Obinna IgwebuikeNigeria announced its commitment to net zero by 2060 at COP26 in Glasgow. To deliver this, the country has approved an Energy Transition Plan (ETP), “a home-grown, data-backed, multipronged strategy developed for the achievement of net-zero emissions in terms of the nation’s energy consumption.”
The objectives of the ETP are to lift 100 million Nigerians out of poverty, provide modern energy services, manage the expected long-term job losses in the oil sector, position Nigeria as an African leader in energy transition and streamline the country’s energy transition initiatives. The ETP is expected to achieve these objectives across 5 sectors; power, cooking, oil and gas, transport and industry, covering about 65% of Nigeria’s total emissions.
The context for these transition ambitions is compelling, as developing countries like Nigeria are more vulnerable to climate change. According to the University of Notre Dame Global Adaptation Index (ND GAIN), Nigeria is the 53rd most vulnerable country and the 179th most ready country. The impact of climate change is in plain sight. Over the last half century, Lake Chad, which provides food for about 40 million people in Nigeria, Cameroon, Niger and Chad, has shrunk about 90% from 25,000 square kilometers in the 1960s to approximately 1,350 sq.km today.
With rural smallholder households very dependent on the water from the lake for their agricultural activities, there has been significant reduction in agriculture production in the area. A direct and tragic consequence of this is the farmer-herder crisis, as pastoralists move away from the arid North to the South, literally in search of greener pastures. What is more, the World Bank reports that increasing climate variability is leading to more intense and untimely rainfall, degrading physical infrastructure like roads, pipelines and houses in rural and urban Nigeria, and stifling the productivity of especially rural farmers. The floods of September to October 2022, the worst in 10 years, was said to have rendered 176,852 hectares of farmlands partially damaged and 392,399 hectares of farmlands totally damaged, with investment losses in the multiples of billions of dollars. This situation clearly shows that the climate is having negative implications on Nigeria’s food security ambitions.
The private sector, as the driver of innovation should be at the heart of Nigeria’s bold transition ambitions. Energy transition at a scale that can achieve Nigeria’s net zero objective by 2060 will come with significant investment in infrastructure. According to the ETP, Nigeria needs about $1.9 trillion between now and 2060 to achieve net-zero. Given the public debt profile globally and domestically, the case for public-led investments in this transition is quite tenuous. According to the IMF’s Debt Monitor, while public debt fell sharply by 4 percentage points from 100% of GDP in 2021 to 96% of GDP in 2022, it is still significantly higher than pre-pandemic levels.
The public debt picture in Nigeria is also telling. Total public debt could rise to 37.1% of GDP in 2023, which is very close to the country’s self-regulatory limit of 40% of GDP. This will be a rise of about 14 percentage points from September 2022. Development practitioners have advocated for a stronger stress test of the country’s debt levels, emphasising the need for a debt to revenue approach to assessing the sustainability of the country’s debt levels. Using this metric, Nigeria’s debt service – to – revenue ratio is expected to reach 73.5% in 2023, a situation that is already 23.5 percentage points higher than the government’s self-limit. This public debt situation provides an opportunity for the private sector to plug the financing gap.
Private sector climate finance landscape in Nigeria
The current landscape for climate financing in Nigeria is heavily skewed towards public sector investments. According to the Climate Finance Initiative (CFI), private sector investment accounted for only 23% of total climate finance of $1.9billion committed in 2019/2020. Disaggregating the private capital tracked to instrument type, equity contributed $226 million or 52% of total finance, debt contributed $174 million or 40%, while grants accounted for $21 million or 8% of total private finance.
While 44% of private climate finance sources were untracked, 34% was sourced from corporations, while the remaining 22% was sourced from commercial finance institutions, households / individuals and institutional investors. Clearly there is scope for more private sector participation in funding Nigeria’s transition to net zero.
Stimulating private sector finance to achieve climate goals
The story of climate change is about people and how vulnerable their lives and livelihoods are to changing climate conditions. However we choose to tell this story: environmental, social, commercial, political, a combination of some or all of these, we must keep this in mind. This is an opportunity to deploy private capital to improve lives and livelihoods, with an investment return.
As compelling as this sentiment seems, it is important at this point to highlight that there have historically been constraints that have prevented the private sector from optimally participating in climate finance. Considering that investments flow in the direction of optimal returns, how can the local and international private sector lead the charge towards the $10 billion in annual investments needed till 2060 to achieve net zero? I highlight a couple of very specific actions that are needed by stakeholders across the public, private and social sectors to stimulate private climate investment.
A great start point will be to build a robust, multi-sector, net-zero transition Investment Plan (IP). This will provide a road-map for the mobilisation of resources towards the net zero ambitions. The IP will contain guidelines for resource mobilisation, prioritisation of climate transition projects for implementation, and project appraisal and selection. The IP will include detailed costs of all transition activities and their social, environmental and economic benefits. It will also include the potential sources of funding (domestic, regional, institutional public, private or donor options) for these activities.
The IP will also provide details of the policy levers required to stimulate the investments, as well as the institutional arrangements needed to provide comfort for all participating investors. Policies and institutional arrangements must speak to the unique needs and aspirations of the private sector as a valuable source of capital towards Nigeria’s net-zero emissions. Such an IP also provides a platform for multi-sector financial risk sharing. This is the kind of financing framework that provides the clarity needed for the private sector to make such long-term (now to 2060) investment decisions.
To optimise the value of the private sector as an economic bloc, creating a private sector coordination and collaboration body for the specific purpose of aligning private sector interests in climate financing will be useful. Such a body will also act as a private sector self-regulator, holding its members accountable for their investment commitments.
This IP and the private sector coordinating body solve a lot of the constraints to private sector investments in climate transition. They potentially strengthen the policy and institutional arrangements, incentivise risk sharing within the private sector and across sectors ensuring all stakeholders leverage their unique strengths in financing. Finally, they ensure transparency in the mechanics of climate financing, reducing the kind of information asymmetry that has been a challenge for private sector investment in climate transition
Obinna Igwebuike, a management consultant and climate policy advisor, is the Consulting Partner at Sawubona Advisory Services in Lagos. He was a critical part of the team that designed and developed the Policy Framework for Climate Smart Agriculture in Nigeria. He can be reached on o.igwebuike@sawubonang.com
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