Climate Change and Economic Growth in Nigeria: Moderating Effect of Tax Reform

Ibrahim Hussaini; Mohammed Bukar Maina; Aminu Shehu

doi:10.5281/zenodo.15111265

E-ISSN:2583-0074

Research Article

Climate Change

Social Science Journal for Advanced Research

2025 Volume 5 Number 2 March

Publisher

www.singhpublication.com

Climate Change and Economic Growth in Nigeria: Moderating Effect of Tax Reform

Ibrahim Hussaini^1*, Mohammed Bukar Maina², Aminu Shehu³

DOI:10.5281/zenodo.15111265

^1* Ibrahim Hussaini, Department of Accounting, Yobe State University, Damaturu, Nigeria.

² Mohammed Bukar Maina, Department of Geography, Yobe State University, Damaturu, Nigeria.

³ Aminu Shehu, Department of Accounting, Yobe State University, Damaturu, Nigeria.

Climate change presents significant challenges to Nigeria's economic growth, primarily through temperature anomalies, rainfall variability and deforestation. This study examines how tax reforms can moderate these environmental impacts, ensuring economic stability and sustainability. Using multiple regression and heteroskedasticity-robust regression models, the study analyzes the relationship between climate change indicators and GDP growth. Findings reveal that rainfall variability negatively affects economic performance, while temperature anomalies and deforestation exhibit mixed effects. Tax reforms as an interacting variable moderating role, influencing how environmental factors impact economic outcomes. Interaction analyses indicate that well-structured tax policies can either amplify or mitigate environmental risks, reinforcing the need for balanced fiscal approaches. The study underscores the importance of adaptive climate policies, sustainable tax frameworks and economic diversification to enhance resilience against climate change. Informing policymakers on optimizing tax structures for sustainable development, the research contributes to the ongoing discourse on balancing economic growth and environmental responsibility. The findings also offer valuable insights for businesses and investors navigating Nigeria’s evolving economic landscape in response to climate change challenges.

Keywords: climate change, economics growth, tax reform, nigeria

Corresponding Author	How to Cite this Article	To Browse
Ibrahim Hussaini, Department of Accounting, Yobe State University, Damaturu, Nigeria. Email:	Ibrahim Hussaini, Mohammed Bukar Maina, Aminu Shehu, Climate Change and Economic Growth in Nigeria: Moderating Effect of Tax Reform. soc. sci. j. adv. res.. 2025;5(2):32-44. Available From https://ssjar.singhpublication.com/index.php/ojs/article/view/230

Manuscript Received	Review Round 1	Review Round 2	Review Round 3	Accepted
2025-02-04	2025-02-27			2025-03-19
Conflict of Interest	Funding	Ethical Approval	Plagiarism X-checker	Note
None	Nil	Yes	3.42

© 2025 by Ibrahim Hussaini, Mohammed Bukar Maina, Aminu Shehu and Published by Singh Publication. This is an Open Access article licensed under a Creative Commons Attribution 4.0 International License https://creativecommons.org/licenses/by/4.0/ unported [CC BY 4.0].

soc. sci. j. adv. res. 2025;5(2)32

Download PDF Back To Article 1. Introduction 2. Literature
Review 3. Methodology 4. Results
and Discussions References

Hussaini I, et al. Climate Change and Economic Growth in Nigeria

1. Introduction

Economic growth is commonly defined as the sustained increase in a country’s real gross domestic product (GDP) or gross national income (GNI) over time, reflecting improvements in productivity, infrastructure and living standards. Climate change has emerged as a critical global challenge, with profound implications for economic development, particularly in developing nations like Nigeria. The intricate interplay between environmental changes manifested through temperature anomalies, rainfall variability, and deforestation rates and economic growth necessitates a comprehensive analysis. In Nigeria, where sectors such as agriculture and energy are pivotal to the economy, understanding how tax reforms, especially corporate tax rates in the manufacturing and energy sectors, can moderate these environmental impacts is essential for sustainable development (World Bank, 2023). Over the past few decades, Nigeria has experienced significant temperature increases, aligning with global warming trends. Rising temperatures exacerbate desertification in the northern regions, reducing arable land and impacting agricultural productivity.

Consequently, this environmental shift threatens food security and the livelihoods of millions dependent on farming (Nwafor & Okechukwu, 2024). The World Bank (2024) estimates that climate change could cost Nigeria 30% of its GDP by 2050, underscoring the economic ramifications of rising temperatures.In addition to rising temperatures, erratic rainfall patterns have become increasingly common, leading to severe flooding and prolonged droughts. For instance, in 2024, heavy monsoon rains caused devastating floods across West and Central Africa, including Nigeria, affecting over 8.5 million people and resulting in substantial economic losses (United Nations, 2024). Such variability disrupts agricultural cycles, diminishes crop yields, and hampers hydroelectric power generation, thereby affecting both food security and energy supply (Adeyemi & Yusuf, 2023). Another pressing environmental concern is deforestation, which is driven by factors such as logging, agricultural expansion, and urbanization. The loss of forest cover contributes to biodiversity decline, soil erosion, and reduced carbon sequestration capacity, further exacerbating climate change effects (FAO, 2023).

This environmental degradation poses significant threats to the agricultural sector and rural livelihoods, further challenging economic stability (Ibrahim & Okonkwo, 2022). Given Nigeria’s heavy reliance on climate-sensitive sectors, its economy remains particularly vulnerable to environmental changes. Agriculture, which contributes approximately 23% to the GDP, is especially susceptible to temperature increases and rainfall variability (National Bureau of Statistics, 2024). Climate-induced disruptions in agriculture can lead to reduced income for farmers, increased food prices, and heightened poverty levels. Similarly, the energy sector, vital for industrial activities, faces challenges from fluctuating water levels affecting hydroelectric power and increased cooling demands due to rising temperatures (International Energy Agency, 2023). The World Bank’s projection of a potential 30% GDP loss by 2050 due to climate change highlights the urgency of addressing these environmental challenges (World Bank, 2024).

To mitigate these adverse effects, tax policy plays a crucial role in shaping economic responses to climate change. In Nigeria, recent tax reforms aim to enhance revenue generation and promote sustainable economic practices. For instance, the government has proposed increasing the value-added tax (VAT) to 12.5% by 2026, with exemptions for essential items to mitigate inflationary pressures (Federal Inland Revenue Service, 2023). However, the impact of corporate tax rates, particularly in the manufacturing and energy sectors, requires careful consideration (Ajayi & Uche, 2024). The manufacturing and energy sectors are integral to Nigeria’s economic growth and are also significant contributors to environmental degradation. High corporate tax rates in these sectors can influence business operations, investment decisions, and environmental practices. In 2024, tax revenue from manufacturers plunged by over 70%, reflecting the challenges faced by the sector amid economic reforms and environmental constraints (Nigerian Economic Summit Group, 2024). Therefore, balancing tax policies to encourage sustainable practices while maintaining economic viability is a complex but necessary endeavor. Recognizing these pressing issues, this study aims to explore the nexus between climate change and economic growth in Nigeria and how tax reforms can serve as a moderating factor.

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Since Nigeria’s economy heavily depends on climate-sensitive sectors, understanding how environmental factors such as temperature anomalies, rainfall variability, and deforestation rates impact economic growth is crucial for developing adaptive strategies (Olusegun & Bello, 2023).

Furthermore, insights from this study can inform policymakers on designing tax reforms that not only enhance revenue but also promote environmental sustainability. By examining the effects of corporate tax rates on the manufacturing and energy sectors, the research can guide the creation of fiscal policies that encourage green investments and sustainable industrial practices (Eze & Adamu, 2025). Addressing climate change is also integral to achieving the United Nations Sustainable Development Goals, particularly those related to economic growth, industry innovation, and climate action (UNDP, 2024). This study aligns with these global objectives by exploring how tax policy can serve as a tool for mitigating climate change impacts while fostering economic development (Sustainable Development Report, 2023). Additionally, this research will contribute to the existing body of knowledge by providing empirical evidence on the moderating role of tax reforms in the relationship between climate change and economic growth. The findings can serve as a reference for other developing nations facing similar challenges, thereby extending the study’s relevance beyond Nigeria (Adebayo & Chukwu, 2024). For businesses operating within Nigeria, understanding the interplay between environmental factors and tax policies is essential for strategic planning. The findings can aid corporations in aligning their operations with national sustainability goals while optimizing their tax obligations (KPMG Nigeria, 2024).

Highlighting the economic consequences of climate change and the potential of tax reforms to mitigate these effects can raise public awareness. An informed populace is more likely to support and engage in sustainable practices, creating a bottom-up approach to environmental stewardship (Okon & Lawal, 2023). Moreover, as climate change is a global issue, this study can showcase Nigeria’s efforts and challenges in aligning economic growth with environmental sustainability. This, in turn, can foster international cooperation, attract foreign investment in green technologies,

and enhance Nigeria’s position in global climate negotiations (World Economic Forum, 2024).

2. Literature Review

2.1.1 Concept of Temperature Anomalies

Temperature anomalies refer to deviations from the average temperature over a specific period, often used to assess climate change trends. Research indicates that rising temperature anomalies can disrupt ecosystems, reduce agricultural productivity, and exacerbate extreme weather conditions (Smith & Johnson, 2023; Williams et al., 2022). In Nigeria, increasing temperature anomalies have contributed to desertification in the northern regions, reducing arable land and threatening food security (Adeyemi & Usman, 2023). Studies suggest that prolonged exposure to high temperatures negatively affects labor productivity, particularly in heat-sensitive sectors such as agriculture and construction, further impacting economic stability (UNEP, 2024).

2.1.2 Concept of Rainfall Variability

Rainfall variability refers to fluctuations in precipitation patterns over time, which can significantly impact water resources, agriculture, and hydroelectric power generation. Research highlights that increased variability in rainfall contributes to droughts, floods, and soil erosion, affecting food production and rural livelihoods (Okafor & Bello, 2022; Nwankwo et al., 2021). In Nigeria, rainfall unpredictability has led to severe flooding in urban centers such as Lagos and coastal erosion in the Niger Delta, causing property damage and displacement (World Bank, 2023). Additionally, inconsistent rainfall patterns disrupt agricultural cycles, reducing crop yields and contributing to food price inflation (FAO, 2024).

2.1.3 Concept of Deforestation Rate

Deforestation rate measures the annual loss of forest cover due to logging, agriculture, and urban expansion. Studies show that high deforestation rates accelerate biodiversity loss, contribute to carbon emissions, and reduce ecosystem resilience (Oluwole & Ibrahim, 2023; Green et al., 2022). In Nigeria, rapid deforestation—driven by illegal logging, charcoal production, and land conversion—has led to significant environmental degradation, particularly in states like Cross River and Ondo (UNDP, 2023).

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This decline in forest cover has exacerbated climate change effects, reduced rainfall levels, and increased the frequency of natural disasters such as landslides and droughts (WWF, 2024).

2.1.4 Concept of Tax Rate

Tax rate refers to the percentage at which individuals or corporations are taxed by the government, influencing business investment, economic growth, and fiscal sustainability. Research suggests that optimal tax policies can enhance government revenue without discouraging business expansion (Adebayo & Lawal, 2022; Becker et al., 2021). In Nigeria, high corporate tax rates have been cited as a deterrent to foreign direct investment (FDI) and small business growth, while tax evasion and inefficiencies in tax collection remain challenges (IMF, 2023). The introduction of policies such as the Finance Act 2023 aims to address revenue shortfalls and improve tax compliance, yet concerns persist about their impact on business competitiveness (World Bank, 2024).

2.1.5 Concept of Economic Growth

Economic growth represents the increase in a country's output of goods and services over time, typically measured by gross domestic product (GDP). Studies highlight that sustained economic growth is driven by investment in infrastructure, technological advancement, and policy stability (Obinna & Adewale, 2022; OECD, 2021). In Nigeria, economic growth has been constrained by structural weaknesses, including weak industrialization, insecurity, and overreliance on oil exports (CBN, 2023). Despite these challenges, sectors such as fintech and telecommunications have shown resilience, contributing to GDP diversification and job creation (AfDB, 2024).

2.1.6 Concept of Foreign Direct Investment (FDI) (% of GDP)

FDI refers to capital investments made by foreign entities in a country’s businesses, often measured as a percentage of GDP. Research suggests that FDI plays a crucial role in technology transfer, employment generation, and industrial development (Eze & Uchenna, 2022; World Economic Forum, 2021). In Nigeria, FDI inflows have fluctuated due to policy uncertainties, security concerns, and infrastructure deficits (NBS, 2023). While recent initiatives such as the Ease of Doing Business reforms have aimed to attract foreign investment,

persistent regulatory challenges continue to affect investor confidence (UNCTAD, 2024).

2.1.7 Concept of Inflation Rate

Inflation rate measures the percentage increase in the general price level of goods and services over a given period. High inflation erodes purchasing power, reduces consumer confidence, and increases the cost of borrowing (Adesina & Okonkwo, 2022; IMF, 2021). In Nigeria, inflation has been fueled by supply chain disruptions, currency depreciation, and high energy costs, leading to rising food prices and declining real incomes (CBN, 2023). The government's monetary policies, including interest rate adjustments and foreign exchange interventions, aim to stabilize inflation, though effectiveness remains debated (World Bank, 2024).

2.1.8 Concept of Unemployment Rate

Unemployment rate refers to the percentage of the labor force that is actively seeking employment but unable to find work. Research indicates that high unemployment levels are associated with economic stagnation, social unrest, and reduced consumer spending (Afolabi & Hassan, 2023; ILO, 2022). In Nigeria, youth unemployment remains a critical issue, with factors such as job market mismatch, inadequate vocational training, and limited industrialization contributing to high joblessness rates (NBS, 2023). Government initiatives such as the National Youth Investment Fund (NYIF) have been introduced to address employment challenges, yet structural barriers persist in achieving sustainable job creation (AfDB, 2024).

2.2 Empirical Review and Hypotheses Development

An empirical review is a critical examination of past studies based on observed and measured phenomena rather than theoretical assumptions (Creswell, 2014).

2.2.1 Temperature Anomalies and Economic Growth

Zhang et al. (2024) investigated the impact of temperature anomalies on economic growth across 50 countries from 1990 to 2023. Using panel data analysis, the study found that rising temperature anomalies negatively affect GDP growth, particularly in agricultural-dependent economies. The authors argue that extreme temperature fluctuations reduce crop yields, labor productivity,

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and overall economic stability. Similarly, Khan and Rauf (2023) analyzed the effects of temperature anomalies on industrial output in South Asian economies. Their findings revealed that higher-than-average temperatures lead to increased energy consumption and operational costs, adversely impacting manufacturing sector growth. The study recommends adopting climate-resilient technologies to mitigate economic losses. In contrast, Bianconi et al. (2023) explored the relationship between temperature anomalies and economic productivity in Scandinavian countries. The study found that in colder regions, moderate temperature increases improved economic productivity due to reduced heating costs and extended work periods. These findings suggest that the economic impact of temperature anomalies varies across different climatic zones. Based on the reviewed literature, the following hypothesis is proposed:
H1a: Temperature anomalies negatively influence economic growth.

2.2.2 Rainfall Variability and Economic Growth

Adegbite and Ojo (2024) examined the effects of rainfall variability on economic growth in sub-Saharan Africa between 2000 and 2023. Using time-series regression models, the study found that unpredictable rainfall patterns significantly impact agricultural output, leading to fluctuations in GDP growth. The study highlights the need for improved irrigation infrastructure to reduce dependency on rainfall. Likewise, Singh et al. (2023) analyzed the economic consequences of rainfall variability in South Asia. Their research demonstrated that excessive rainfall causes flooding and disrupts transportation networks, whereas insufficient rainfall leads to water shortages, both of which hinder economic activities. The authors recommend adaptive policies such as water resource management to mitigate these effects. Contrastingly, Müller and Weber (2023) investigated the relationship between rainfall variability and hydropower generation in European economies. The findings suggest that while excessive rainfall enhances hydropower output and energy security, erratic rainfall patterns lead to supply disruptions. The study underscores the need for diversified energy sources to stabilize economic growth. Based on the reviewed literature, the following hypothesis is proposed:
H1b: Rainfall variability negatively impacts economic growth.

2.2.3 Deforestation Rate and Economic Growth

Rodríguez et al. (2024) explored the long-term impact of deforestation on economic growth in Latin America. Analyzing data from 1995 to 2023, the study found that rapid deforestation initially boosts short-term economic growth through timber exports but ultimately leads to soil degradation, biodiversity loss, and reduced agricultural productivity, slowing long-term economic growth. The study suggests balancing economic activities with reforestation initiatives. Similarly, Bello and Ahmed (2023) examined the deforestation rate and its impact on rural economies in Nigeria. Their findings indicate that deforestation leads to declining agricultural yields and increased poverty levels due to the depletion of forest resources that support local livelihoods. The authors recommend afforestation programs and strict environmental regulations to counteract these effects. On the contrary, Kim and Park (2023) investigated the role of deforestation in economic expansion in Indonesia. Their study revealed that deforestation-driven industrialization contributed significantly to GDP growth in the short term. However, they caution that unchecked deforestation could trigger long-term economic instability due to environmental degradation. Based on the reviewed literature, the following hypothesis is proposed:
H1c: Deforestation negatively affects economic growth.

2.2.4 Tax Rate and Economic Growth

Johnson and Liu (2024) assessed the impact of corporate tax rates on economic growth in OECD countries from 2000 to 2023. The study found that high tax rates discourage business investments and slow GDP growth, while moderate tax policies attract foreign direct investment (FDI) and enhance economic performance. The study recommends tax reforms to strike a balance between government revenue generation and economic expansion. In the same vein, Adeyemi et al. (2023) examined the relationship between personal income tax rates and household consumption in developing economies. The study found that higher tax rates reduce disposable income, leading to lower consumer spending and slower economic growth. The authors suggest implementing progressive tax policies to minimize economic distortions. Conversely, Schmidt and Bauer (2023) investigated the effects of tax incentives on small and medium enterprises (SMEs) in Germany.

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Their findings indicate that targeted tax incentives stimulate entrepreneurship and economic growth by encouraging business expansion and innovation. However, they caution that excessive tax cuts may reduce government revenues needed for public investments. Based on the reviewed literature, the following hypothesis is proposed:
H1d: High tax rates negatively affect economic growth.

2.2.5 Moderating Effect of Tax Reform on the Relationship between Temperature Anomalies and Economic Growth

Liang, Chen, and Zhao (2024) examined the impact of temperature anomalies on economic productivity across 50 countries from 2000 to 2023, with a focus on climate-sensitive industries such as agriculture and manufacturing. Their study found that temperature anomalies significantly reduce economic output by increasing energy costs and disrupting labor productivity. However, the study noted that effective tax reforms, such as carbon taxation and energy subsidies, mitigated these negative effects by incentivizing greener technologies and adaptive business practices. Similarly, Ahmed et al. (2023) investigated the moderating effect of tax policies on the relationship between temperature anomalies and GDP growth in African economies from 1995 to 2022. The study found that economies with structured tax incentives for renewable energy and climate adaptation measures experienced lower productivity losses due to temperature anomalies. Conversely, countries with ineffective tax policies saw prolonged economic disruptions. Moreover, Gomez and Rodriguez (2022) explored how corporate tax reforms influence the resilience of industries to temperature shocks in Latin America. The findings suggest that tax incentives for climate adaptation investments significantly improve firms' ability to withstand temperature variations, ultimately enhancing national economic performance. Based on the reviewed literature, the following hypothesis is proposed:
H2a: Tax reform moderates the relationship between temperature anomalies and economic growth.

2.2.6 Moderating Effect of Tax Reform on the Relationship between Rainfall Variability and Economic Growth

Kumar and Patel (2024) analyzed the effect of rainfall variability on economic growth in South Asia,

highlighting the impact on agricultural output and water-dependent industries. The study found that excessive rainfall variability led to inconsistent crop yields and infrastructure damage, negatively affecting GDP growth. However, tax policies that provided relief funds and insurance subsidies to affected sectors reduced the adverse effects. In a similar vein, Williams et al. (2023) assessed the role of tax incentives in mitigating the effects of rainfall variability on economic performance in sub-Saharan Africa from 2000 to 2023. Their study showed that tax-exempt agricultural investment funds and drought relief programs helped stabilize economic growth by improving resilience in the farming sector. Additionally, Castillo and Fernandez (2022) examined tax reform strategies in response to changing rainfall patterns in European economies. The research concluded that countries with well-structured environmental tax policies, such as tax credits for water conservation projects, were better able to manage the economic instability caused by rainfall variability. Based on the reviewed literature, the following hypothesis is proposed:
H2b: Tax reform moderates the relationship between rainfall variability and economic growth.

2.2.7 Moderating Effect of Tax Reform on the Relationship between Deforestation Rate and Economic Growth

Brown and Taylor (2024) investigated the long-term effects of deforestation on economic growth in tropical regions from 1990 to 2023. The study found that high deforestation rates lead to soil degradation, biodiversity loss, and declining agricultural productivity, which, in turn, hamper economic development. However, tax reforms such as deforestation penalties and reforestation incentives significantly mitigated these effects by encouraging sustainable land use. Similarly, Osei et al. (2023) examined the impact of taxation policies on deforestation-driven economic instability in West Africa. Their study found that countries with carbon tax implementation and forest conservation tax relief programs experienced less economic volatility due to deforestation. The findings suggest that tax policy design plays a crucial role in balancing environmental sustainability and economic growth. Moreover, Silva and Martins (2022) explored the role of corporate tax incentives in reducing the negative impact of deforestation on industrial and agricultural productivity in Brazil. The study revealed that tax credits for sustainable land management and eco-friendly business

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practices resulted in improved long-term economic growth despite ongoing environmental challenges. Based on the reviewed literature, the following hypothesis is proposed:
H2c: Tax reform moderates the relationship between deforestation rate and economic growth.

3. Methodology

3.1 Research Design

This study employs a quantitative research design to examine the impact of climate-related factors (temperature anomalies, rainfall variability, and deforestation rate), tax rate, foreign direct investment (FDI),

inflation rate, and unemployment rate on economic growth in a given economy. A panel data approach is adopted to analyze the relationships among these variables over a period of time (five years). The research utilizes multiple regression analysis to estimate the effect of predictor variables on economic growth, with robustness tests to check for heteroskedasticity.

3.2 Data Sources and Collection

The study utilizes secondary data obtained from World Bank (for GDP growth, FDI, inflation, and unemployment rate), The National Bureau of Statistics (NBS) (for tax rate and deforestation rate) and Meteorological Agencies (for temperature anomalies and rainfall variability)

Table 1: Variables and Measurement

Variable	Type	Measurement	Sources
Economic Growth (GDP Growth Rate)	Dependent Variable	Annual percentage change in GDP	World Bank, IMF (2023), Adebayo & Yusuf (2023)
Temperature Anomalies (Temp_Anomalies)	Independent Variable	Deviations in temperature from the historical mean (°C)	IPCC (2023), Nwankwo & Adeleke (2022)
Rainfall Variability (Rainfall_Variability)	Independent Variable	Standard deviation of annual rainfall from the long-term average (mm)	NOAA (2023), Okonkwo & Bello (2023)
Deforestation Rate (Deforestation_Rate)	Independent Variable	Percentage of forest area lost annually	FAO (2023), Adegbite & Okeke (2023)
Tax Rate (Tax_Rate)	Independent Variable	Percentage of corporate or individual income taxed by the government	OECD (2023), Eze & Nwachukwu (2023)
Foreign Direct Investment (FDI)	Independent Variable	FDI as a percentage of GDP	UNCTAD (2023), Adamu & Olanrewaju (2023)
Inflation Rate (Inflation_Rate)	Independent Variable	Annual percentage increase in consumer prices	Central Bank of Nigeria (CBN, 2023), Obinna & Adeyemi (2023)
Unemployment Rate (Unemployment_Rate)	Independent Variable	Percentage of the labor force without jobs	ILO (2023), Chukwuma & Ibrahim (2023)

Previous studies compilations 2025

3.3 Model Specification

A multiple linear regression model is used to estimate the impact of independent variables on economic growth. The model is specified as:

EconomicGrowthi=β0+β1TempAnomaliesi+β2RainfallVariabilityi+β3DeforestationRatei+β4TaxRatei+β5TempTaxInteractioni+β6RainfallTaxInteractioni+β7DeforestationTaxInteractioni+β8FDIi+β9InflationRatei+β10UnemploymentRatei+ϵiEconomicGrowth_i = \beta_0 + \beta_1 TempAnomalies_i + \beta_2 RainfallVariability_i + \beta_3 DeforestationRate_i + \beta_4 TaxRate_i + \beta_5 TempTaxInteraction_i + \beta_6 RainfallTaxInteraction_i + \beta_7 DeforestationTaxInteraction_i + \beta_8 FDI_i + \beta_9 InflationRate_i + \beta_{10}

UnemploymentRate_i + \epsilon_iEconomicGrowthi=β0+β1TempAnomaliesi+β2RainfallVariabilityi+β3DeforestationRatei+β4TaxRatei+β5TempTaxInteractioni+β6RainfallTaxInteractioni+β7DeforestationTaxInteractioni+β8FDIi+β9InflationRatei+β10UnemploymentRatei+ϵi

Where:

β0\beta_0β0 = Intercept

β1,β2,...,β10\beta_1, \beta_2, ..., \beta_{10}β1,β2,...,β10 = Coefficients of independent variables

ϵi\epsilon_iϵi = Error term

To capture the moderating effect of tax rate, interaction terms are included:

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Temp_Tax_Interaction (Temp_Anomalies × Tax_Rate)

Rainfall_Tax_Interaction (Rainfall_Variability × Tax_Rate)

Deforestation_Tax_Interaction (Deforestation_Rate × Tax_Rate)

3.4 Robustness Tests

To check the validity of the results, the study conducts: Heteroskedasticity-Robust Regression to correct for potential heteroskedasticity issues in the OLS model.

3.5 Data Analysis Techniques

Descriptive Statistics: Mean, standard deviation, minimum, maximum, and quartiles for all variables. Correlation Analysis: Examining relationships between predictor variables. Multiple Regression Analysis: Estimating the effects of independent variables on GDP growth. Robustness Check: Using heteroskedasticity-robust standard errors for reliable inference.

4. Results and Discussions

4.1 Descriptive Statistics

Variable	Count	Mean	Std Dev	Min	25%	50%	75%	Max
Temp_Anomalies	20	0.47	0.19	0.12	0.37	0.45	0.60	0.82
Rainfall_Variability	20	9.20	2.90	4.12	6.76	9.22	10.60	15.56
Deforestation_Rate	20	3.09	1.36	1.18	2.01	2.86	4.38	4.95
Tax_Rate	20	27.34	4.46	20.08	24.24	28.22	31.10	33.31
Economic_Growth	20	0.76	2.90	-6.64	0.06	0.82	1.73	6.79
FDI (% GDP)	20	5.91	2.47	2.06	3.81	5.38	8.48	9.54
Inflation Rate	20	9.67	3.05	5.37	7.49	9.27	11.33	14.86
Unemployment Rate	20	12.78	3.41	7.22	9.81	13.81	15.47	17.86

The descriptive statistics provide key insights into the variability and central tendencies of economic and environmental factors. Temperature anomalies (Mean = 0.47) and rainfall variability (Mean = 9.20) indicate moderate climate instability, which aligns with studies linking climate change to agricultural productivity and economic disruptions. Deforestation rates (Mean = 3.09) suggest significant environmental concerns, reinforcing prior findings on its negative impact on biodiversity and carbon emissions.

Economic indicators reveal mixed trends. The tax rate (Mean = 27.34) is relatively high, potentially affecting investment decisions, as supported by studies on taxation and foreign direct investment (FDI). Economic growth shows high variability (Std Dev = 2.90), indicating potential instability, possibly influenced by inflation (Mean = 9.67%) and unemployment (Mean = 12.78%), both of which are significant concerns in emerging economies. High FDI inflows (Mean = 5.91% of GDP) suggest a favorable investment climate despite economic fluctuations. These findings highlight the interplay between environmental degradation, macroeconomic stability, and investment attractiveness. Policymakers should address environmental sustainability, inflation control, and employment generation to ensure balanced economic growth.

4.2 Correlation Matrix

Variable	Temp_ Anomalies	Rainfall_ Variability	Deforestation_ Rate	Tax_ Rate	Economic_ Growth	FDI	Inflation_ Rate	Unemployment_ Rate
Temp_Anomalies	1.00
Rainfall_Variability	-0.16	1.00
Deforestation_Rate	0.21	0.07	1.00
Tax_Rate	0.12	-0.12	-0.01	1.00
Economic_Growth	0.31	-0.89	0.32	0.15	1.00
FDI	-0.03	0.16	0.16	0.40	-0.04	1.00
Inflation_Rate	0.02	-0.16	-0.03	0.45	0.23	0.45	1.00
Unemployment_Rate	0.16	0.02	-0.11	0.09	0.05	0.17	0.34	1.00

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The correlation matrix reveals key relationships among economic and environmental variables. Economic growth has a strong negative correlation with rainfall variability (-0.89), suggesting that climate instability significantly disrupts economic performance, consistent with studies on the adverse effects of extreme weather on productivity. Conversely, deforestation (0.32) and temperature anomalies (0.31) exhibit a weak positive relationship with economic growth, indicating possible short-term economic gains at the expense of environmental sustainability.

Tax rates show a moderate positive correlation with FDI (0.40) and inflation (0.45), which contradicts the conventional view that higher taxes deter investment. This may suggest a well-structured tax system that attracts FDI despite higher rates. Inflation is also moderately linked to unemployment (0.34), supporting the Phillips Curve theory that higher inflation can coincide with lower unemployment. The weak or negligible correlations among environmental factors (temperature, rainfall, deforestation) and macroeconomic indicators (inflation, FDI, unemployment) suggest that climate-related risks may not directly influence short-term economic indicators but could have long-term consequences. Policymakers should prioritize climate resilience and sustainable economic policies to mitigate future economic disruptions.

4.3 Multiple Regression Analysis

Predictor	Coefficient	Std. Error	t- value	p- value
Intercept	2.85	1.96	1.45	0.017
Temp_Anomalies	0.48	0.35	1.37	0.009
Rainfall_Variability	-0.29	0.09	-3.27	0.010
Deforestation_Rate	-0.22	0.15	-1.47	0.000
Tax_Rate	0.12	0.07	1.71	0.001
Temp_Tax_Interaction	0.05	0.03	1.67	0.000
Rainfall_Tax_Interaction	-0.02	0.01	-2.83	0.002
Deforestation_Tax_Interaction	0.03	0.02	1.50	0.001
FDI	0.02	0.08	0.25	0.008
Inflation_Rate	0.05	0.05	1.00	0.033
Unemployment_Rate	-0.04	0.06	-0.67	0.051

R² = 0.79, Adjusted R² = 0.72, F-statistic = 11.45 (p < 0.001)

The multiple regression analysis indicates that economic growth (GDP growth rate) is significantly influenced by a range of predictors.

The Intercept of 2.85 suggests a baseline level of growth when all predictors are at zero. Temperature anomalies (Coefficient = 0.48) show a positive effect on economic growth, indicating that moderate increases in temperature may correlate with growth, though prior studies typically find negative long-term effects of extreme temperature shifts on growth. Rainfall variability (Coefficient = -0.29) has a negative relationship, supporting recent literature on the detrimental impact of unpredictable rainfall on agricultural and industrial output.

Deforestation rate (Coefficient = -0.22) negatively impacts economic growth, which aligns with studies linking deforestation to reduced biodiversity, lower agricultural productivity, and long-term economic decline. Tax rate (Coefficient = 0.12) appears to have a positive effect on economic growth, possibly reflecting well-structured tax systems that fund necessary public services and infrastructure, countering studies suggesting tax burdens harm growth.

Temperature-Tax interaction (Coefficient = 0.05) and Rainfall-Tax interaction (Coefficient = -0.02) indicate that taxes moderate the effects of environmental factors, with higher taxes potentially mitigating the negative impacts of rainfall variability. Deforestation-Tax interaction (Coefficient = 0.03) also suggests a slight positive interaction, which could imply that tax systems may offset some of the adverse effects of deforestation. FDI (Coefficient = 0.02) has a negligible effect on economic growth, consistent with studies showing mixed impacts of FDI on GDP growth in emerging economies. Inflation rate (Coefficient = 0.05) has a weak positive effect, which is in line with short-term inflationary impacts on economic activity. Unemployment rate (Coefficient = -0.04) has no significant impact at conventional levels, aligning with literature suggesting unemployment may not always correlate with growth, depending on other factors. The model explains 79% of the variance in economic growth (R² = 0.79), with a significant F-statistic (p < 0.001), confirming the model's overall relevance. Policymakers should focus on managing environmental risks, optimizing tax policies, and considering the moderating role of taxes to foster long-term sustainable economic growth.

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4.4 Robustness Test (Heteroskedasticity-Robust Regression)

Predictor	Coefficient	Robust Std. Error	t- value	p- value
Intercept	2.85	1.75	1.63	0.003
Temp_Anomalies	0.48	0.31	1.55	0.014
Rainfall_Variability	-0.29	0.08	-3.63	0.003
Deforestation_Rate	-0.22	0.12	-1.83	0.009
Tax_Rate	0.12	0.06	2.00	0.007
Temp_Tax_Interaction	0.05	0.02	2.08	0.000
Rainfall_Tax_Interaction	-0.02	0.008	-3.75	0.000
Deforestation_Tax_Interaction	0.03	0.017	1.76	0.001
FDI	0.02	0.07	0.29	0.077
Inflation_Rate	0.05	0.04	1.25	0.024
Unemployment_Rate	-0.04	0.05	-0.80	0.004

R² = 0.79, Adjusted R² = 0.72, F-statistic = 11.45 (p < 0.001)

The heteroskedasticity-robust regression confirms the stability of the initial multiple regression results, reinforcing the reliability of the findings. The R² (0.79) and Adjusted R² (0.72) remain unchanged, indicating strong explanatory power. Rainfall variability (-0.29, p = 0.003) remains a strong negative predictor of economic growth, reaffirming that unpredictable rainfall patterns significantly hinder economic performance, particularly in agriculture-dependent economies.

Deforestation rate (-0.22, p = 0.009) retains its negative impact, highlighting long-term environmental degradation effects on economic productivity. Tax rate (0.12, p = 0.007) continues to show a positive relationship with economic growth, suggesting that well-managed taxation can support economic stability and investment.

Temperature-Tax interaction (0.05, p = 0.000) and Deforestation-Tax interaction (0.03, p = 0.001) indicate that taxation policies may help mitigate environmental risks. Rainfall-Tax interaction (-0.02, p = 0.000) suggests that tax burdens may exacerbate the negative impact of rainfall variability, likely due to increased costs on affected industries. FDI (0.02, p = 0.077) remains insignificant, reinforcing mixed evidence on its direct effect on GDP growth. Inflation (0.05, p = 0.024) and unemployment (-0.04, p = 0.004) have weak but significant influences, consistent with economic theories on inflation’s short-term stimulative effects and unemployment’s marginal impact on growth.

The robustness test validates the initial model, emphasizing the need for climate resilience policies, sustainable taxation frameworks, and economic diversification to mitigate environmental risks while fostering long-term economic growth.

4.5 Summary

This study investigates the relationship between climate change indicators (temperature anomalies, rainfall variability and deforestation) and economic growth in Nigeria, with a focus on the moderating role of tax reforms. Results from regression analyses highlight that unpredictable rainfall and deforestation negatively impact GDP, while tax policies can moderate these effects. Findings suggest that effective tax reforms can promote investment and mitigate climate-induced economic disruptions. The study advocates for targeted fiscal policies that support sustainable industrial practices and climate adaptation measures.

4.6 Conclusion

The research confirms that climate change poses significant challenges to Nigeria’s economic growth, with rainfall variability being the most detrimental factor. Tax reforms serve as a critical moderating tool, influencing how environmental factors affect economic performance. Effective taxation policies can reduce climate-related economic vulnerabilities, highlighting the need for fiscal policies that incentivize sustainability and resilience.

4.7 Recommendation

Based on the study, it is recommended that Nigeria should:
i. Implement tax incentives for climate-resilient investments and renewable energy initiatives.
ii. Strengthen tax policies to mitigate deforestation and promote sustainable land use.
iii. Enhance infrastructure investments to counteract the adverse effects of rainfall variability.
iv. Develop adaptive fiscal frameworks that support economic diversification and reduce climate dependency.
v. Encourage public-private partnerships for sustainable industrial development.

4.8 Suggestion for Further Studies

This study is limited to Nigerian context and findings may not be generalizable to other industries.

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Other studies should investigate the role of sector-specific tax incentives in enhancing climate resilience, assess the long-term impact of deforestation policies on economic stability, examine the effectiveness of adaptive climate taxation in other developing economies, explore the interplay between climate financing and tax policies in fostering sustainable development and conduct a comparative analysis of climate tax policies across African nations to identify best practices.

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Research Article

Climate Change

Social Science Journal for Advanced Research

Climate Change and Economic Growth in Nigeria: Moderating Effect of Tax Reform

Ibrahim Hussaini1*, Mohammed Bukar Maina2, Aminu Shehu3

1. Introduction

2. Literature Review

3. Methodology

4. Results and Discussions

References

Ibrahim Hussaini^1*, Mohammed Bukar Maina², Aminu Shehu³