INTRODUCTION OF CARBON TAX AS AN INSTRUMENT FOR JUST TRANSITION TO A LOW CARBON ECONOMY IN NIGERIA: PROSPECT AND CHALLENGES

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INTRODUCTION OF CARBON TAX AS AN INSTRUMENT FOR JUST TRANSITION TO A LOW CARBON ECONOMY IN NIGERIA: PROSPECT AND CHALLENGES

ABSTRACT

This study aim at examine theintroduction of carbon tax as an instrument for just transition to a low carbon economy in Nigeria: prospect and challenges. The study used survey research design. The population of consist of 33 motorists in Port-Harcourt selected through purposive sample techniques. The study find out that carbon tax can serve as an effective green industrial policy measures to improve low carbon economy in Nigeria. Carbon taxes have several advantages for developing and emerging countries, in that it provides a good tax base and raise revenues which in turn can be used to support social and economic aims. Their technical implementation is relatively easy and they send stable price signals, especially when compared to cap and trade schemes. Lastly, when formal and informal companies alike have to pay, carbon taxes reduce incentives for firms to remain in the informal sector. Tax revenues could, for example, be used for direct transfers or the cross subsidization of electricity lifeline tariffs to protect people living in poverty from the negative impacts of carbon pricing. The study therefore, recommends that Governments should integrate these measures into broader fiscal reform strategies, prioritizing the use of resulting revenues to offset impacts on low-income households and for other productive uses such as financing reductions in existing distortionary taxes.

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Environmental problems being witnessed globally continues to raise concerns for experts and policy makers globally in ensuring/meeting sustainable development targets. These problems vary from either the emission of damaging pollutants to the overuse of natural resources (United Nations Environment Programme, UNEP, 2004). Different strategies are been employed in addressing these challenges. One of the sectors identified to have contributed to this problem, especially climate change, is the energy sector. The energy sector’s contribution had been through the production and consumption of fossil fuel which results in increased emission of carbon dioxide (a greenhouse gas [GHGs]). The important role that the energy sector plays in enhancing the prosperity and by extension growth of an economy had exacerbated further degradation of the environment. As an essential component in the development process of an economy needed for economic and social growth, energy serves as an important source of revenue for government, especially for oil-producing countries like Nigeria. This crucial role of energy in supporting growth makes government usually seek to ensure adequate access to energy resources by exercising control on pricing of these energy products. This is often done through the use of energy subsidies. However, the UNFCC effort to simultaneously address climate change and advance its development may be regarded as one of the key challenges of the 21st century. Low-carbon development is a development paradigm that contributes to addressing these twin challenges. It seeks to promote economic growth and sustainable development while keeping greenhouse gas emissions low, or lower than without

interventions (Van, etal., 2011). The transition to a low carbon economy appears exciting but has its socioeconomic challenges along with the transformation process (The Scottish Government , 2010). Attaining a lowcarbon society requires the formulation and implementation of strategic policies that are sustainable in the long term1 . Usually, a low carbon development is followed by the move towards a green growth which results to a green society (Wang, etal., 2010). Climate change has been confirmed to affect several countries and regions, following the release of the 4th IPCC Assessment report (IPCC, 2007). In the study, Africa will be worst hit by the effects of climate change which Nigeria is part of it, and this makes Nigeria vulnerable to the effects of climate change (IPCC, 2007). Available evidence show that climate change will be global, likewise its impacts, but the severe effects will be felt more by the developing countries, especially those in Africa due to their low level of coping capabilities (Nwafor, 2016; Jagtap, 2007). The impacts of climate change are being felt by both developed and developing countries.

In Nigeria, green growth can be a kind of economic strategy cushion the effect of climate change and ensure sustainability in the presence of resource constraint and climate change (10). Although the global average carbon dioxide (CO2) emission stands at 5.0 metric tons per capita2 , Nigeria emits about 0.5 metric tons per capita3. Although this may seem little as compared with countries such as China with CO2 emission per capita of about 7.6, Nigeria needs to make good strive to ensure CO2 emission stay minimal. This study intends to explore the strategies that can provide a low carbon development in Nigeria with a view to attaining green growth (Van, etal., 2011). However,among the most common solutions, carbon pricing mechanisms such as carbon taxes or emission trading schemes (ETS) have emerged as the two cornerstones of public climate action. According to James Poterba’s (1991), carbon tax is defined as a specific tax, that is a fixed absolute amount per ton of coal or a barrel of oil. The tax is designed to internalize the externalities associated with fuel consumption, so that should not vary to shocks in fuel prices as it would an ad valorem tax. By putting a price of a ton of CO2 emissions, a carbon tax sends a price signal to the energy market, aiming to incite consumers to favour low-carbon alternatives in their economic decisions. This means that the tax will have an influence on choices as diverse as the means of transportation of a worker commuting to the city centre, the heating type of a retired couple in the countryside, the place of residence of a young couple looking to buy a first house, or the investment decision of a company renewing its equipment. Paying a higher price for commodities that have a harmful impact on the environment allows what is called in economic theory, the internalization of externalities. This approach considers that prices in a free market do not fully reflect the cost of environmental externalities of economic activities. Therefore, a public policy is required to restore the “real” price of those activities, a price that will cover the loss or degradation of an environmental service. Although it is impossible to evaluate the exact economic value of environmental services, a carbon tax creates an additional price burden on the commodity that generates externalities, fossil fuels in particular and over-energy consumption in general. Abundant economic literature has also shown how the redistribution of the revenues of environmental taxes by decreasing other taxes can create a so-called “double dividend (Pearce, 1991; Poterba, 1993; Goulder, 1995; Ekins, 1997; Parry, 1995). An environmental dividend due to the reduction of environmental externalities, and an economic dividend due to the economic benefits of the decreased taxes. However, while fitting the description of environmental taxes, carbon taxes somehow stand as a distinct subcategory. A carbon tax indeed raises tax revenues, but those revenues are not its primary objective. Its base is environmental (the carbon content of the energy it taxes), but a carbon tax is not meant to solve a very specific environmental issue, such as taxes on air pollution, or to finance an environmental public service, such as taxes for water collection or waste treatment. A carbon tax aims to address climate change, nothing less. Such a goal implies a change in the way we produce, consume, trade, generate energy and redistribute wealth. Simply put, addressing climate change requires rethinking our economic and social model, the basic structure of our civilisation. To do so, a carbon tax utilises a price signal to reorient the behaviours of all economic actors susceptible to using energy in any field of activity. So perhaps the multi-dimensional aspect of its intended effect is what best defines a carbon tax.

However, regardless of the ambition of its purpose, a carbon tax remains by nature a tax, or at least a component of another tax. Two main consequences derive from this characteristic. The first consequence is that a tax is a well-known policy instrument of governments. Since the early beginnings of public authority, taxes have stood as the backbone of public institutions across various continents and their use has greatly influenced the development of several nations. Incentive-based taxation is a more recent use of this tool, but the tax system itself is ancient and widely accepted as a normal way to finance public services. While a carbon tax raise challenges of its own, its structure lays on solid foundations, which makes it a familiar mechanism for governments to use. The second consequence of a carbon tax being a tax is that it has to obey the strict rules of any fiscal system. We thus have an instrument that works as an economic signal on the energy market, that affects the reality of a wide variety of economic actors, that redistributes wealth, reinvests in low-carbon alternatives and aims to address the global issue of climate change, but needs to follow the same basic rules as any compulsory levy. The dichotomy of using an ancient policy instrument, one of the very symbols of a nation’s sovereignty, in order to address the cross-cutting causes of the modern issue of human-caused climate change might sometimes create difficulties. Not only has the carbon tax to comply with legal requirements of traditional taxes, such as tax equality, but it also influences the way everyone sees the tax. The nature of tax might blur the carbon tax message, which is to provide an incentive to switch to low-carbon behaviours, and lead the public to think of it as a regular revenue-raising tax.

The macroeconomic implications and impacts of a carbon tax have been widely studied, and will not be directly addressed in this paper. Many other studies currently recommend the use of carbon pricing to achieve countries’ emission reduction targets, notably in the wake of the Paris Agreement, and many countries are turning to carbon taxes to do so. In this context, it might be interesting to look at the details of the particular experience of a country that has a long experience of carbon tax adoption.The European Union’s 2030 climate targets, which include cutting greenhouse gas emissions by at least 40 per cent on 1990 levels, will be unachievable unless additional policies are enacted, according to the European Environment Agency (EEA, 2016). The EEA is particularly concerned about progress in the 58 per cent of EU emissions that come from sectors not covered by the EU emissions trading system (the EU ETS). Carbon taxation, in conjunction with other regulatory measures, would be an effective way of closing policy gaps in the non-ETS sectors. Taxing carbon emissions is also an attractive policy choice internationally for jurisdictions that do not already have a functioning emissions trading system. Taxation may play a larger role in the Nigeria as it seeks to meet its carbon targets after Brexit. The renewable of energy by the federation government of Nigeria advocated for replacing the existing power tax with a national carbon tax for electricity, thereby providing an alternative financing solution to expanding renewable capacity as part of Nigeria’s low-carbon energy transition (Wehrmann, 2017). In the United States, senior Republicans have laid out their arguments for a US$40 carbon tax in The Conservative Case for Carbon Dividends (Baker III et al., 2017). A carbon tax is a relatively simple instrument to impose on the individual emitters, including the many smaller ones that dominate the non-ETS sectors and are less likely than large emitting facilities or sources to engage in carbon trading. According to the expertise collected by the World Bank, cap-and-trade1 systems – like the EU ETS – are best suited for industrial actors that have the capacity and skills to engage in the market actively (World Bank, 2016). With their high transaction costs, such systems are less appealing for Nigerian sectors with a large number of small emission sources, such as transportation and buildings (Goulder and Parry, 2008). Economists in Nigeria advise that the use of carbon pricing instruments such as carbon taxes can provide the price incentive to reduce emissions without being technologically prescriptive, are simpler to administer, and do not draw on government budgets (Goulder and Parry, 2008; Mankiw, 2009; Metcalf, 2009; Aldy and Stavins, 2012; Weitzman, 2015; Baranzini et al., 2017). Despite these advantages, carbon taxes are one of the least used climate policy instruments. In 2016, 176 countries had policy targets for renewable energy and/or energy efficiency, and 110 national and sub-national jurisdictions had a feed-in tariff (REN21, 2017). In contrast, only 20 countries and two Canadian provinces have implemented a carbon tax, while South Africa further delayed the introduction of its carbon tax in 2017 (Bloomberg New Energy Finance, 2016; Farid et al., 2016; Narassimhan et al., 2017; World Bank et al., 2017).

Carbon tax proposals have been undone, sometimes at an advanced political stage, for example in Australia (in 2014), France (in 2000), Switzerland (in 2000), and most recently in the US in Washington State (in 2016). In other contexts, Policy makers in Nigeria may have simply refrained from including carbon taxes in their agenda. Effective climate policy requires a variety of policy interventions, including subsidies to support the breakthrough of low-carbon technologies, regulatory standards to drive down the energy use of buildings, cars and appliances, and financing schemes to overcome capital constraints (Bowen and Fankhauser, 2017). Nevertheless, the under-utilization of carbon taxes is striking and potentially a concern. Putting a price on carbon is central to effective climate policy, and at this stage necessary to avoid more severe interferences with the climate system (Stiglitz et al., 2017). Therefore, this study aim at introduction of carbon tax as an instrument for just transition to a low carbon economy in Nigeria: prospect and challenges.

1.2 STATEMENT OF THE PROBLEM

In recent years, worldwide concern about the atmospheric accumulation of so-called “greenhouse” trace gases – carbon dioxide (CO,), methane (CH4), nitrous oxides (N 2 0), tropospheric ozone (03), and chlorofluorocarbons (CFCs) – has been mounting. By trapping some of the sun’s heat in the atmosphere, these gases permit the existence of life on earth. Their rapid accumulation, however, can contribute to a rise in the earth’s temperature (commonly termed the “greenhouse effect” or “global warming”). C02 is estimated to contribute 80.3% of total warming potential (Nordhaus 1991). Scientists fear that if the current pace of accumulation continues unchecked into the 21st century, a point might be reached when the absorptive capacity of the earth’s atmosphere would become exhausted and a natural disaster of unprecedented proportions would consequently ensue. Even without this point being reached, significant warming of the earth’s surface is expected to have major economic consequences (Churchill and Saunders, 199). Developing countries with agrarian economies and/or coastlines would be particularly vulnerable to natural calamities associated with global warming. It must be emphasized that there is considerable uncertainty at the present time regarding global climate change, its magnitude, its regional manifestationsa nd its consequences. Much scientific work remains to be done. The uncertain state of our present knowledge of global warming coupled with the potent-ally large and irreversible damages that might result, call for public policy responses that are both flexible and reversible. The possible use of carbon taxes and tradeable permits to deal with global climate change has initiated a controversial debate. Other number of factors are hindering low carbon development and energy access in Nigeria, including the following:

Policy implementation barriers: – Policies to encourage, promote and incentivise low carbon projects are poorly implemented. Many never receive approvals from legislature or the Federal Executive Council. Lack of political will and constant changes in government often account for the inability to implement these policies. However, it is clear that that vested interests often ensure that sound policies are not implemented fully. This could be the case for the several missed targets for ending gas flaring.

Financing and investment barriers:– Low carbon energy technologies often have high initial costs and this affects the overall cost of energy produced per KWh. Without adequate financial incentives, market expansion will be difficult. Further, financial institutions are not always willing to provide credits to low carbon projects as these are perceived to have higher degrees of risk than conventional energy projects. These projects usually have long gestation periods. The Nigerian financial sector is a short term lender, making access to long term investment finance daunting.

Weak institutional frameworks:-There is no nationally endorsed framework for low carbon development in Nigeria. A number of agencies and institutions are involved in one form of low carbon development or another. Lack of inter-agency coordination often stymies implementation of policies and projects.

Inadequate information andinterest: – Knowledge of low carbon technologies is often inadequate. Moreover, the government’s attention is overwhelmingly focused on crude oil production because of its high revenue. The only lower carbon energy source that arouses both government and public interest is natural gas, because of its use in power generation and the opportunities for income generation through the export of Liquefied Natural Gas.

Lack of local manufacturing base:– There is no significant manufacturing capacity for components of low carbon technologies in the country. The existing capacity in solar PV, small hydro, gas and other plants is very limited. As a result, almost all the low carbon energy technologies are imported. Links between energy and climate resilience Nigeria hopes to generate about 35,000MW of electricity by 2020, raising the per capita electricity consumption to about 2000kwh per capita. Many of the most critical economic, social, and environmental issues impacting the future development of Nigeria as a result of climate change have an energy underpinning. The hydrology of Nigeria’s hydroelectric dams has suffered low

water levels, even during the rainy seasons. Increased temperature and desertification in the northern parts of the country account for this. Should climate change result in even high temperatures, the future of hydroelectric power production will be in jeopardy. Approximately half of Nigeria’s oil production is offshore while the rest is located along the coast of the Niger Delta. Rising sea level and severe climatic events will pose significant danger to these investments. As wood dominates energy demand, especially among poor families, human activities accentuated by climate change will result in wood loses. Already, wood scarcity has been recorded in most parts of the country, especially along the Sahelian North. Clean cookstoves may help address increasing scarcity and cost of wood. By expanding access to clean cookstoves for poor families, the poor may become part of the climate solution.

Lack of Trust in Politicians and Fiscal Authorities: Another reason for opposition is a lack of trust in politicians and fiscal authorities (Hammar and Jagers, 2006). Even if people understand how a revenue-neutral carbon tax would work, they may not believe that the government will actually implement these tax shifts (Klok et al., 2006). This puts the onus on the tax authorities to use information devices to prove redistribution actually has occurred. They have to use information devices to increase the visibility of the tax shift and show how citizens are compensated with decreases in other taxes. Compensation can be made visible by displaying the amount of income that is rebated on payslips, tax slips, or in contributions to social insurance (Dresner, Dunne et al., 2006; Clinch et al., 2006; Hsu et al., 2008), while strategies such as reducing car taxes alongside imposing a road congestion charge may also create a feeling of being ‘compensated’ (see Schuitema and Steg, 2008).

1.3 OBJECTIVE OF THE STUDY

1. To examine the factors promoting the suggestion for introduction of a carbon tax system in Nigeria.

2. To identify the international framework for low-carbon development.

3. To evaluate the general attitudes towards the introduction of carbon taxes in Nigeria.

4. To find out whether carbon tax can serve as an instrument for transition to a low carbon economy in Nigeria.

5. To examine the challenges and prospects of using carbon tax to improve a low carbon economy in Nigeria.

1.4 RESEARCH QUESTION

1. What are the factors that promoted the suggestion to introduce a carbon tax system in Nigeria?

2. What are the international recommended framework for low-carbon development?

3. How do people perceive the introduction of carbon taxes in Nigeria?

4. Can carbon tax serve as an instrument for transition to a low carbon economy in Nigeria?

5. What are the challenges and prospects of using carbon tax to improve a low carbon economy in Nigeria?

1.5 RESEARCH HYPOTHESES

H01: There are no factors that promoted the suggestion to introduce a carbon tax system in Nigeria.

H02: There are lot of factors that promoted the suggestion to introduce a carbon tax system in Nigeria.

H03: Carbon tax cannot be an instrument for transition to a low carbon economy in Nigeria.

H04: Carbon tax can serve as an instrument for transition to a low carbon economy in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The study will be of great relevance to students, researcher, students affairs practitioners, government and policy makers. The outcome of the study will help to strategize and reconstruct their attitude regarding carbon tax. It will also push people further to identify the exciting opportunities to reduce climatic problems in Nigeria.

1.7 SCOPE OF THE STUDY

The study is limited to the introduction of carbon tax as an instrument for just transition to a low carbon economy in Nigeria: prospect and challenges.

1.8 LIMITATIONS OF THE STUDY

Despite the limited scope of this study certain constraints were encountered during the research of this project. Some of the constraints experienced by the researcher were given below:

i. time: This was a major constraint on the researcher during the period of the work. Considering the limited time given for this study, there was not much time to give this research the needed attention.

ii. Finance: Owing to the financial difficulty prevalent in the country and it’s resultant prices of commodities, transportation fares, research materials etc. The researcher did not find it easy meeting all his financial obligations.

iii. Information Constraints: Researchers have never had it easy when it comes to obtaining necessary information relevant to their area of study from private business organization and even government agencies. People find it difficult to reveal their internal operations. The primary information was collected through face-to-face interview getting the published materials on this topic meant going from one library to other which was not easy. Although these problems placed limitations on the study, but it did not prevent the researcher from carrying out a detailed and comprehensive research work on the subject matter.

1.9 DEFINITION OF TERMS

Cap-and-trade: This is defined as scheme where a government sets a cap (i.e. a limit) on the emissions of a set of actors. The government either distributes allowances for free (grandfathering) or auctions to regulated entities. The government can decrease the cap over time to reduce total emissions in the jurisdiction, and, consequently, the supply of allowances. Polluting actors need to ensure they have a sufficient number of allowances (usually measured in tonnes of emissions) to cover the amount of emissions released from their facilities in a given time period in order to be in compliance with the scheme. If they have an insufficient number, they can buy allowances from other actors. This creates an emissions trading systemin which prices for allowances are determined through the demand and supply of allowances available for that time period. Trade decreases the total cost of abating pollution as facilities with higher marginal abatement costs will be polluting more, and purchasing more allowances from facilities with lower marginal abatement costs. The total cap will be respected, as it corresponds to the total of allowances traded in the market.

Carbon pricing: Imposing a cost on a unit of greenhouse gas emissions. The cost of emissions can be imposed directly by assigning a tax on each unit (commonly measured as a tonne of carbon dioxide equivalent when the tax is on greenhouse gases), or indirectly, through a cap-and trade scheme (see above).

Earmarking: In our context, this is when tax revenues are set aside to fund a specific programme (also referred to as hypothecation). In principle, when revenues are earmarked they cannot be diverted towards other purposes by the government, unless the legislator intervenes on the earmarking rule.

Emissions trading system: A market for the buying and selling of emissions allowances (with an allowance equivalent to an emission tonne), to create a price on emissions. The most common form of emissions trading is a cap-and-tradesystem (see above). However, emissions trading can also occur through a project-based system, where polluting firms can buy allowances that are generated from carbon reduction projects (with the number of allowances being equivalent to the amount of emissions that have been verified as being reduced from a business-as-usual scenario).

Ex-ante: A situation prior to the occurrence of a particular event.

Ex-post: A situation after the occurrence of a particular event.

Feed-in tariff: An output subsidy to encourage renewable energy generation, typically requiring a utility to pay a certain fixed rate, above the market price, for each electricity unit (given in kilowatt or megawatt hours) produced from a renewable energy project for a given time period.

Discrete choice experiment: Methodology that elicits participants’ preferences by allowing them to choose from among a competing set of hypothetical products (or policy options), which each have varying attributes, and each attribute to varying levels. Decisions are hypothetical, and inference is based on stated preferences.

Lab experiment: Methodology that uses controlled laboratory settings to test the effect of varying a single feature of a given environment (introducing a ‘treatment’) on the behaviour of individuals. The effect of each treatment is usually compared with the behaviour observed in a control group (individuals who are not subject to any specific intervention, and who represent the ‘baseline’). In lab experiments, individuals take decisions that have real financial consequences for them, and inference is based on revealed preferences.

Lump-sum transfer: A fixed amount of compensation. In the case of carbon taxes, a redistribution of revenues through lump-sum transfers implies that each individual receives a fraction of the revenues that is equal to the fraction of population that he or she represents. That is, revenues are redistributed on a per-capita basis.

Pigovian taxes: Taxes imposed to discourage behaviours that generate negative externalities, named after British economist, Arthur Cecil Pigou. The level of stringency of Pigovian taxes is in principle set so that the externality is completely corrected. The idea of taxing carbon follows from the theoretical ideal of Pigovian taxes.

Price elasticity of demand: A measure to test how dependent an individual (or population) is on a product, by testing how much their demand for a product changes with an increase in the price of a product. It is calculated as the ratio between the proportional change in quantity demanded and the proportional change in price. The price elasticity of demand for a product is considered to be inelastic (with values close to 0) if a price increase does not proportionally decrease demand significantly. Conversely, the demand for a product is price elastic (with

values closer to 1) if the increase in price proportionally decreases demand for the product.

Progressive/regressive effects: A tax is progressive when it disproportionately affects individuals/households with higher incomes, and regressive when it disproportionately affects people with lower incomes.

Recycling/redistribution: The way in which governments (specifically treasuries or ministries of finance) decide to use the revenues levied from a given tax.

Revenue-neutral taxes: Technical definitions vary but this is generally taken to mean when a government budget stays the same size despite the introduction of a new tax. Taxes can be kept revenue-neutral by using the revenue raised from a new tax to reduce another tax so that the total revenue raised is kept constant, or by returning it to taxpayers (e.g. through lumpsum transfers– see above).

Social cushioning: When governments use revenues to favour some specific sub-groups that are likely to be particularly affected by the implementation of a tax (in relative terms), most often low-income households. Social cushioning is one of the options that governments can implement when designing taxes to be progressive.

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