The International Energy Agency (IEA) has advocated for the removal of fuel subsidies as a pathway to energy security, especially in resource-dependent countries like Nigeria.
In its October 2022 World Energy Outlook (WEO), the IEA said inefficient fossil fuel subsidies are a major hindrance to a more sustainable future.
The report noted that although there is a social imperative to protect the most vulnerable in society, one of the most visible costs of fossil fuel consumption subsidies is the financial burden that it imposes on countries.
Therefore, countries need to secure their energy transition by removing inefficient fuel subsidies. Payments for fuel subsidies have been on the rise between 2021 and 2022 after a noticeable dip in 2020.
According to the IEA, governments need to harness the vast resources of markets and incentivize private actors to play their part. Governments need to put in place stable, and predictable long‐term market frameworks designed to support the achievement of their goals.
The IEA estimates that high fossil fuel prices and additional measures to protect consumers during the energy crisis could lead to a further sharp increase in fossil fuel subsidies in 2022.
What the IEA said
The IEA said that in fuel-exporting countries, subsidies are the opportunity cost of foregone revenue rather than an explicit budget item. The less visible costs are felt in the way that subsidies encourage excess consumption of fossil fuels, and the distorted incentives that they introduce for investment.
The IEA also acknowledged that pricing reform is essential but politically difficult, as low-cost fuels are often part of the implicit social contract in many developing economies, especially those with large hydrocarbon resources.
The IEA also explained that subsidy removal, on its own, is a blunt tool. So, efforts in this area need to be part of a broader strategy that includes efficiency policies to improve the supply of more energy‐efficient goods and services as well as measures to protect vulnerable groups.
The agency gave an example of the United Arab Emirates and how the country started to gradually phase out gasoline and diesel subsidies in 2015 when global oil prices were relatively low, thus smoothening the impact on citizens. By 2022, gasoline and diesel prices in the country are near the global average.
To secure the energy transition of resource-dependent countries like Nigeria, the IEA also suggests that the government needs to invest in clean energy technology innovation and early-stage deployment.
- “In order to get to net zero emissions by 2050, innovation cycles for early-stage clean energy technologies need to be more rapid than has typically been achieved historically. Bringing early-stage clean energy technologies to market by 2030 requires going from the prototype to market around 20% faster on average than the quickest energy technology developments in the past, and around 40% faster than was the case for solar PV. Demonstration projects in sectors where economies of scale favor large installations, such as for sustainable fuels and industrial decarbonization, are generally the hardest to fund without public support.”
What you should know
- Successive Nigerian governments have had difficulty removing the fuel subsidy in Nigeria, especially in times of high and volatile fuel prices.
- In August 2022, Nigeria’s Minister of Finance, Budget and National Planning, Zainab Ahmed revealed that the Federal Government spends an estimated N18.39 billion daily on petrol subsidy payments.
- In the proposed 2023 budget breakdown, the President Buhari-led government planned N3.6 trillion for fuel subsidy payments for the first half of 2023, while announcing the discontinuation of fuel subsidy payments after HI/2023, when he vacated the office of the president.
