The CO2 emissions trend and their reduction potential in the Nigerian manufacturing sector from 2010 to 2020 were studied. The Logarithmic Mean Divisia Index was applied to decompose the change in CO2 emissions into pre-set factors: carbon intensity effects, firm energy intensity effects, cost structure effects, asset-turnover effect, asset-to-equity effect, equity-funded production effect and productive capacity utilization. The results show that the change in emissions increased by $$1668\times {10}^{12}$$ 1668 × 10 12 GJ between 2010 and 2020. Energy intensity and equity-funded production were the leading drivers of increased emissions, while productive capacity utilization reduced emissions. The CO2 emissions increased throughout the study, except for a few periods. Without a carbon tax policy, the results show that firm-level drivers increased CO2 emissions in the business-as-usual scenario. However, under the 5% carbon tax (CAT) policy scenario on energy consumption, there was a reduction in CO2 emissions between 2010 and 2020. Furthermore, a CAT policy of 5% on energy consumption reduced CO2 emissions by 22%. A further implication of CAT policy, given its interaction with firm-level drivers, resulted in lowering CO2 emissions in the interactional scenario. The findings indicate productive capacity utilization, equity-funded production, and CAT impacted CO2 emissions variation.

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