Carbon Trading as an option for Greening Nigeria’s Economy

 In Thinking Aloud

Introduction

If there were any doubts about the resolve to tackle climate change concerns, the Paris Climate Change Convention, held in November 2015, ought to put finality to that. There is concerted effort on a global scale to combat the rising scourge of global warming, green house gases (GHGs) – the major ones being carbondioxide, methane, nitrous oxide and halocarbons, and other environmental challenges connected to anthropogenic activities. There now appears to be the multilateral will for action[1], what individual countries have to do is to find a way to actualize their targets by utilizing the various incentives that are available. Nigeria’s carbon management policy stands to gain from aligning national emissions planning to international mechanisms such as Emissions Trading Scheme (ETS)[2] and the Clean Development Mechanism (CDM)[3]. Following recommendations at the Kyoto Protocol[4] which were ratified in subsequent climate change conferences, developing countries (Annex II countries) have been presented with a multiple of intervention options for charting a green future.

On a national scale, Nigeria emitted 95, 650mt[5] of carbon in 2013 with a substantial portion of this emission coming from industry, an inevitable outcome of inefficient production systems and obsolete machineries deployed to the production process. 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 sustainability path is not looking so bright as it is clogged with negative externalities that are counterproductive to long run productivity. What is required is a measure that internalizes the negative externalities arising from inefficient production practices through market-based instruments, knowing that government inefficiency has been a recurring decimal in our national life making it doubtful that non-market, state-led interventions will succeed in halting the trend of Nigeria’s rising carbon emissions. Industrial sector carbon trading provides ample opportunity for extending market-based emission reduction strategies to other sectors of the Nigerian economy[6]. Success on a national scale has the potential to position Nigeria as the leading regional carbon trading centre.

Total Carbon Emissions in Nigeria (million tonnes)

Source: Factfish[7]

Industrial Carbon Emissions in Nigeria (million tonnes)

Source: Trading Economics[8]

Carbon trading is patterned after the ETS which is fully underway in Europe as a means of combating emissions by establishing emission standards or caps, which limit how much an entity/organisation/country is permitted to emit, and to buy/sell the excess/savings. 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 climate being a typical example. 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. These conditions are fulfilled in Nigeria through the Ministry of the Environment acting as the regulator while the Nigerian Stock Exchange provides the trading platform.

Carbon Emissions Trading on the Floor of the Exchange

Trading activities already take place on the floor of the Nigerian Stock Exchange (NSE) for the purchase and sale of the shares of quoted companies, to the effect that there is an organised platform, based on demand and supply principles, for establishing the true worth of public limited liability companies. Adding on a carbon trading facility is by no means a far stretch to the function that the NSE performs though this will involve carbon monitoring capability and technical knowledge of carbon trading mechanisms.

Delineation of Functions

As is the case with the EU emissions trading scheme where emitting units are allocated emissions targets at the beginning of the period, an emissions control unit should be created under the Ministry of the Environment for estimating allowable industrial emissions and allocating these to manufacturing companies on a taxonomical[9] basis, possibly (and perhaps for administrative convenience) at the beginning of the financial period[10]. Companies will be forced to incorporate emission management policies into their financial plans while taking steps to eliminate inefficient practices. Periodic monitoring between officials of the Ministry and the emitting company representatives will be required for a mutual assessment of accumulated emissions level to trigger off a buy or sell response from the company.

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, energy economists and a host of other specialists.  In economic parlance, the function of the NSE will be to bring buyers and sellers together in an organised market setting where trading rules are clear and fair. In 2013 the NSE signed unto the Sustainable Stock Exchanges initiative for responsible investment and promoting of disclosure in respect of environmental and corporate governance, which can be considered as a preliminary step to developing a functioning carbon trading arm.

 

Hypothetical Carbon Trading Scenario

Nigeria’s industrial carbon emission (4.32mt) as at 2011[11], accounted for 4.4percent of total carbon emissions in Nigeria in the same period. Under the Kyoto Protocol, participating countries were required to reduce carbon emissions to 5 percent of preindustrial levels[12]. 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, given a 9 percent average growth rate in industrial carbon emissions in the BAU scenario, and compounding for the number of years from 2011 to 2030[13]. The likely carbon price will be determined on the floor of the exchange emitters enter into buy/sell bargaining depending on who is emitting more or less than the other. A conservative price of 1 dollar per unit of carbon creates a 23.1 million dollars carbon market (conservatively 6.93 billion naira[14]) in local currency. In itself, this is a significant incentive for efficiency in the production process.

Conclusions

Nigeria and the rest of the developing world have an opportunity in the traction gained by the United Nations Framework Conference on Climate Change (UNFCCC) to divert way from the emission-heavy, carbon-intensive industrialisation path of the West towards a green future in line with 21st century demands for the protection of the sustainability of the ecosystem. Carbon trading offers Nigeria the chance to lead sub-Saharan Africa in accessing and deepening the potential gains from the green economy.

Carbon trading limits government participation to the role of regulator while creating incentives for the private sector to adopt sustainable business methods and practices. It also functions as an efficient tax system that replaces a government-imposed tax rate with a carbon price that is determined by the interaction of demand and supply thereby enhancing resource allocative efficiency and the deepening of private players in corporate governance.

 

[1] Of the 194 member countries of the United Nations Framework Conference on Climate Change (UNFCCC), 193 have signed the treaty reached at the conference while 133 countries have ratified it.

[2]. Under the ETS permissible emissions limit, called carbon credit, is established on a country basis, which are then traded on an international trading platform called the International Transactions Log (ITL)

[3] The ETS and CDM are specifically oriented towards market-based implementation tools, and they are easily deployable to helping developing countries acquire the needed technical competence and capabilities

[4] The Kyoto Protocol was an agreement reached at the UNFCCC (1992) that held in Japan and it represents the first widely adopted treaty to tackle climate change.

[5] See, http://www.factfish.com/statistic-country/nigeria/co2%20emissions.

[6] Industrial sector emission makes up to 4 to 5 percent of total emissions in Nigeria. This may appear insignificant but if you consider that most manufacturing companies operate at less than 50 percent of installed capacity, and that the industrial sector contributes less than 30 percent to the Nigerian economy, a full scale industrial industrialisation drive has the potential of increasing the contribution of industrial carbon emissions by a factor of 1.5 to 2.

[7]http://www.factfish.com/statistic-country/nigeria/co2%20emissions.

[8] http://www.tradingeconomics.com/nigeria/co2-emissions-from-manufacturing-industries-and-construction-million-metric-tons-wb-data.html.

[9] Targets could be allocated based on level of energy intensiveness or industrial capacity.

[10] Sustainable business practices are evaluated on the extent to which they comply with the three Es (Economy, Efficiency and Environment) so that businesses move from profit consciousness to sustainability consciousness.

[11] Industrial carbon emissions grew from 1.11million tonnes in 1971 to 4.32 million tonnes in 2011 representing an average growth rate of 9 percent per year over the 31-year period. Using the formula {[(Lyv – Iyv)/ Iyv] * 100}/ no. of years, where Lyv = last year value and Iyv = Ist year value.

[12] The 1970s were the reconstruction periods for Nigeria fuelled by huge foreign inflows from crude oil sale, in a sense, 1971 can be regarded as the onset of the industrialisation period for Nigeria.

[13] Using the compound growth rate of A(I+i)r  where A = emissions level in 2011 (4.32mt), i = average growth rate (9%), and r = no. of years between 2011 and 2030 (20 years).

[14] I assume an exchange rate of 300 naira to one dollar.

 

Image Source: www.foeeurope.org

 

Author: Kingsley Onyeka

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