In revolt against the norm, Nigeria plans a carbon tax system

Nigeria is confronting its rising greenhouse emissions from agricultural, energy, and industrial processes by setting up a carbon tax system, but in a country where these practices are deeply ingrained, it may seem like swimming against the tide because even the government’s own policies are not always sustainable, writes ISAAC ANYAOGU.

It’s the first thing you notice upon entry into the Oko-Oba Abattoir Complex located on the Old Abeokuta Road in Agege, Lagos – that smell of rotten cheese atop a rotten carcass, smeared with alkaline, that clings to the air in a vice grip, overpowers the senses, makes you giddy with nausea, and churns at your insides.

The muddy road path around the market is emblazoned with growling tricycles spewing black smoke into the air, adding to the billowing cloud of sooth from kilns where animal hide is singed over a blazing fire fueled by vehicle tyres and plastic materials. The atmosphere is a complex brew of toxins and carbon.

Yet, this is only one of insignificant ways toxic fumes get into the air. Nigeria generates about 32 metric tons of waste annually, but less than 50 percent of that waste is collected. Current estimates suggest 41 percent of the municipal solid waste goes to open dumpsites, making the open burning of waste a problem in sub-Saharan Africa, according to a United Nations Environment Programme (UNEP) report.

Experts say burning waste releases greenhouse gases, air pollutants, reactive trace gases, toxic compounds, and short-lived climate pollutants, which include black carbon. Black carbon emissions are a leading cause of illness and premature death and have a climate change impact up to 5,000 times greater than CO2.

Forests and farmlands are often set ablaze to prepare for planting season or build real estate, ramshackle commercial buses billow thick, black smoke into the air. Demand for timber and mining properties each year leads to deforestation and the eventual depletion of biodiversity, unleashing carbon into the atmosphere.

Carbon tax system

Nigeria is eager to demonstrate its commitment to the Paris Agreement. The Federal Government has issued green bonds, created an elaborate energy transition plan that will require $10 billion to finance, and will soon unveil a carbon tax policy and budgetary system for the country to fully implement the new Climate Change Act 2021.

Salisu Dahiru, the director-general of the National Council on Climate Change, the implementing agency, said the agency will determine allowable emissions and penalties for exceeding them.

The Center for Climate and Energy Solutions, a US-based think tank, notes that under a carbon tax system, the government sets a price that emitters must pay for each ton of greenhouse gas emissions they emit. Businesses and consumers can avoid the tax by switching fuels or adopting new technologies, to reduce their emissions.

Taxes on greenhouse gases come in two broad forms: an emissions tax, which is based on the quantity an entity produces; and a tax on goods or services that are generally greenhouse gas-intensive, such as a carbon tax on petrol.

Under the arrangement, the Federal Government is expected to set a price that emitters pay for each ton of greenhouse gas emissions. This will raise government revenue and encourage consumers to take steps to switch fuels, adopt new technologies that will reduce emissions.

The NCCC will collaborate with the Federal Inland Revenue Service (FIRS) to develop a mechanism for “carbon tax and carbon trading” in Nigeria, and proceeds will fund the climate change fund proposed by the Act.

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Carbon tax policy design

As of 2021, 35 carbon tax programs have been implemented across the world. South Africa became the first African country to implement a carbon tax in 2019.

A review of the carbon tax system in these countries shows that policy makers consider a range of design choices, including the scope of substances covered. Many levy taxes on the carbon dioxide content of fossil fuels.

Policymakers also consider levying a carbon tax at different points in the energy supply chain. For some, the tax is levied upstream, mostly on suppliers of fossil fuels such as coal and natural gas processing facilities. Others concentrate taxation in the midstream like electric utilities. Others, on the other hand, enforce the carbon tax at the downstream level, which includes energy-consuming industries, households, and vehicles.

South Africa’s carbon tax is predicated on the “polluter pays” principle, ensuring that the real cost of greenhouse gas emissions to the environment and society are incorporated into the price of carbon-intensive production activities.

Policymakers also value emission taxes based on the present value of estimated environmental damages over time caused by an additional ton of carbon dioxide emitted today.

Rules guiding carbon taxes also include provisions protecting local production, as a carbon price could put domestic energy-intensive, trade-exposed industries (EITEs), such as chemicals, cement, and steel, at a competitive disadvantage against international competitors that do not face an equivalent price.

Policymakers also decide how revenues from a carbon tax are used, they could be returned to consumers in the form of a dividend or reinvested in climate purposes, such as advancing low-carbon technologies or building resilience.

Implications

While the specific modalities for Nigeria’s carbon tax are being designed, the reality is that whatever system is implemented, has far-reaching implications. The Nigerian government, which plays an out-sized role in the economy, first has to rethink some of its policies. Zainab Ahmed, minister of finance, budget, and national planning, recently told lawmakers that the Federal Government spends N18.397 billion on petrol subsidies daily.

This is why analysts say the implementation of a carbon tax needs to be strategic, “bearing in mind Nigeria’s present realities without compromising the country’s competitiveness,” said Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PwC.

Being strategic involves properly diagnosing the problem to arrive at a pragmatic solution, something that is not exactly the Nigerian government’s forte. For example, the disappearance of Lake Chad is often presented as the main cause of crises and other social ills in northern Nigeria. Based on this, Nigeria’s defense budget has ballooned, and a presidential aspirant in the 2023 general elections said he would pump water into the dry Lake Chad to deal with the crisis. But is there a factual basis?

“Recent scientific analyses have debunked the widely held view that the lake is drying up, showing instead that water levels fluctuate and that the lake has partly replenished since its low point of the 1970s and 1980s. These studies therefore unravel the myth that the current crisis in the region is linked to the disappearance of the lake. More than the shrinking of the lake, the issue at hand lies with the impact of climate change, and the occurrence of extreme weather and variability,” says a study by the World Bank.

According to Oyedele, some of the peculiar circumstances to address include dealing with the existing petrol subsidy regime, which is effectively incentivizing consumption of fossil fuel in addition to the lack of a stable power supply, making it expedient for manufacturers and households to constantly rely on petrol and diesel powered generators for their operations.

Power constitutes 40 percent of the costs of manufacturing companies, according to the Manufacturers Association of Nigeria (MAN), pushing many to install dirty diesel generators. Fixing the power supply would lead to a fair carbon tax and benefit the environment.

Nigeria, like many parts of the world, is experiencing climate change. The country is becoming warmer. Various studies show that annual and seasonal timescales indicate a significant positive increase in temperatures in Nigeria. They show that mean temperatures have been consistently increasing throughout the country in the last five decades and rising significantly since the 1980s, with a change of 1.01°C (0.52 to 1.5°C) in the linear warming for the period 1951–2005.

This validates the need for a carbon tax. It can slow climate change and significantly broaden Nigeria’s tax base, bringing informal operators into the net, improving government revenues and its ability to deliver social infrastructure.

Yet, analysts say there is a need for caution. There is already the risk of too much taxation on the same payers, mostly corporate organizations. Also, the “polluter pays” principle, which shifts the burden of responsibility to the worst polluters, while, encouraging investments into clean energy development, raises “the fear that any fine or levy placed on suppliers of fossil fuels would simply be transferred to consumers,” says Ivie Ehanmo, an energy lawyer based in Lagos in a note.

Ehanmo also noted that a lot more work will need to be done if African governments are to maximize the value of a tax on carbon due to the complex architecture and significant expenditure needed for enforcement and compliance.

It will also require that the government really think through the process. For example, Nigeria’s gas flares declined by 52 percent from 2018 to 2022, according to the Nigeria Gas Flare Tracker (GFT), a satellite-based technology created by NOSDRA, but the decline was largely spurred by declining production as a result of crude oil theft. What happens when production recovers?