Economic policy regarding ways to combat oil pollution in Nigeria
Since the discovery of oil in the Delta region of Nigeria, the country reports an estimated export value of oil from the region to be $89b USD per annum, which translates into a contribution of up to 35% to Nigeria’s gross domestic product, and over 90% of its foreign exchange wealth (OPEC, 2015). With 48 oil fields and 93 natural gas fields, the Delta region’s redeemable reservoir is approximately 34.5 billion barrels of oil and 94 trillion cubic feet of gas, with a value in excess of $3.1 trillion—equal to 11 years of the entire GDP of the country (Allen, 2013). Nevertheless, a majority of the people in the region are at/ below the poverty level. The threat of a food shortage in the region also looms ever closer due to oil pollution and gas flares, and it is this oil pollution that poses the biggest threat to the people of Delta state. Below, I will briefly summarize the extent of the pollution, assess two current measures that the government has in place to combat the pollution, and suggest two policies that can be adopted to reduce the effects of the pollution.
Oil regulations and legislations such as the Petroleum Act of 2004 were established so as to allocate the scarce resource (oil) more efficiently, in order for the government to gain as much revenue from the resource as possible. But the oil sector suffers from a form of market failure known as a negative externality in the form of oil pollution. 13 million tonnes of hydrocarbons have been reported as spilled in the Niger Delta (Nwilo and Badejo, 2006; Kadafa, 2012). The Nigerian National Petroleum Corporation (NNPC) estimates an average of 300 individual oil spills occurs each year, but there are numerous more that go unreported, meaning this number is an underestimate. This issue is still ongoing, and causing both the government and the oil companies billions in costs, along with leaving the country often unable to supply enough oil to meet the demands of its two major ‘customers’- America, and the UK.
According to Nwilo and Badejo (2001), “50% of oil spills is due to corrosion, twenty eight percent (28%) to sabotage and twenty one percent (21%) to oil production operations. One percent (1%) of oil spills is due to engineering drills, inability to effectively control oil wells, failure of machines, and inadequate care in loading and unloading oil vessels.” But the sabotage aspect is due to the fact that the communities in the area believe that they are not being compensated for the damage that they believe the oil companies presence is causing (e.g. loss of livelihood), and so they vandalize the oil pipes, which thus causes moiré oil spills, along with the oil companies threatening to move offshore, or leaving the country altogether. Most of these acts of vandalism are caused by a militancy group- the Niger Delta Avengers, a group that has led to a fall in oil exports from Nigeria by almost 50%, and has even contributed to a spike in world oil prices(Campbell, n/a). The Nigerian government is also busy performing damage control, and cannot adequately divert its attention towards expanding from oil into gas based industrialization which would boost GDP. The pollution is a very serious problem, but the following have to be considered in the creation of policies: the value of its prevention, the cost towards its abatement, and the effects on welfare, along with the fairness brought by the different policies employed. This puts to mind the question on how this inefficiency can be reduced, as (for example) Shell is set to pay out £55 million, funds that could have been invested into maintaining the oil pipes. Thus the question that many have attempted to answer: what policies does the Nigerian government have in play to solve this issue, and what more can they do?
The Clean Development Mechanism (CDM) established under the Kyoto Protocol is used in seven projects run by Shell in the Delta. This mechanism, backed by the World Bank, enables Shell and the government to purchase funds from both the public and private sector in order to reduce the emissions caused by gas flaring. To put it simply, CDM recompenses Shell and the Nigerian government with profitable opportunities in emissions trading, irrespective of the fact that the two parties are legally compelled to end the practice of gas flaring. In the words of Amunwa (2011), “Instead of adhering to the global ‘polluter pays’ principle, SPDC’s use of CDM in Nigeria could make more profit for the polluters.” While compensation is an incentive, it should be targeted toward activities that are not legally required.
Nigeria is a monoproduct economy, and 90% of total exports revenue is made up of petroleum exports (Elenwo, Akankali, 2014). Due to its monoproduct status, the country experiences several shocks to the economy as a result of the unpredictability of oil prices, along with lowering regulation and environmental standards to increase the demand of oil producers to work within the country at a lower price. Nevertheless, the country earns a lot from the oil production, but the proceeds during the periods of high prices are mismanaged, leaving inadequate funds to cover periods where less revenue through oil is earned. Between 2003- 2009, the country attempted to save during periods of economic booms by establishing the Excess Crude Account (ECA) in 2003 and later on, the Nigerian Sovereign Investment Authority (NSIA) in 2012, to store the surplus inflow, along with providing a means to compensate the sufferers of the pollution caused by oil. From 2003 to 2008, the ECA had $22bn, which allowed the government to withdraw $15bn when oil prices fell in the last half of 2008 to act as a shock absorber for the economy. Since 2009, the ECA has continued to be drawn down despite high oil prices, and stood at just US$2.5bn as of January 2015. While it started out as a good idea and was carried out well in the following years, it has been neglected due to the opportunity cost of storing it for the future, as it is being used presently to pad the budgets of the 36 states of the country, along with counter-terrorism measures.
Globalization and economic integration has brought even more trade and Foreign Direct Investment to Nigeria, but the country is as a result often viewed as a pollution haven, that oil companies can carry out operations in for the same quantities but at a cheaper cost due to less stringent and enforced environmental policy, and better make use of economies of scale. There is evidence that developing countries (e.g. Nigeria) do not impose policies so as to entice and keep investors, and that said investors have often influenced such behavior (Mabey and McNally, 1999). But if the Nigerian government can benefit from tightening policy at the risk of a slight decrease in revenue, they will be incentivized to carry them out, and one way to do this is through the implementation of a pigovuan tax. It is a tax which levies unto the producer of the negative externality (oil companies) an amount which is equivalent to the harm caused through pollution, and also includes the approximate cost of future pollution. The Nigerian government could take a note of the US, who implemented this same method, and used the funds generated from it to create the Oil Spill Liability Trust Fund. The implementation of a Pigouvian tax will better internalize the externality, and prevent the ‘race to the bottom’ mentality that the government currently practices. Previously, the polluters only internalize the marginal private costs and not the marginal external (societal) cost, thus leading to a deadweight loss to society.
Graph depicting Pigouvian Tax Mechanism
MB curve depicts the marginal benefit of the oil companies for each level of production which declines as the amount of output increases. The (MPC) curve shows the marginal cost bared by the companies as output increases. The greater the output, the more pollution and thus, the bigger the negative externality, which is shown by the marginal damage curve. Lastly, the marginal cost to society (MCs) represents the aggregate MC for society. The distance between Q and Q* is market failure, which can be corrected by the imposition of a tax. But the tax should not be implemented on the entire company, but rather, on the polluting aspect. The government can use the revenue obtained from the tax to compensate the communities affected by the pollution, along with hiring, training, and compensating said members to report oil spills to approved government agencies in order to get a more accurate figure of the damage being caused. Funds can also be used to provide subsidies to the likes of Shell towards the cost of upgrading and maintaining oil pipes, especially if they are made of locally sourced materials.
Another policy that could be employed is geared towards the diversification of the economy. Before the discovery of oil, Nigeria was known for its agricultural exports, but the agriculture sector has since seen a decline. Due to the fact that the countries budget decisions are tied to the oil market, the country experienced a budgetary shortfall of roughly $11 billion USD in 2016 (IPI Global Observatory, 2016), as well as a steady fall in the value of the naira, the national currency. This also made imports into the country expensive. United States Department of State (2005), stated that the country is no longer a crucial exporter of cocoa, groundnut, rubber, and palm products. Cocoa is stagnant at around 150,000 tonnes annually. Twenty-five years ago, cocoa production in the country was about 300,000 tonnes (Ndimele). If the country were to allocate more land and budget towards going back to increasing cocoa production alone, it would bring in roughly £517 million into the economy, create more jobs for citizens, and stop the country being solely dependent on oil. If the dependency falls, the government may be willing to introduce more stringent laws and taxes, without the fear of losing the companies these regulations are imposed on to other oil producing countries. If the government set up the farms in the rural communities of the Delta, it may also solve the issue of the militancy group and pipeline vandalism, as the people will regain employment where it was lost due to wildlife not surviving the oil spilsl e.g. fish. This could give the government more room in terms of a different avenue for FDI to come into the country, along with employing loose fiscal and monetary policy, as the country is currently facing inflation of 14% due to spikes in oil prices. Although this shift in policy may originally present a challenge due to the fact that most of the current farmers in the country practice peasant farming, and so cannot employ economies of scale, it is a start in weaning the country off of some of the oil conglomerates that pollute without cleaning up or compensating the communities.
To conclude, the discovery of oil in the country helped in the speedy development of its infrastructure and growth in GDP, but with it came the harmful effects of pollution in the form of oil spills and gas flaring. The current policies that the government has in play is not enough to combat the issue or motivate the companies operating within its borders to adhere to environmental regulation, With my suggestion of the use of the Pigouvian tax and the diversification of the economy, there is still a chance for the full recovery of the Delta state.
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