Nigeria's Fossil Fuel Surcharge: Impacts And Readiness.

The Nigerian Government will implement a 5% surcharge on fossil fuel products, such as gasoline and diesel. The surcharge is scheduled to go into effect in January 2026. Officially referred to as the "surcharge on fossil fuel products," this policy is positioned as a component of a larger plan to encourage the use of cleaner energy sources and increase government revenue. The expectation is that the proceeds from the surcharge will be utilized for infrastructure development, environmental initiatives, or fiscal consolidation.

The idea has generated a lot of discussion, even though it is in line with worldwide trends toward environmental sustainability. Critics criticize the timing and effects of the tax, pointing out how ironic it is to impose it in a nation that produces a significant amount of oil.

Similar to a carbon tax, the surcharge's goal is to deter dependence on dangerous fuels by raising their cost. This would encourage companies and customers to switch to greener options. Notably, compressed natural gas (CNG), which the government is aggressively pushing as a cleaner alternative to gasoline, and renewable energy sources like solar, wind, and hydropower, are not subject to the surcharge.

However, it is difficult to overlook the irony. Nigeria's economy is heavily dependent on fossil fuels, and in the past, the government has kept fuel costs artificially low by subsidizing it. In 2023, when these subsidies were removed, fuel prices skyrocketed. The extra surcharge now runs the risk of making matters worse financially for residents, particularly those who are already struggling with economic hardship.

Practices in other Jurisdictions

Fuel taxes, duties, and surcharges are common tools for raising revenue, funding infrastructure, and managing energy consumption, but they come with political and economic risks. Global experiences with fuel surcharges reveal what makes these policies succeed or fail.

One of the most consistent themes across countries is the importance of having a clear purpose for the surcharge. In South Africa, for example, fuel levies are split into two main components: a General Fuel Levy that goes into national revenue, and a Road Accident Fund (RAF) Levy that directly supports victims of road accidents. This dedicated use makes the tax more politically acceptable, even if economic studies suggest that long-term increases in fuel levies can negatively impact growth.

Ghana's approach has been more reactive, often driven by crisis management. The introduction of the "GH¢1 Fuel Levy" in 2025 was aimed at resolving energy sector debt and stabilizing electricity supply. While the goal was clear, which was to eliminate frequent power outages, the rollout faced strong public resistance. Concerns over rising transport costs and the broader cost-of-living crisis were heightened by inadequate stakeholder engagement, particularly with transport unions and oil marketers. As a result, the government was compelled to postpone implementation and enter negotiations, underscoring that even well-intentioned policies can fail without proper consultation and communication. Nevertheless, the levy has now been enforced, following a marginal decline in petroleum product prices prior to its rollout.

India presents a more complex picture. Fuel surcharges are layered, involving central excise duties, state-level VAT, and additional charges. These taxes are a major source of revenue for both state and federal governments, funding infrastructure and welfare programs. India also uses Fuel Surcharge Adjustments (FSA) in electricity billing, allowing utilities to pass on rising fuel costs directly to consumers. This helps maintain financial stability in the power sector and prevents debt accumulation. However, not all states have adopted the FSA mechanism, largely due to political reluctance to impose unpopular charges even when they are economically justified.

Nigeria's Readiness for a Clean Energy Transition

Nigeria's readiness for this energy transition is a pressing and complicated issue. Fossil fuels are intricately woven into the country's daily life, economy, and infrastructure. A significant section of the populace is impoverished, and the elimination of gasoline subsidies has already caused living expenses to skyrocket.

For many Nigerians, gasoline is a need rather than a luxury. In the face of an unstable national power grid, it provides electricity for residences, small enterprises, and transportation. Diesel and gasoline generators are now necessary due to frequent blackouts and grid breakdowns. In this case, the surcharge acts more as a tax on the lack of dependable public infrastructure than as an environmental incentive.

Furthermore, the tax is regressive due to its flat rate. Low-income people who spend a larger portion of their income on fuel are subject to greater financial hardship. Increased operating costs will probably affect companies in many industries, including manufacturing, transportation, and agriculture. This could lead to inflation and impede economic progress.

Businesses will need to decide how to manage the extra cost from the fuel surcharge, and this choice will directly affect their pricing and competitiveness. Many will likely pass the cost on to customers through higher prices, which could drive up inflation and reduce people's ability to spend. On the other hand, companies in competitive industries might choose to absorb the cost to stay affordable, but this would cut into their profits and limit their ability to invest in expanding operations. Businesses that include shipping in their product pricing will find it especially hard to keep prices stable, since fuel costs will keep changing.

The fuel surcharge adds to the already unpredictable cost of fuel, making it harder for businesses to plan and budget accurately. Prices may need to be adjusted frequently, which disrupts long-term purchasing strategies. This can lead to either holding too much inventory, tying up cash, or running out of stock more often due to cautious buying. Fixed-price contracts, especially in logistics, manufacturing, and supply chains, will become difficult to manage when fuel costs keep changing.

One of the biggest challenges businesses will face with the new fuel surcharge is updating their financial systems. Most companies will need to adjust their accounting or ERP software to track the surcharge separately from the base fuel cost, VAT, and other levies. Since the surcharge is paid at the point of sale and later remitted by the supplier to the government, there would be a need for an accounting system that can accommodate these changes to avoid confusion during audits.

Businesses are now required to show how much fuel they have purchased and how much surcharge they have paid over time. Failing to meet these reporting standards could lead to heavy penalties, making compliance a top priority.

Another area of concern is how the surcharge affects other taxes. Businesses need clarity on whether it counts as a deductible expense and how it interacts with VAT and Company Income Tax. If it's not handled correctly, it could lead to errors in tax filings and costly reconciliation issues during audits.

Nigeria has a lot of potential for renewable energy sources, such as wind and solar, but its domestic production capability for clean energy technology is still quite small. The nation imports a lot of solar panels, batteries, and other parts, which are becoming increasingly costly because of currency devaluation. As a result, many citizens cannot afford to adopt sustainable energy.

If the solution to an environmental problem has the potential to worsen social and economic misery if it is not implemented well, is this endeavor a positive step? Only time will tell.

Suggestions for an Equitable and Successful Implementation
The fossil fuel surcharge must be incorporated into a larger, open, and inclusive policy to guarantee promotion of sustainable development rather than acting as an additional burden. To ensure a successful implementation, the following may be required:

• Accountability and Transparency: The use of surcharge funds must be made explicit by the government. Building confidence and avoiding mismanagement need the establishment of a specific, audited sustainable energy fund with frequent public reporting.

• Infrastructure Investment: A significant amount of the funds should go into bolstering the national grid and growing off-grid options, such solar mini-grids, particularly in rural areas that are underserved.
• Targeted Subsidies and Tiered Taxation: Rather than a flat tax, a tiered system could be introduced, alongside targeted subsidies for low-income households and small businesses to support their transition to cleaner alternatives like solar or CNG.

• Capacity Building and Local Manufacturing: Investment in training programs and local manufacturing of clean energy technologies is critical. This would reduce reliance on imports, create jobs, and support the growth of a domestic green economy.

• Business Impact Assessment (BIA): The fuel surcharge makes it essential for businesses to carry out a proper Business Impact Assessment (BIA). This will help them estimate how much operating costs will rise, especially in areas like transport and power generation. Companies need to figure out how much of the cost can be passed on to customers and how much they will need to absorb. The BIA should also highlight ways to cut costs and improve efficiency. On the government side, collecting anonymized data from these assessments can help identify which sectors are most affected, guiding decisions on targeted support or incentives.

• Contract Renegotiation: To stay ahead, companies will need to renegotiate their agreements to include a clear Fuel Surcharge Clause (FSC). This clause would link fuel costs to an official price index, so adjustments occur automatically and fairly, without the need for constant renegotiation.

• Review and Upgrade of Accounting Systems for Accurate Reporting: Accurate tax collection is paramount for the surcharge's success. This places a significant burden on businesses to upgrade their financial and operational technology. Businesses must immediately ensure their Enterprise Resource Planning (ERP) and accounting software are updated to properly account for the surcharge.

Conclusion

The Fossil Fuel Surcharge is a daring policy initiative that might spur climate action and bring in money. Its effectiveness, however, hinges on how well the government can carry it out in an open and equitable manner. The surcharge runs the potential of turning into yet another financial burden rather than a step toward a sustainable future in the absence of a comprehensive plan that tackles energy poverty, infrastructure deficiencies, and economic fragility.

Indeed, the surcharge policy represents a significant shift in Nigeria's fiscal and energy landscape. Even though it presents challenges, proactive planning and strategic adjustments can help businesses manage the transition effectively. Businesses must stay informed, engage with other stakeholders, and leverage best practices from other jurisdictions to successfully navigate the new regulatory environment.

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.