Why Nigeria needs an effective emission tading scheme

BY CHIMA IBE

Nigeria stands at a critical crossroads in balancing its climate commitments with economic realities. The government’s recent proposal to impose a 5% fuel tax from January 2026 as a way of addressing environmental concerns risks deepening hardship in a country already grappling with inflation, rising energy costs, and widespread poverty. Instead of taxing fuels directly, Nigeria should prioritise strengthening emission regulations and building a robust Emission Trading Scheme (ETS) that delivers environmental benefits without worsening the economic burden on ordinary citizens. This is the case in other countries, like Brazil, India, Mexico, Indonesia and Colombia, with comparable economic trajectories like Nigeria.

Fuel taxes are often used globally to discourage consumption and fund clean energy transitions. However, in Nigeria, such a policy risks amplifying inequality and pushing many who are on the edge further down. Over 63% of the population is classified as multidimensionally poor, and energy affordability is already one of the most pressing challenges since the removal of fuel subsidies in May 2023, and subsequent increases in electricity tariffs. A new tax on fuel would cascade through the economy, increasing transport fares, food prices, and the cost of basic services, pushing millions further into financial distress.

This policy may be hinged on Nigeria’s commitment to the Paris Agreement and subsequently the signing into law of the Climate Change Act 2021 by late President Muhammadu Buhari to protect the Nigerian environment, ecosystem and livelihoods from the dangers of climate change and ensure a reduction in greenhouse gas emissions.

However, this blanket fuel tax does not differentiate between high and low emitters. The wealthy who consume more fossil fuels can more easily absorb higher costs, while the poorest, who already spend a large share of their income on energy and transportation, are disproportionately punished. This creates a regressive system that undermines public trust in climate policy.

The Climate Change Act 2021 also stipulates the establishment of the Emission Trading Scheme, which requires a robust regulatory environment for effectiveness, which the government perhaps considers “hard work” and instead opts for the easier 5% fossil fuel tax route. Strengthened emission regulations through ETS would focus on industries and sectors that are the largest contributors to Nigeria’s carbon footprint, such as oil and gas, power generation, cement, and heavy transport.

By tightening monitoring, reporting, and verification of emissions, regulators can hold polluting companies accountable without pushing the burden onto households. The regulatory value chain and the shifts companies will make in aligning their objectives to the regulatory environment would create newer opportunities in new jobs that are rooted in economic sustainability.

Establishing an effective emission trading scheme aligns with Nigeria’s Climate Commitments and serves Nigeria’s ultimate decarbonisation goal. Nigeria’s Nationally Determined Contribution (NDC) under the Paris Agreement commits to reducing emissions by 20% unconditionally and 47% with international support by 2030. Achieving this requires systematic reforms in how emissions are measured and reduced. Strong regulations, coupled with market-based instruments like ETS, would create an enforceable pathway toward meeting these targets and raise Nigeria’s decarbonization credentials globally.

Many may scoff at this as Nigeria is nowhere near the high-emitting countries, but the reality is that the global economy is interlinked through world trade. Countries, companies, products and services are getting a lot of scrutiny on emission requirements and standards, and countries in particular that set up effective regulatory environments stand to reap in investment flows that would define the new sustainability economic order.

Emission regulations, when linked with an Emission Trading Scheme, incentivise firms to innovate. Companies that reduce emissions below the regulatory cap can sell excess allowances, while those that do not face the cost of purchasing permits. This creates a competitive environment that rewards efficiency and investment in cleaner technologies.

An effective ETS, supported by strong regulation, lays the foundation for Nigeria to participate in international carbon trading schemes. This opens new revenue streams through the sale of carbon credits, attracting green finance and foreign investment without imposing additional tax burdens on the poor.

An ETS operates by setting a cap on total allowable emissions and allocating tradable permits to emitters. Those who exceed their limit must buy credits, while those who emit less can sell theirs. For Nigeria, this system offers several advantages in flexibility for industries, as firms can choose the most cost-effective route to compliance rather than facing a rigid fuel tax.

Another benefit is that the government can generate huge revenue without regressive taxation that affects the poor. Instead of taxing fuel at the pump, revenue can be generated through auctioning emission permits and channelling that into renewable energy projects, rural electrification, and adaptation programs. The Rural Electrification Agency (REA) could champion this process based on its mandate and ensure that many rural communities have access to renewable infrastructure projects deliberately funded from the sale of government carbon permits.

Establishing an ETS helps the Nigerian energy and climate ecosystem integrate with global markets. As global carbon markets expand, Nigeria stands to benefit from exporting carbon credits, especially through nature-based solutions and carbon offset projects like reforestation and mangrove restoration, which a lot of our people can be encouraged to be part of through community-based associations, town unions and cooperatives.

Nigeria’s economic conditions require that climate policy be both socially just and economically sound. A fuel tax risks inflaming public discontent, much like the backlash seen with subsidy removals. Strengthened emission regulation and an ETS, however, offer a path where environmental responsibility aligns with industrial accountability, not household suffering.

By choosing smart regulation over blunt taxation, the government can safeguard our people from further economic pain while still advancing toward a sustainable, low-carbon future. President Tinubu can review this fuel tax policy before the rollout date and, like his characteristic bold move on the subsidy removal, follow the more economically sustainable, but rigorous ETS path. That is a sustainable path for the people, for the planet and for profit.

Chima Ibe, an energy and carbon finance expert, can be reached via [email protected]