Fiscal Reforms with Energy Transition and Climate Benefits in Oil Exporting Countries: the Case of Nigeria

This paper presents an incentive-compatible approach to engaging oil-exporting countries in climate policy by aligning mitigation with their own economic interests. It quantifies how alternative fiscal and industrial policies affect economic diversification and emissions in Nigeria, Africa's largest oil producer, and analyzes how domestic reforms interact with climate and energy policies implemented by trading partners. Using a global economic model, the study simulates non-cooperative scenarios in which the rest of the world forms hypothetical climate clubs that adopt ambitious climate policies. Nigeria either aligns its fiscal reforms with these clubs or maintains business-as-usual policies. The reforms evaluated include removal of the petrol subsidy, broadening the VAT base, raising the VAT rate to 15%, and introducing a carbon tax. The resulting expansion of the fiscal space is directed either to households or to investments supporting productivity-driven diversification. Findings show that traditional diversification without green and efficiency-boosting fiscal reforms risks locking Nigeria into a structure reliant on domestic services and energy-intensive, low-productivity downstream industries vulnerable to external policy shocks. Fiscal reforms combined with innovation-focused investments boost economic growth-raising GDP by over 6% above baseline by 2050-while reducing emissions by up to 36% and promoting broader diversification. However, long-term GDP gains entail short-term welfare losses. Results-based climate finance linked to verified emissions reductions could compensate, providing up to $10.1 billion over 25 years at $10 per ton of CO2 abated, offering climate clubs a powerful tool to encourage cooperative climate action-even among oil exporters.