Nigeria’s fossil fuel subsidy reforms: the welfare effects on households

Understanding the distributional consequences of progressive fossil fuel subsidy reform is critical to the sustainability of reform efforts as well as progress towards more just and inclusive energy transitions. This study examines the welfare effects of fossil fuel subsidy reforms on Nigerian households, focusing on the socio-economic implications of petrol price changes caused by the removal of subsidies. Using the Quadratic Almost Ideal Demand System (QUAIDS) model, the research explores household energy consumption patterns, estimating budget, own-price, and cross-price elasticities for petrol. The study critically evaluates the welfare impacts of petrol price increases and assesses the effectiveness of government redistribution policies targeting economically vulnerable households. It considers the immediate, direct impact of price changes on household budgets (first-order effects) and adjustments households can make (second-order effects), including substitution between goods. By analysing both these effects, the research provides a holistic view of the dynamic interaction between subsidy removal and household welfare, highlighting the varied impacts across different income groups and residential settings. The study finds that the increase in petrol prices following subsidy removal disproportionately affects lower-income households.