Carbon tax is a form of pollution tax which leaves a fee on the production, distribution or use of fossil fuels based on how much carbon is emitted. Carbon tax sets a price per ton on carbon which then translates into tax on electricity, natural gas or oil, with the aim of increasing cost-competitiveness of alternative power and most importantly enhancing environmental harmony. This is best achieved through carbon pricing.
Carbon pricing has been recognised not only as the most efficient economic policy instruments to internalise the social cost of emissions, but also as a major tool to generate public revenues that can be used to offset the potential adverse distributional effects of climate policy. However, in many developing countries (Nigeria inclusive), there is a widespread reluctance to commit to climate policy, largely due to financial constraints, a lack of public support, and concern over its regressive effects.
The reported corporate carbon prices in use are diverse, ranging from US$0.01/tCO2e to US$909/tCO2e. For the power sector, carbon prices range from US$24–39/tCO2e by 2020 and US$30–100/tCO2e by 2030. The United Nations Global Compact has called for businesses to adopt an internal carbon price of at least US$100/tCO2e by 2020, which will be needed to keep GHG emissions consistent with a 1.5–2°C pathway. This attempt is not intended to completely halt businesses operating in this sphere, but it is an indirect approach towards encouraging companies/businesses towards embracing new technologies and innovative strategies in reducing carbon emissions considering its impact on the environment.
Carbon pricing is relatively new and yet to gain grounds in Nigeria. However, there has been numerous signature efforts from related government organisations/establishments as well as the private sector coalitions which includes the Nigerian Sustainable Banking Principle (NSBP) amongst others.
While government adopts carbon pricing as one of the instruments of the climate policy package needed to reduce emissions, in most cases, it could also be a source of revenue, which is particularly important in an economic environment of budgetary constraints. Businesses use internal carbon pricing to receive incentives, tax reduction, , measure their carbon footprint, and to systematically integrate the negative externality of CO2 emissions into project appraisal as part of commitments to support low-carbon solutions through their lending portfolio as well as identify potential climate risks and revenue opportunities.
Finally, long-term investors use carbon pricing to analyse potential impact of climate change policies on their investment portfolios, allowing them to reassess investment strategies and reallocate capital towards low-carbon or climate-resilient activities.
At the international space, about 1,300 companies—including more than 100 Fortune Global 500 companies with a total annual revenue of about US$7 trillion– reported to CDP, an independent environmental stewardship and climate organisation in 2017 that they are currently using an internal price on carbon or plan to do so within the next two years. This represents an 11 percent increase compared to 2016. Of these companies, 607 reported to CDP that they are using an internal price on carbon—a fourfold increase compared to 2014.
An additional 782 companies stated that they are planning to implement internal carbon pricing over the course of 2018–2019. About two thirds of the companies currently use internal carbon pricing as a risk management tool. The current coverage and expected growth of mandatory carbon pricing initiatives have contributed to these developments: of the companies that have publicly disclosed that they are using an internal price on carbon or plan to do so within the next two years, 83 percent are headquartered in countries where mandatory carbon pricing is in place or scheduled for implementation at a national or sub-national level. These companies are also using it to explore cost savings and revenue opportunities through innovation.
An increase in the adoption of internal carbon pricing is anticipated following the final recommendations of the Financial Stability Board Task Force on Climate-related Financial Disclosures (TCFD) in 2017. The TCFD considers climate-related risks to be material and advises businesses to disclose their climate-related financial risks and opportunities under existing financial disclosure obligations, including in a scenario that limits global warming to 2°C or below. As part of this disclosure, the TCFD recommends companies and investors to report the internal carbon prices that are used to manage these risks and opportunities. In particular, organisations are encouraged to disclose the parameters used for scenario analysis of climate-related risks and opportunities and explain their assumptions, including the internal carbon price scenarios used.
National Carbon Management Policy
Nigeria’s carbon management policy stands to gain from aligning her national emissions planning to international mechanisms such as Emissions Trading Scheme (ETS) and the Clean Development Mechanism (CDM). Carbon pricing has been recognized not only as the most efficient economic policy instruments to internalize the social cost of emissions, but also as a major tool to generate public revenues that can be used to offset the potential adverse distributional effects of climate policy.
However, in many developing countries, there is a widespread reluctance to commit to climate policy, largely due to financial constraints, a lack of public support, and concern over its regressive effects. Evidence from contemporary development patterns link industrialisation to economic prosperity, a pattern that Nigeria policy makers intend to replicate as proposed in various economic plans. Under a business-as-usual scenario where a high-carbon emission industrial footprint perpetuates, Nigeria’s environmental sustainability path is not looking so bright as it is clogged with negative externalities that are counterproductive to long run productivity.
Carbon pricing as a system of governance through markets, carbon trading relies on the allocative efficiency of market agents to provide the right signals for innovative and efficient means of pursuing economic activities, more so for ensuring socioeconomic optimality in the use of public goods. The existence of two external parties, a regulator (government agency) and a broker (trading platform) constitute the necessary and sufficient condition for the workability of carbon trading.
The NSE will broker buy-and/or-sell deals between companies and through this process, a price discovery mechanism will be established for carbon pricing. This will require a network of professionals including; carbon analysts, environmental management practitioners, sustainability experts, energy economists and a host of other specialists. NSE’s 2013 signing of the Sustainable Stock Exchanges initiative for responsible investment and promoting of disclosure in respect of environmental and corporate governance can can thus be considered as a preliminary step in developing a functioning carbon trading arm. Numerous private sector arms as the Nigerian Sustainable Banking principles (NSBP) amongst others have also made signature efforts by working in this line.
National Carbon Trading Status-quo
Under the Kyoto Protocol, participating countries were required to reduce carbon emissions to 5 percent of preindustrial levels. Industrial carbon emission (4.32mt) as at 2011 accounted to 4.4percent of total carbon emissions in Nigeria, thus signalling lesser emissions.
In utopia, if Nigeria commits to keeping emissions level to the 1990 levels by say 2030, this will create a potential market 23.1million tonnes of carbon by 2030 taking cognisance of a conservative price of 1 dollar per unit carbon amounting to 23.1 million dollars carbon market (8.32 billion Naira equivalence). With Nigeria’s carbon tax pricing starting modestly at $8/tCO2e (see section 3.D), Nigeria can generate carbon revenue of about $1.30 million per year. Strategically, this would also be advantageous for Nigeria in a bid to secure climate funding grants.
Carbon trading limits government participation to the role of regulator while creating incentives for the private sector to adopt sustainable business methods and practices. Therefore, reducing outrageous taxes rate as well as creating an efficient tax system that is primarily determined by the interaction of demand and supply, thus creating a more transparent system.