Climate change, macroprudential policy responses and their distributional consequences in South Africa

In transitioning from coal-dependent growth to a low-carbon economy, South Africa faces intertwined environmental, macro-financial and distributional risks. We build a two-period computable general equilibrium model with heterogeneous households, firms and a dual-tier banking system, embedding endogenous default, brown and green capital markets and a pollution-damage feedback. After calibrating to South African data, we compare three instruments – downstream carbon taxes, brown risk-weighted capital surcharges and green capital discounts – individually and jointly. Carbon taxation most sharply curbs emissions and, when revenues are rebated to workers, also narrows wealth and consumption inequality. Brown penalising factors restrain leverage and reduce default probabilities but raise energy prices and widen wage inequality; green supporting factors lower financing costs yet trigger a Jevons-type rebound that can increase coal demand. Welfare decompositions show that no single tool dominates; the optimal approach involves pairing a carbon tax with prudential tweaks that balance climate gains, stability and equity for South Africa.