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Legal Response To Gas Flaring In Nigeria

Updated on March 28, 2013

CONTEMPORARY ISSUES IN LEGAL RESPONSE TO GAS FLARING IN NIGERIA

Various attempts of the Nigerian government to achieve sustainable flaring reductions in its oil and gas sector have proved futile, resulting in only minimal reductions.

This section of the work discusses contemporary issues involved in the failure of government’s policies, especially with regards to the adoption of environmental tax and flare out deadlines as frontline policies for flaring reduction.

ENVIRONMENTAL TAXATION AS A FLARING REDUCTION TOOL IN NIGERIA: A PROPER APPROACH?


Gas flaring is considered a negative externality of oil production and thus there are attempts to utilize economic tools to internalize this externality and reduce the social cost of flaring.

One of such tools is the use of environmental taxes to regulate flaring by oil companies by imposing tax on the amount of gas flared or amount of CO2 released by the gases flared.

An environmental tax, also known as a ‘carbon tax’ is aPigovian tax’ levied on the carbon content of fuels.

It is a form of carbon pricing and is aimed at protecting the environment from the adverse effects of CO2 emissions released during energy production by discouraging release of CO2 into the atmosphere by energy producers.

The theoretical consideration behind the use of carbon taxes is that it spurs oil producers to invest in technological developments of facilities which produce less carbon emissions in a bid to avoid paying heavy taxes on CO2 emissions from their oil production, while also raising revenue for the government.

There is also the ‘announcement effect of the tax when introduction of the tax is informed in advance and countermeasures are taken ahead of schedule.


In relation to gas flaring, an environmental tax is utilized by governments for two major purposes-

i. To discourage the practice of flaring by oil companies by inducing them to invest in flaring reduction technologies and facilities in a bid to avoid paying high taxes on CO2 emissions from flares, and

ii. As a resource management tool,by ensuringadequate payment is received for the valuable gas resource burnt off by the oil companies and raise substantial revenue for the governmentin the process.

Environmental taxes on gas flaring could be direct – as in Nigeria’s case where the tax is imposed on the amount of gases flared or vented, or indirect- as in Norway’s case where the tax is imposed, not on the gas flared or vented, but on CO2 emissions from the flaring and is therefore applicable to a wider range of CO2 emitting activities.

Environmental taxation has from the onset been an integral part of the gas flaring legal regime in Nigeria and has been one of government’s frontline policies in seeking to eliminate flaring. Even though the AGRA 1979 contained no provision on taxes for flaring, it was eventually introduced by the AGRA 1984 which imposed a tax rate of 0.50 Naira per million cubic feet (mcf) of flared gas.

This tax rate was increased 20-fold in 1995from 0.50 Naira to 10 Naira (about 0.12 USD) per mcf of gas flared. Further increment was implemented in 2008 when the government increased the fine to USD 3.5 (about 141naira) per mcf in a bid to mount pressure on the oil companies to reduce flaring for fear of paying excessively in the event of continuous flaring.

It is imperative to note in respect of Nigeria’s use of environmental taxation as a flaring reduction tool, that the underlining idea has always been as a punitive tool rather than a resource management tool. In essence, the taxes imposed have always been viewed from the angle of being penalties and fines on the oil companies for flaring rather than as taxes imposed to raise revenue from wastage of the country’s gas resources.

The significance of this approach is that in fixing the tax rate, little account is taken of the actual value of the gas being flared, but rather on the need to punish the oil companies for continuous flaring, leading to significantly low level of tax on the flared gas.

The result of this is the fact that while the country loses an estimated USD 2.5billion annually from flared gases that could have been sold, revenue realized from the fines in recent yearsis a paltry 20 – 50 million Naira (or US$150,000–370,000) annually. In essence, the country loses 100 times more from flaring than it realizes from revenue paid by the oil companies for flaring.

On the effectiveness of environmental taxes in flaring reduction in Nigeria, it is beyond doubt that it has neither had any appreciable impact on flaring reduction, nor has it led to investments in innovative technologies for gas capturing and utilization facilities by the oil companies.

The relatively low level of the tax compared to the high cost of gas utilization facilities meant that the oil companies were simply comfortable to continue flaring and pay the penalty rather than commit substantial investments in gas utilization facilities.

This has led to repeated calls by environmental groups for an increase in the tax rate by the government to discourage continuous flaring.

However, this proposition would be difficult to adopt in view of the fact that a substantial increase in the tax rate would make it uneconomical for the oil companies to continue oil production, resulting in shut-down of oil operations by the IOCs with its attendant effect on the Nigerian economy.

As stated by OGP 2001, the utilization of gas is an economic proposition, and oil companies will only continue production where the cost of gas utilization (or penalties for non-utilization) does not erode whatever profits the oil production would present.

Therefore, in the absence of a domestic or international gas market for Nigerian gas and continuous lack of infrastructural gas facilities such as gas pipeline networks and gas capturing facilities, environmental taxes on flaring in Nigeria has proved ineffective and has not affected the behavior of the oil companies towards utilization of associated gas.

above reveals that the introduction of environmental tax in 1984had no impact on gas utilization in Nigeria which continued to flat-line.

The 20-fold increase of the tax rate in 1995 also had no impact on gas utilization which remained on a flat line. The little bump in gas utilization noticeable on the chart between 2000 – 2003 were likely to be impacts from the fiscal incentives introduced by the government in 1998 to encourage gas utilization facilities in the form of tax breaks and exemptions for gas projects.

The failure of environmental taxation to achieve flaring reduction in Nigeria is not surprising as GGFR 2004 indicated that the use of a combination of incentives and penalties has proved to be more effective than penalties alone.

This is due to the fact that to be an effective deterrent to flaring/venting, penalties would need to be set at such a high level that neither flaring/venting nor installing of gas gathering facilities is economically viable, and the preferred option for the operator becomes not to produce the oil.

In other words, in using environmental tax, there is no alternative to setting the rateat a sufficiently high level to make the alternative of investing in flare and vent reduction more attractive than paying the penalty.

Otherwise, it will likely just increase the operator’s costs and the government's revenues - while flaring and venting continue.

Unfortunately, in Nigeria’s case, setting the tax rate so high will inevitably result in a situation where shutting down oil production becomes the preferred option for the operator.

This situation is not peculiar to Nigeria, as environmental tax has not been shown to significantly achieve flaring reductions in any major flaring nation in the world.

In this regard, attention is drawn to Norway which has been regularly identified as a success case for the use of environmental tax (carbon tax) to achieve flaring reductions.

However, this proposition is flawed as studies have shown that Norway’s Carbon tax had no appreciable impact on its success in achieving flaring reductions, and even if such impact can be accepted, it is likely a result of a combination with other socio-political factors in the oil and gas industry in Norway prior to the introduction of the tax which had already resulted in significant flaring reduction.

According to GGFR, “while taxes and fines had also played an important role, the effect of taxes in Norway was unclear because significant reductions had already been achieved by the time they were introduced”

Thus, Norway’s carbon tax did not change the behavior of the oil companies or lead to technological advancement in gas utilization facilities as the majority of the technical measures taken to reduce the CO2 discharge proved to be profitable without the tax, and no unprofitable measures were implemented.

The problem with relying on environmental taxation as a flaring reduction tool is that its effectiveness is theoretically analysed under the ideal world and ignores various complex reality, so it does not reflect the background of real politics and is therefore just an ‘arm-chair theory’ that does not operate in reality.

This explains its failure in achieving flaring reductions in Nigeria since its inception, as it overlooks the complex socio - economic and political considerations which make it unsuitable to the Nigerian situation.

Thus, contrary to the agitations of environmental groups and activists, an increase in the fines imposed will not result in any progress (in addition to being counter-productive) as the problem lies not in the tax rate but its general unsuitability in Nigeria’s situation in the absence of gas markets or relevant gas infrastructures.

In summary therefore, environmental taxation,as a flare reduction tool, is completely ineffective in Nigeria and as a resource management tool, it is a complete monumental economic waste as the country realizes less than US$ 1 million annually from such tax while losing over US$ 2.5bilion annually in flared gas.

It is therefore not a proper approach to achieving flaring reductions in Nigeria, except where effectively combined with fiscal incentives and infrastructural development of gas utilization facilities.

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