture through forestry is highly dependent upon trustworthy regulation without which certification would not be credible.
Bio-fuels face a different offsetting disadvantage. To generate sufficient spatially concentrated mass, bio-fuel needs high-quality land and therefore competes with food crops. Africa is a net importer of food and a net exporter of energy resources, so devoting land to bio-fuels rather than food increases energy exports and food imports. Yet due to the high transport costs that Africa faces in its international trade, growing bio-fuel and exchanging it for food through trade is unlikely to be efficient: it is probably better to grow more food.
Africa is currently reliant upon carbon-based energy, but here also capital disadvantage offsets Africa’s natural advantage. Africa has 12 percent of world oil production plus significant endowments of gas and coal, yet it generates little energy, with firms and households in the region facing acute shortages of power. The high shadow-price of energy is reflected in the resort to small diesel generators with very high costs per kilowatt. This, in turn, offsets Africa’s latecomer advantage: Africa needs to invest in power as soon as possible, and currently the cheapest fuels for energy generation are coal and gas. Africa cannot wait for green technology to improve to the point at which solar is the cheapest source.
Capital shortage also inhibits the scope for energy saving. For example, Africa’s truck fleet is highly energy inefficient because it is so old. Yet firms do not replace old vehicles because capital is too costly. Were African households and firms faced by low world interest rates, many carbon-saving investments would also be cost-saving. But at the cost of capital facing Africans – typically an interest rate of around 60 percent – continuing high emissions are the cheapest option.
Hence, left to its own resources, – and the costs of energy implied – Africa should lag not lead in green energy. However, it is not in the global interest for Africa to be left to its own resources. If the capital inputs to energy generation and saving were available at world prices, the world could reduce emissions at much lower cost in Africa than in the North. Whether Africa leads or lags on greening thus depends upon whether international finance and regulation can rectify the region’s deficiencies in its own capital endowment.