Being Green and Prudent: Economy-Wide and Environmental Impacts of Renewable Energy Production Subsidy in Nigeria

Abstract

ABSTRACT: Green fiscal policies are becoming prominent policy instruments for achieving energy transition. However, while the effectiveness of these policies on renewable energy outcomes have been well documented, the economy-wide impacts are rarely studied. This study examines the economy-wide and environmental impacts of renewable energy production subsidy in Nigeria. The study provides a novel modeling framework for analysing fiscal and other incentives for green energy in Nigeria by incorporating self-generated electricity, which is a major component of electricity supply in Nigeria, into a macroeconomic model. The study uses a Computable General Equilibrium (CGE) model to analyse the effectiveness and economic impacts of renewable energy production subsidy in Nigeria. CGE models are commonly used to assess the economy-wide impacts of public policy. Specifically, the PEP-1-1 model, which is a static single-country model, is used for the analysis. The model is calibrated on Nigeria's updated social accounting matrix (SAM). The results of the analysis show that renewable energy production subsidy is effective in enhancing the development of the renewable-electricity sector and encouraging the use of renewable electricity but does not significantly reduce the use of conventional electricity sources. The subsidy, if financed by public deficit, has positive impacts on real economic outcomes such as GDP, household income, welfare, and employment, but has a smaller effect on CO2 emissions. In contrast, the economic effects are mostly negative, but the CO2 emissions-reduction effects are larger if the subsidy is financed by reallocation of public expenditure. In addition, the effects on sectoral outputs are mixed. The results of this study can be used by policy makers to ascertain how to finance green subsidies in fiscally constrained and energy-poor developing countries. Specifically, policy makers should take cognizance of economic and feedback effects when designing and implementing environmental policies. Beyond Nigeria and the specific case of fiscal subsidies, the modeling framework presented in this study can be applied to other green energy policies and can be adapted to other developing countries.