This study uses household expenditure data from Nigeria to understand energy consumption patterns
with respect to income levels, different energy goods, urban and rural livelihoods, and geographical
distribution. Using the empirical subsidy simulation model by Araar & Verme (2012), this paper
simulates 50% and 100% reductions of subsidies on petrol, electricity and kerosene. It presents the
estimated effects of such reforms on consumption, poverty, and government revenue. This analysis
also determines the minimum level of universal cash transfer that is required to achieve “poverty
neutrality” of subsidy removal; i.e. the threshold at which direct cash compensation offsets increasing
energy prices, such that the national poverty headcount rate is unchanged after the subsidy removal.
By disaggregating this analysis to the state level, it is shown that poverty effects (and thus the required
poverty neutral cash compensation) can vary significantly across states. Poverty is estimated to
increase particularly strongly in urban, industrial and higher income states, which were in fact hotspots
of civil unrest during Nigeria’s attempted subsidy reform in 2012. Understanding these differences in
vulnerability, and designing tailored compensation and social protection policies is critical for ensuring
public and political support for subsidy reforms.