Wednesday, October 14, 2009

A carbon tax for France? Encore un effort !




BLOG ACTION DAY: This is a special guest post from Eloi Laurent, to mark International Blog Action Day, the theme of which this year is climate change. His book with Jean-Paul Fitoussi, La Nouvelle écologie politique: Économie et développement humain, is well worth your attention.



Eloi writes:




Early next year, France will introduce a carbon tax, becoming the largest economy in the world to do so. As the increasingly uncertain global negotiations prior to the Copenhagen summit draw to a close, and the nations of the world prepare to draft a successor to the fatally flawed Kyoto Protocol, this is an important commitment. First, because it somewhat eases the grave "crisis of credibility" that currently plague the UN talks among the developed countries (proposed mitigation efforts are obviously insufficient and offers of financial aid to assist developing countries in adapting are even more so, given the historical responsibility of the developed countries in causing climate change). Second, because carbon taxes are an efficient but underutilized economic instrument for curbing so-called "diffuse pollution", i.e. decentralized greenhouse gas (GHG) emissions stemming from transport and housing. Because these emissions come from hundreds of millions of sources, they are very hard to monitor and reduce through cap-and-trade markets (which are much better suited to curbing centralized pollution by energy-producing and energy-intensive industrial sectors; for example, the EU Emission Trading Scheme, or ETS, comprises a mere 11 000 participating installations). The French initiative is thus to be commended.


Yet as we enter the nuts and bolts era of climate change policy, we have to go beyond good intentions and take a hard look at the details of proposed policies, in search of the proverbial devil.


The obvious question to be asked first is "why?". Why would France need a carbon tax, while it enjoys the lowest carbon-intensive economic growth in the developed world thanks to the massive investment it made some thirty years ago in nuclear power (see graph below from the latest UN WDR and data on carbon intensity from the EIA here)?

(see top figure, click to enlarge)


Source: WDR 2010.


The answer is legal: France has committed since 2007 to a new development strategy based on ecological sustainability. The so-called "Grenelle de l'environnement" has now been translated into law, with another law currently under debate in Parliament (for more on this and on French attitudes towards climate change, see Laurent, 2009). This law demands that France divide its GHG emissions by a factor 4 from 1990 to 2050, when it should emit less than 140 millions tons of CO2. But why would we need a carbon tax to do that? The answer here is empirical, and comes from the observation of GHG emissions dynamics in the French economy during the last four decades.




(see middle figure above)

French emissions of CO2, 1960-2008, in millions of tons

Source: Laurent and Le Cacheux, 2009.


What is clear from this graph is that the French economy suffers, ecologically speaking, from "nuclear fatigue" or "complacency": sins in diffuse pollution from housing and transportation have over time offset energy virtue (road transportation alone now accounts for a third of total emissions, as its share increased by an astonishing 490% since 1960). Hence, if French CO2 emissions went down 30% from 1980 to 2007, they only decreased by 10% from 1990 to 2007. If France is to respect its commitment and reach the "factor 4" target by 2050 (in line with the scientific consensus framed by the IPCC), it must control its diffuse emissions. If it is to control these emissions, it has to find an economic instrument able to do just that.

Carbon tax is the way to go. But doesn't France already heavily tax carbon through existing energy taxation? Well, not really, at least not by European standards: the latest data compiled by Eurostat show that energy taxation has, if anything, gone down in the last decade in France, the country now ranking at the very bottom of the EU both for energy taxes as % of GDP, with 1,4% in 2007 (23rd out of 27) and for energy taxes as % of total taxation, with 3,3% in 2007 (26th out of 27), see table below.


Evolution of energy taxation in the EU



Energy taxes as % of GDP


Energy taxes as % of total taxation


Difference

Ranking

Difference

Ranking


1995 to 2007

2000 to 2007

2007

1995 to 2007

2000 to 2007

2007

BE

-0,2

-0,1

25

-0,4

-0,1

27

BG

-

0,8

1

-

1,9

1

CZ

0,0

0,2

5

-0,1

-0,1

4

DK

0,1

-0,4

6

0,2

-0,7

18

DE

-0,1

-0,2

12

-0,2

-0,1

16

EE

1,3

0,7

11

4,2

1,8

8

IE

-0,5

-0,2

27

-1,4

-0,7

23

EL

-1,3

-0,4

26

-4,8

-0,8

25

ES

-0,4

-0,3

24

-1,7

-1,4

24

FR

-0,6

-0,4

23

-1,3

-0,8

26

IT

-1,1

-0,5

9

-3,1

-1,4

15

CY

1,3

1,1

17

2,3

2,0

20

LV

0,7

-0,1

19

2,5

-0,7

9

LT

0,5

-0,1

22

1,4

-0,4

11

LU

-0,4

-0,2

2

-1,0

-0,1

3

HU

-0,6

-0,3

8

-1,2

-1,0

12

MT

0,9

0,4

16

2,0

0,2

13

NL

0,2

0,0

15

0,5

0,1

17

AT

0,2

0,1

21

0,5

0,2

21

PL

1,2

0,6

3

3,6

1,5

2

PT

-0,6

0,4

10

-2,6

0,8

10

RO

-

-1,5

18

-

-4,9

7

SI

-0,8

-0,1

4

-1,8

-0,4

6

SK

-0,3

-0,1

13

1,0

0,4

5

FI

-0,5

-0,3

20

-0,8

-0,3

22

SE

-0,2

-0,1

7

-0,4

0,0

19

UK

-0,5

-0,5

14

-1,6

-1,4

14


Source: Eurostat.





The crucial question thus becomes "how?" Two issues are at stake here: how to choose the right "carbon price" and even more importantly the right carbon price trajectory so that the tax reform is a success in terms of ecological efficiency? How to compensate for social regressivity effects in order to improve political acceptability, given the fact that more modest French households pay, like households everywhere else, a higher share of their income on energy (2.5 times more for the bottom 20% compared to the top 20%)?

On these two fronts, alas, the political debate does not look good so far.

The first point has been a classical example of "idealist" experts v "realist" politicians (on the issue of climate change, adjectives should be inverted). In the end, President Sarkozy set the price tag at 17 euros per ton of CO2 for 2010. This level is substantially lower than the 32 euros per ton of CO2 advocated by the Rocard Commission, most members of which actually favored a launching level of 45 euros. But France could end up with a third of what is required by science, even lower. Worse still, there is no clear political indication to date about the price trajectory, experts setting the 2030 level at 100 euros (a level Sweden already surpasses) to eventually reach the "factor 4" target. Reading Sarkozy's September 10 speech of carefully, one realizes that it was the EU ETS (the European carbon market) that led the president to settle on the figure of 17 euros:


Cependant, sur le marché où s'échangent aujourd'hui les quotas d'émissions entre grandes entreprises, la valeur de la tonne de CO2 se situe en moyenne depuis sa création en février 2008 autour de 17 euros. Qui comprendrait que les ménages et les PME soient imposés sur une base deux fois plus élevée que celle des grandes entreprises soumises à quotas d'émissions ? En responsabilité, j'ai donc décidé que le niveau de départ de cette fiscalité nouvelle serait fixé par référence à la valeur des quotas d'émission de CO2 sur le marché du carbone.



« Stratégie de la France dans la lutte contre le réchauffement climatique »


Artemare (Ain) – Jeudi 10 septembre 2009



The French decision thus reveals that the flaws of the EU ETS not only are a problem for the sectors it covers, but also for the other sectors for which is serves as a benchmark (on the problems related to EU ETS, and more generally on the EU climate change policy, see my recent presentation at Art's seminar:


The second key issue is that of compensation. Contrary to a common belief, it is perfectly possible to preserve the ecological efficiency of carbon taxes by not allowing any exemption and yet compensate households financially to ease energy taxation social regressivity. In other words, it is perfectly possible to render compatible social justice and sustainability through intelligent policy design. The French case illustrates this nicely. Computations by ADEME, the French agency for environment and energy efficiency, show that, for instance, with transfers of 94 euros for people living in the country and 76 euros for people living in urban areas, the tax actually benefits French citizens up to the third decile of income distribution (see table).


(see bottom figure above)

Impact of a 17 euros/t carbon tax on the French income distribution, in euros/year

Source: adapted from ADEME/Alternatives Economiques.



Other economically sound compensation options exist, such as lowering social contributions to foster employment, not a bad idea in current economic times. Yet, the government wants to compensate households through tax credits on their income taxes, a strategy that will hurt one of the last bits of progressivity remaining in the French tax system.


Overall, debates surrounding the introduction of a carbon tax in France are quite a good example of the truth that ecologically efficient and socially fair solutions do exist to curb climate change, but that it takes pedagogy and above all political courage to bring them into being. We are left with the hope that the parliamentary debate that will begin in France in the next weeks can improve this crucial but imperfect reform. It is not at all clear that this is a hope we can believe in.




Éloi Laurent is an economist and scientific advisor at OFCE/Sciences-po (Paris)

and a visiting scholar at Harvard Center for European studies.




This post is based on a talk on "The Future of France climate and carbon policy" that will be given on Dec 1st at Harvard University Center for European Studies, 4-6pm, concluding the "Future of France" conference series (organized by Michèle Lamont and Éloi Laurent).

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