Like many other countries, Nigeria has a long history of providing subsidies to the fossil fuel industry. These subsidies were initially introduced to support the country’s oil industry’s development and ensure that fuel was affordable for Nigerian consumers. However, these subsidies have become a significant drain on the country’s finances and a barrier to developing a more sustainable energy system.
Nigeria heavily subsidized petroleum products such as gasoline, diesel, and kerosene in the 1970s and 1980s to make them affordable to the growing population. The government set fixed prices for these products, which were often below the cost of production, and paid oil companies the difference in price as a subsidy.
By the 1990s, Nigeria’s oil industry faced significant challenges, including declining production and revenues. The government responded by increasing subsidies to the industry to support its development and encourage foreign investment.
However, these subsidies were expensive and often needed to be more targeted. In addition, they encouraged wasteful consumption and smuggling of subsidized fuels to neighboring countries while providing little benefit to the poorest Nigerians. Furthermore, subsidies aided environmental degradation and air pollution while undermining the country’s efforts to promote renewable energy and energy efficiency.
In recent years, there have been efforts to reform fossil fuel subsidies in Nigeria. In 2012, the government attempted to remove fuel subsidies entirely, which sparked widespread protests and social unrest. According to the International Monetary Fund (IMF), Nigeria spent $2.6 billion on fossil fuel subsidies in 2015. Since then, the government has pursued more gradual reform, including implementing a new pricing regime for petrol in 2016 and the removal of fuel subsidies for the power sector in 2020.
Despite these reforms, however, Nigeria continues to support the fossil fuel industry significantly. The International Institute for Sustainable Development (IISD) estimated that Nigeria spent $3.94 billion on fossil fuel subsidies in 2018, representing around 2.4% of Nigeria’s GDP and 17% of the country’s total government revenues. The persistence of these subsidies has been a significant barrier to Nigeria’s efforts to transition to a more sustainable and diversified energy system.
In Nigeria, subsidies to the fossil fuel industry come in various forms, including direct payments or tax breaks to oil and gas companies, subsidies for fossil fuel-supported home energy efforts, and subsidies for importing and exporting fossil fuels.
One example of direct payments or tax breaks is the Nigerian government’s provision of tax incentives and breaks to oil companies to encourage foreign investment in the country’s oil and gas industry. However, these incentives have been criticized for providing little benefit to the Nigerian people while costing the government significant revenue.
In addition to direct payments and tax breaks, Nigeria also provides subsidies for fossil fuel-supported home energy efforts. For example, the government provides subsidies for distributing liquefied petroleum gas (LPG) to households as a cleaner alternative to firewood and charcoal. However, these subsidies have been criticized for being poorly targeted and benefiting wealthier households more than the poor.
Nigeria also provides subsidies for the import and export of fossil fuels. For instance, the government provides subsidies for the import of refined petroleum products, such as gasoline and diesel, to ensure that domestic fuel prices remain low. However, these subsidies have been criticized for encouraging wasteful consumption and smuggling of subsidized fuels to neighboring countries.
Furthermore, the Nigerian government has been known to provide direct subsidies to domestic refineries to keep them operational, even though they are known to be inefficient and outdated. In addition, the government has also provided subsidies for the construction of new refineries, which has yielded little success.
In conclusion, despite efforts to reform or eliminate fossil fuel subsidies in recent years, progress has been slow and limited due to opposition from powerful interest groups and challenges with implementation. To achieve a more sustainable and diversified energy system, Nigeria must continue to prioritize policy measures that support the development of renewable energy and energy efficiency while also addressing the challenges of corruption and mismanagement that have hindered progress in the past. Ultimately, the successful reform of fossil fuel subsidies in Nigeria will require strong political will and a commitment to promoting the public interest over the interests of powerful industry groups.
This Post was submitted by Climate Scorecard Juwonlo Michael
Learn More Resources
International Monetary Fund. (2015) Country Report. https://www.imf.org/external/pubs/ft/scr/2015/cr1585.pdf
International Energy Agency. (2021). Energy subsidies database. Retrieved from https://www.iea.org/data-and-statistics/data-product/energy-subsidies-database
Nigeria National Bureau of Statistics. (2020). Premium motor spirit (PMS) price watch. Retrieved from https://www.nigerianstat.gov.ng/pdfuploads/PMS_Price_Watch_January_2020.pdf
Okafor, O. (2019). Nigeria’s energy poverty, fuel subsidies and implications for sustainable development. Energy Policy, 127, 27-37.
Onuoha, F. C. (2019). Nigeria’s energy subsidies: An overview of their economic and social costs. Energy Policy, 128, 796-802.