Fuel Subsidy Removal And Environmental Quality In Nigeria: A Dynamic Computable General Equilibrium Approach

ABSTRACT

Environmental challenges such as climate change continue to threaten human existence globally. This has necessitated renewed focus on some existing policies that by design or otherwise may counter global efforts at addressing these challenges. Various engineering solutions have been championed while economic and social development tools have focused on using various policy instruments to reduce the concentration of emissions in the atmosphere. One of such policies is the fuel subsidy policy and various arguments for and against this policy exists. While some support the policy as it enhances access to energy and promotes welfare, others argue that it places budgetary burden on the economy. More so, studies that have focused on policy instruments have employed different approaches. However, those that focused on addressing environmental questions in terms of promoting green growth are very scarce. This study, thus, investigated the environmental consequences of fuel subsidy removal in Nigeria using an economy-wide modelling approach. It adapted the energy-environment (E2) dynamic CGE model of the Nigerian economy that is based on the Partnership and Economic Policy (PEP) recursive dynamic CGE model. Furthermore, the study simulated three scenarios namely the partial removal (Simulation1), gradual removal (Simulation 2) and complete removal (Simulation 3) of import tariff on imported refined oil. It assessed the impact of the various simulation strategies on carbon emissions (as a measure of environmental quality) in Nigeria. The dataset employed is the re-aggregated version of the 2006 Nigerian Social Accounting Matrix (SAM) that specially accounted for petroleum subsidy. The re-aggregation was to make it more compatible with the main objective of the study. This is necessary since the 2006 SAM has different components. The outcome of the simulation analysis showed that reduction in carbon emission occurred only when subsidy was partially removed, but marginally increased with gradual removal and complete removal. This suggests that even though the removal of subsidy can reduce emission, it is not sufficient in the long term especially as there is yet to be a viable “green” alternative to petrol in Nigeria. Therefore, subsidy removal will only make consumers reduce consumption initially and then increases later in order to meet their energy demands since there is no better environmentally friendly alternative to petrol. It is recommended that subsidy on petrol be targeted towards enhancing the commercialisation of renewable energy sources or appropriate technology (such as fuel blending) which are still not affordable for some households. This will further enhance the development of green growth practices and then be supported with relevant financing options in order to make it sufficient for driving environmental quality in Nigeria.