The removal of fossil fuel subsidies is critical to limit temperature increases and lower carbon emissions. But doing so can have profound social and economic implications. When Nigerian president Bola Tinubu ended the country’s petrol subsidy in May 2023, citizens faced soaring petrol prices, sparking concerns around the socio-economic impact of subsidy reform for vulnerable households.

While the removal of fossil fuel subsidies paved the way for sustainable growth and the fulfilment of climate change commitments in Nigeria, it also created challenges for the nation’s socio-economic landscape. Understanding the distributional consequences of fossil fuel subsidies is therefore critical for sustainable and inclusive energy transitions.

This report delves into the dynamic interaction between subsidy removal and household welfare, finding that widespread dependence on petrol by Nigerian households meant the higher prices from subsidy reform disproportionately impacts lower-income households.

By evaluating the effectiveness of redistribution policies in aiding impoverished households, the report finds that by redistributing the revenues saved through lump-sum transfers to the poorest households, some welfare losses were counteracted. Policies like these are needed to limit the adverse effects of such a transformational reform and as such, must be carefully designed.

Advocating for redistribution policies that balance fiscal objectives with social welfare considerations, this research highlights the need for appropriate policies and informed decision-making to deliver more equitable outcomes in post-subsidy Nigeria.

Report by the Overseas Development Institute