Examining the Effectiveness of Nigeria’s Battle Against Carbon Pollution.
Ahmad Danburam*
The question of climate change and its ever increasing economic and social costs has been at the forefront of global policy debates in recent decades. This point becomes even more relevant as the world tries to move towards the Intergovernmental Panel on Climate Change (IPCC) goal to keep temperatures below the 1.5-degree target by the year 2050. Providing context to this issue and Nigeria’s progress towards this goal, the country currently ranks 7th on the pollution index with a score of 87.70. Furthermore, in the period between 2007 and 2017, energy-related CO2 emissions increased by 3.1% per year in total, and 0.3% per capita. This score and data serve to highlight and represent the poor progress towards Nigeria’s development to becoming a net-neutral emitter of carbon by 2050.
Current research shows that Nigeria’s strategy to reduce its industry related carbon emission is a carbon credit akin to that of the European Union. However, many economists believe that a better form of arresting the issue will be through the adoption of Pigouvian taxes to ameliorate the negative externalities of carbon production. Continuing this theme, the goal of this report will be to examine the effectiveness of Nigeria’s proposed carbon credit scheme and its effect to provide incentives for carbon reduction and the potential to introduce a Pigouvian tax to help combat this issue of carbon emission in Nigeria.
A Pigouvian tax, first proposed by British economist Arthur Pigou in the 1920s is one levied on any activity that creates socially harmful externalities or socially harmful effects. The theory behind this is to ensure that the private costs of producing a good equal the social costs that it generates. Therefore, carbon taxes are a common method of collecting Pigouvian through the imposition of levies on companies that burn coal, oil, or gas as well as producers of greenhouse emissions. These GHG emissions lead to ozone depletion and sequentially, climate change. Unlike cap-and-trade carbon credit schemes which often set limits too high and are hard to govern, Pigouvian taxes offer a much more effective route to emissions reductions as it provides stable carbon pricing of CO2 emissions.
The OECD (2017) shows that by establishing a Pigouvian tax of EUR 30/tCO2 Nigeria could gain an additional to 0.6% of GDP revenue. Which would be comparatively higher than the EUR 1 million that the country has gained from the sale of carbon credits in the year 2021. While this price by tCO2 might seem high for the Nigerian market, it is close to the lower limit that most developed and advanced economies pay. Other research estimates have proposed the development of a deforestation avoidance projected rate at $15/tCO2 that is sequestered. Within this sort of framework Nigeria’s carbon credit sequestration capacity is expected to generate equivalent of $229,605,000 USD per year in positive externalities. A national carbon tax is currently implemented in 27 countries around the world, including various countries in the EU, Canada, Singapore, Japan, Ukraine and Argentina. The most effective use of this sort of tax is in Sweden, where they have implemented a carbon tax of $127/tco2 which has reduced the carbon emissions by 25% since 1995 while allowing the economy to expand by almost 75%.
However, critics argue that Pigouvian taxes can be seen as regressive depending on how high they are set, poor individuals particularly in the global south with carbon intensive lifestyles are often left without a choice. Cap and trade schemes raise the question of equitability as permits are usually distributed to companies that are responsible for most of the greenhouse gases emitted. Whereas, if taxation were adopted, the market would simply be one where everyone from firms to individuals could pay a price per ton of CO2 emitted therefore solving this question of an unfair marketplace and leading to investment in low carbon technologies. Opponents of the Pigouvian tax tend to note that there is also the problem of capital flight where individuals and institutions avoid paying taxes. However, this system prevents the rent seeking behaviour and speculation that is inherent on cap-and-trade schemes. While also tackling the cost of externalities at the source.
Consequently, current research shows that Nigeria operates a “negative” Pigouvian tax in the energy sector by providing a subsidy on gasoline price regulation and on-grid end use tariffs. This is done by regulating the market to produce a price that is a level below supply costs and charged below end-user-costs respectively. The contributions of this sort of policy amounted to 0.8% of GDP in 2018, putting further pressure on the already cash strapped Nigerian government. These subsidies also contribute adversely to the Effective Carbon Rate, which is the total price that applies to CO2 emissions from energy use because of taxes and emissions trading. These policies have propelled the gasoline sector but at a significant social cost by discouraging a transition to cleaner energy alternatives contribution while being responsible for 7.9% of Nigeria CO2 emissions from energy use.
To conclude, in order for Nigeria to contribute effectively to the global quest to maintain the 1.5°C target set by the Paris agreement there needs to be an urgent revamp in the carbon emission sector. In light of this this paper presents Pigouvian taxes in the form of a carbon tax as a more effective route to emissions reductions than cap and trade schemes as presented in the arguments above. The hope is that if this policy is implemented effectively Nigeria can begin to chart its path towards net carbon neutrality while also achieving an additional source of revenue.
Ahmad Danburam* is a Climate Change & Environment Intern at Clean Technology Hub and a student in the Masters of Development Practice programme (MDP), at The University of Waterloo.
