ANALYSIS: Climate change funding can help solve Nigeria’s gasoline subsidy problem

The Nigerian government has said it will reassess its position on gasoline subsidies this month. Global economic developments and national challenges such as oil theft have led to a revenue crisis that makes subsidies debilitating for the country. Rising oil prices due to the Russian-Ukrainian war also increased the cost of landing gasoline, increasing subsidy payments.

In the past, the removal of subsidies has caused unrest over the high (and rising) cost of living. At current prices, that would be more than double the cost of gasoline and could cost politicians dearly at the polls – situations the government would like to avoid.

But there is a potential solution. Turning to climate change finance could help cushion the blow to consumers while aligning Nigeria with current global goals.

Nigeria is one of Africa’s largest crude oil exporters and depends on the sector for much of its foreign exchange earnings and government revenue. High profile investments onshore oil production driven by oil theft and climate considerations contributed to lower oil exports. In addition, insufficient refining capacity means that Nigeria is dependent on imported refined oil. The country now finds itself in a position where high oil prices are hurting its economy rather than helping it.

The gasoline subsidy was intended as a temporary measure to offset global oil price increases for consumers, but the government is now trapped. To keep the price of gasoline low and constant, he pays the differential with respect to the market price. In 2021, 96% of the government revenue 4.39 trillion naira ($10.59 billion) was spent servicing its growing debt. This year, subsidy payments are expected to reach 4 trillion naira ($9.6 billion). The practice has also become a multi-billion dollar industry full of scandals and Corruption.

Different administrations have tried to end the subsidies. Their complete removal in 2012 led to nationwide Occupy Nigeria protests, and the subsidies were quickly reinstated. There were few consequences when the current administration withdrew them in 2020 after the fall in world oil prices. When oil prices began to rise in 2021, subsidies were reinstated, putting pressure on the federation’s account. This led to an announcement of planned moves in November, which were retracted earlier this year.

Gasoline in Nigeria is crucial not only for fueling vehicles but also for generators. An inadequate power supply means that many small businesses and homes count on gasoline generators. The generators provide a valued 48.6% of electricity in Nigeria, although this figure includes diesel and gas generators. Thus, significantly higher gasoline prices not only increase transportation costs, but worsen access to energy.

The subsidies benefit higher income Nigerians who are more likely to have multiple vehicles and large generators. But removing them will impact the most vulnerable citizens, as higher costs drive up the price of consumer goods in a country already facing high inflation. Rising gasoline prices can also disproportionately affect micro and small businesses, including in the vibrant informal economy, which depends on gasoline rather than diesel generators.

The government recognizes that subsidy payments must stop. The recent Petroleum Industry Law requires their phasing out and the administration is already borrowing to cover them. As security and economic problems worsen, the cost of subsidies has increased dramatically. reduced country’s fiscal space.

But borrowing won’t always be the solution as Nigeria already faces debt crisis motivated by her income problems. More innovative thinking is needed to cushion the effects of rising fuel prices on Nigerians and the economy.

One option is to take advantage of the current global prioritization of climate change and energy transition. Cheap gasoline in Nigeria contributes to carbon emissions and pollution from generator fumes. Rising gasoline prices could incentivize consumers to use renewable energy, including solar, suited to Nigeria’s climate. This could give a boost to Nigeria’s energy transition.

The global recognition that Western nations should finance the energy transition of developing countries presents an opportunity for Nigeria. If the argument for subsidy removal were to be reframed to focus on climate considerations rather than just fiscal issues, resources and investments could be increased to cushion the effects of subsidy removal.

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This has been done before – but with mixed results due to poor implementation. Efforts should be intensified as this aligns with Nigeria’s Energy Transition Plan and Renewable Energy Master Plan.

The renewable energy market in Nigeria is growing rapidly, with lower cost options available on retail sites. Existing external support for renewable energy projects in the country should be strengthened. The partners could also expand their local manufacturing capacity of the necessary components, particularly for solar energy.

Mobilizing resources to boost the renewable energy industry would help sustain energy access in light of high fuel prices and contribute to Nigeria’s industrialization momentum. The growth of renewable energy training institutes could help solve the capacity problem. A higher demand for renewable energies could encourage investment in the local production of certain components, which would help to create jobs.

Addressing the challenge of oil subsidies in Nigeria could align the interests of government and international partners. Helping consumers switch to renewable energy could solve some of the country’s fiscal problems while meeting climate change mitigation commitments.

The government should also learn from past failures. Any changes to the subsidy scheme should be carefully communicated to citizens with adequate information on how they will be supported. Austerity measures must start at the top and citizens’ interests must come before political objectives.

Teniola Tayo, Researcher, Institute for Security Studies (ISS) Regional Office for West Africa, the Sahel and the Lake Chad Basin

This article is published with the support of the Government of the Netherlands.

(This article was first post by ISS Today, a syndication partner of Premium Times. We have their permission to republish).

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