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Saturday, December 10, 2022

Subsidy removal: Why Carbon Fee and Dividend is a better policy option

Barely a month ago, the Federal Government through the Minister of Finance, Budget and National Planning, Zainab Ahmed, revealed a policy plan by the government to remove fuel subsidy on Petroleum Motor Spirit (PMS) in February 2022 and a target date of mid-2022 for the complete elimination of fuel subsidies in Nigeria, adding that Nigerians would get N5,000 per month as a transportation grant after the removal of fuel subsidies.

Zainab Ahmed
Zainab Ahmed, Minister of Finance, Budget, and National Planning

The minister further explained that the Federal Government would give N5,000 to 30 to 40 million poorest Nigerians to cushion the potential negative impact of the removal of the subsidies on the most vulnerable at the bottom 40 per cent of the population.

Obviously, this ambitious and courageous plan of the Federal Government which was announced few days after President Muhammadu Buhari signed the Climate Change Bill into law and Nigeria’s pledge at COP26 in Glasgow to reach Net-Zero in 2060, is a major step in implementing the Glasgow Climate Pact. However, to make this policy more comprehensive, it is pertinent in my opinion, for the government to consider the harmonisation of the policy to include Carbon Fee and Dividend, which is also referred to as Climate Income.

Interestingly, Carbon Fee and Dividend policy is currently operational in Canada and this can also help President Muhammadu Buhari’s plan to lift 100 million persons out of poverty in 10 years, as well as make Nigeria’s build back better to post COVID-19 achievable.

Notably, Carbon Fee and Dividend is the policy proposal created by Citizens’ Climate Lobby (CCL) to internalise the costs of burning carbon-based fuels. It’s the policy that climate scientists and economists alike say is the best first step to reduce the likelihood of catastrophic climate change from global warming as well empowering the poverty through basic climate income. The policy works by   placing a steadily rising fee on the CO2 content of fossil fuels.

To internalise the social cost of carbon in Nigeria, we can begin with an initial fee of N50,000/tonne on the CO2 content of fossil fuels, escalating N75,000/tonne/year, imposed upstream at their point of extraction and collected upon entry into the economy. Moreover, accounting for the true cost of carbon-based fuels not only creates a level-playing field for all sources of energy, but also informs consumers of the true cost-comparison of various fuels when making purchase decisions.

As proposed by the Federal Government, the revenue from the carbon fee is also given back to households. The revenue from the carbon fee is held in a Carbon Fees Trust fund and returned directly to households as a monthly dividend. Most households will receive more than they will pay for increased energy costs. This feature will inject billions into the economy, protect family budgets, free households to make independent choices about their energy usage, spur innovation and build aggregate demand for low-carbon products at the consumer level.

Aside from its economic benefits Carbon Fee and Dividend holds a far-reaching import for the climate. Predictably rising carbon fees on GHG emissions are the most economically efficient, transparent and enforceable mechanism to drive a transition to a low-carbon economy, by giving all businesses and individuals a powerful incentive to reduce their carbon footprints and to develop and make available low and no carbon alternatives.

In addition, Nigeria also stands to gain in the sense that import fees on products imported from countries without a carbon fee, along with rebates to Nigerian industries exporting to those countries, will discourage businesses from relocating where they can emit more CO2 and motivate other countries to adopt similar carbon pricing policies. In the same vein, firms seeking to escape higher energy cost will be discouraged from relocating to non-compliant nations as their products will be subject to import fees. Most importantly, Carbon Fee and Dividend does not increase the size of governments, require new bureaucracies or directly increase government revenues.

The dividend increases real disposable income, protects personal spending decisions and will recruit widespread, sustained engagement. From all indications, carbon pricing is an idea whose time has come and Nigeria cannot be left out.  In a nutshell, Carbon Fee and Dividend policy is elegant in its simplicity, transparent in its accessibility to public scrutiny and crystal clear in its signals and benefits.

Considering the importance of carbon pricing, the World Bank and the International Monetary Fund (IMF) and other partners, including Citizens’ Climate Lobby, formed the Carbon Pricing Leadership Coalition – a voluntary partnership of national and sub-national governments, businesses, and civil society organisations that agree to expand the use of effective carbon pricing policies that can maintain competitiveness, create jobs, encourage innovation, and deliver meaningful emissions reductions.

Similarly, the European Union is planning to enact Border Adjustments, which they call Border Carbon Adjustment Mechanisms (BCAM), in January 2023. The BCAM B will involve the application of import fees on products imported from countries without a carbon pricing policy.

Around the world, carbon pricing initiatives have been implemented or scheduled for implementation in 61 jurisdictions. In total, there are 46 national initiatives and 32 subnational initiatives.Additionally, 97 countries have carbon pricing in their commitments to the United Nations. These 97 Parties represent 58 percent of global GHG emissions. Lending credence to this development, IMF Managing Director, Kristalina Georgieva said there has been progress, with over 60 national and subnational carbon pricing schemes around the world.

“Limiting global warming to 1.5 to 2 degrees will require emissions to be cut by a quarter to a half by 2030, and this is unlikely to happen without measures equivalent to a global carbon price of around $75 per tonne by the end of this decade. Meanwhile, the current global average emission price is only $3 per tonne,” she added.

Meanwhile, the IMF has proposed to set up an international carbon price floor to help limit global warming and achieve the transition toward low carbon growth over the next decade. The Fund noted that gradually increasing price on carbon encourages innovation and transition to renewable energy, clean mobility, and low carbon technologies.

The IMF boss noted that the proposed price floor would be focused on a small number of large emitters, such as some or all G20 countries, the agreement would be anchored on a minimum carbon price, a single, efficient parameter that would allow “simultaneous action” across different countries, adding that the a carbon price floor agreement would be “flexible, pragmatic and equitable” and account for different responsibilities across countries with different pricing based on different levels and historical emissions.

Similarly, the Director General of World Trade Organisation (WTO) and Co-chair of the Global Commission on the Economy and Climate, Dr. Ngozi Okonjo-Iwaela, has urged climate stakeholders to focus more on how carbon pricing can be used to shift investments towards low-carbon and climate-resilient projects, and how carbon pricing can address broader social concerns. She stressed that carbon pricing offers African economies, in particular, a powerful vehicle for delivering on other social and economic priorities.

From the foregoing, it is very glaring that the Federal Government’s plan to completely remove fuel subsidy on PMS by mid-2022 and pay Nigerian N5,000 monthly after the removal, presents another golden opportunity for Nigeria to embrace and adopt Carbon Fee and Dividend policy along with its plan.

Finally, it is my considered opinion that if this step is taken into consideration, it’s going to be a win-win situation for our beloved country, Nigeria. I rest my case!

By David Michael

Michael is currently the Africa Regional Coordinator of Citizens’ Climate International

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