Economic Incentives and Regulatory Effectiveness in Reducing Gas Flaring in Nigeria: Evidence from Dynamic Time-Series

Abstract

ABSTRACT Gas flaring remains a persistent source of economic inefficiency and environmental degradation in Nigeria's petroleum sector, costing over USD 400 million annually and generating 21 million metric tons of CO₂-equivalent emissions. Despite regulatory interventions such as the Nigerian Gas Flare Commercialisation Programme (2016), the determinants of sustained flaring remain poorly understood. This study applies ARDL bounds testing, Vector Error Correction Modelling, Impulse Response Function analysis, and Forecast Error Variance Decomposition to annual Nigerian data (1975–2024) sourced from the World Bank, International Energy Agency, Nigerian Upstream Petroleum Regulatory Commission, and Worldwide Governance Indicators, using three linked models covering economic determinants, policy/institutional factors, and the flaring–emissions nexus. The ARDL bounds test confirms cointegration (F = 4.08 > 4.01 critical value). Oil rents raise flaring significantly (β = 0.196, p = 0.007), while gas prices reduce it (β = −0.394, p = 0.002), supporting an opportunity-cost mechanism; GDP per capita shows a marginal negative effect (β = −1.158, p = 0.091), consistent with an Environmental Kuznets Curve. Crude production drives flaring short-run (β = 0.570) but not long-run. The NGFCP dummy suggests measurable but marginal efficacy (β = −0.534, p = 0.088), with rapid error correction (74.4% annually). The penalty regime explains 53.55–61.84% of long-run flaring variance, and flaring shocks explain 40.78% of short-run emissions variance. Gas-pricing reform and credible penalty enforcement emerge as the most powerful policy levers, with institutional governance improvements yielding the most durable environmental gains.