Article summary
- Nigeria and other African countries are ripe for carbon tax implementation, according to a World Bank report. Nigeria already has legal frameworks to establish an emissions trading system.
- Governments are increasingly recognizing the potential of carbon taxes or ETSs to support fiscal reforms by generating revenue through a mechanism that provides positive incentives for change. This is especially helpful for countries with high debt levels.
- Fiscal pragmatism, border carbon adjustments, and climate action are some of the drivers of growing interest in carbon taxes and emissions trading systems around the world.
Nigeria and five other countries are prime candidates for the implementation of carbon taxes, according to the World Bank.
In its State and Trends of Carbon Pricing report for May 2023, the World Bank highlighted Nigeria and five other African countries as suitable for the adoption of carbon taxes. Currently, South Africa is the sole country on the continent that has implemented carbon tax policies.
However, there is a growing interest in carbon taxes and emissions trading systems (ETS) throughout Africa. The report stated:
- “Almost every world region has low- and middle-income countries considering carbon taxes or ETSs. While South Africa has been the only country to implement a carbon tax in Africa thus far, Botswana, Côte d’Ivoire, Gabon, Morocco, Nigeria, and Senegal have all shown an appetite to adopt either a carbon tax or an ETS.”
Additionally, the report mentioned that Côte d’Ivoire and Senegal have conducted feasibility and impact assessment studies with support from international donors, while Botswana continues to explore the feasibility of implementing a carbon tax. Meanwhile, both Gabon and Nigeria have published legal frameworks to establish their respective domestic ETSs.
The report emphasized Nigeria’s Climate Act, which establishes a council with the authority to establish an ETS. It further noted that if these countries initiate carbon pricing efforts, the global landscape of carbon tax adoption could undergo significant changes.
Drivers behind the growing interest in carbon taxes
The report identified several drivers behind the growing interest in carbon taxes among a wider range of countries, including fiscal pragmatism, border carbon adjustments, EU accession, new policy designs, and climate action.
Governments are increasingly recognizing the potential of carbon taxes or ETSs to support fiscal reforms by generating revenue through a mechanism that provides positive incentives for change. This is particularly pertinent given the high levels of sovereign debt faced by many countries, as well as the challenges posed by informal economies that may limit the effectiveness of other revenue-raising methods like value-added tax (VAT) or income tax.
Additionally, it is worth noting that the European Union’s planned Carbon Border Adjustment Mechanism (CBAM) includes provisions for reduced charges on imports to the EU if the embedded emissions have already been subjected to a direct carbon price in their country of origin.
Understanding Carbon Tax and Emissions Trading System (ETS)
In essence, a carbon tax is a policy tool used by governments to levy fees on covered entities for their greenhouse gas (GHG) emissions, thereby creating a financial incentive to reduce emissions. The government determines the price of emissions (the tax rate) under a carbon tax, and the resulting reduction in emissions depends on the response of emitting entities.
On the other hand, an emissions trading system (ETS) involves the government imposing a limit on the amount of GHG emissions from covered entities. These entities must surrender emission units to cover their emissions within a compliance period.
Each emission unit represents the right to emit a certain volume of emissions and can be traded between covered entities or with other traders.