Following the repeated warnings of climatologists, tax systems for limiting carbon emissions are more and more numerous. They all have one principle: the integration of negative externalities in terms of climate damage into prices linked to CO2 emissions (polluter-pays principle). How does it function in practice? How efficient is it? Several questions have been raised by the project of creating a French carbon tax and a European one.
In the context of the Kyoto Protocol (signed in 1997), the EU has already set up a carbon trading market, which consists in exchanging emissions allowances). The initiale objective of the French carbon tax, the “contribution climat-énergie”, was to complete this system. The tax was to charge 17 euros for every ton of emitted CO2, and cover all fossil fuels (oil, natural gas, coal, liquefied petroleum gas). Moreover, the revenue would have been transferred to French households in the form of a tax credit (or a “green check”). How would this tax have completed the European carbon trading market? It would have tackled all the “diffuse emissions” that were not covered by the European scheme, which represent two thirds of CO2 emissions in France (transports, use of buildings by individuals and companies, agriculture, production and transformation of waste).
Today the French carbon tax project is at a standstill. After being disapproved by the Constitutional Council (29th December 2009), its postponing sine die was announced by French Prime minister François Fillon (23th March 2010). He made his case saying the application of the tax would “cripple the competitiveness” of French companies.
The French carbon tax did not manage to overcome its internal contradictions. First, the tax raised a problem of equity: how to find the balance between tax relief that make it inefficient and lack of adaptation to the various economic agents, which would make it unfair? Second, the gains, both environmental and economic, were questionable: if the collective good to protect is the planet, is a French carbon tax (which hampers national companies’ competitiveness) the solution?
Contradictions of the French carbon tax: equity, efficiency, competitiveness
The dilemma of efficiency and equity
The carbon tax is a potentially unequal tax. In order to modify the behaviour of all economic agents (households, companies, public authorities), the carbon tax must affect the highest number possible. But this raises a problem of equity, as the costs are unevenly shared.
In the first place, the average spending in terms of CO2 emissions vary importantly according to the economic agents. Poor households dedicate a higher percentage of their revenues than rich ones to the consumption of CO2-emitting goods (like heating and cars). In addition, one should point out the fact that the energetic expenses of the 20% lower-revenues have dramatically increased over the past few years. They represented 14,9% of their budget in 2006, compared with only 10,2% in 2001. On the contrary, the 20% highest revenues have seen their energetic bill being cut from 6,3% to 5,9% of their budget. Indeed, the incomes of the richest have increased faster than the prices of energy.
Moreover, in France low-income households often live in the less energy-efficient housings and the more remote from city centres or workplaces. As a consequence, their energetic expenses in comparison with other social categories are also higher in absolute terms. Hence the adjustment of the “contribution climat-énergie” in the form of a tax relief (or “green check”) for households.
Industries are also concerned (half of all CO2 emissions in France come from the secondary and tertiary sectors). They are already subjected to CO2 quotas and specific taxes (such as the domestic tax on oil products, TIPP). But in the case of a higher taxation of CO2 emissions, some sectors would be much more affected than others. Gross profits would sharply decrease in steel, fertilizers, aluminium industries.
Consequently, the text of the bill provides exemptions for 1,018 industrials sites subjects to the European carbon trading scheme (steel, lime, glass, cement, etc), considered to be the most polluting. But this is the same reason why the Constitutional Council opposed this project of carbon tax, rightly arguing that it created a “breach of equality before taxation” (“rupture de l’égalité devant l’impôt”). Indeed, the sectors eventually affected by the carbon tax only represented 7% of industrial CO2 emissions in France!
We must therefore conclude that a carbon tax is caught between its regressive dimension and all kinds of tax cuts that compensates this first aspect but undermines both the efficiency and equality dimensions of the tax.
The planet Earth as a collective good to protect: beyond the means of a French carbon tax
The « contribution climat-énergie » suffers from a second binary problem. Its scope is limited to France’s territory; the area where CO2-based negative externalities are produced is the Earth. Consequently, the effect on which the efficiency of the tax is based– making costs of reduction on margins uniform – will hardly be initiated by a single country.
It is difficult to put forward the “model of virtue” argument – considering that a national initiative will set an example for the world and trigger a spill-over effect. France already taxes fuel oils at approximately 150%. China and India subsidize theirs. One can doubt increasing this taxation up to 170% with the carbon tax will lead other states to do the same.
Another question concerns the empirical impact of a French carbon tax. The economist Remy Prud’homme analyses the case of China, which has committed to reducing its CO2 emissions produced per dollar from 3 to 4% a year. China nonetheless intends to increase its production by 10-11% a year, which means its CO2 emissions will effectively grow by 7% a year, and double by 2020 – in other terms, China is going to produce 7 billion tons of CO2 over this period. If we now observe the French situation, figures are not of the same order. France’s objectives for 2020 are a 20% cut in CO2 emissions, which means minus 70 million tons. Let us assume the carbon tax will allow an extra 10% reduction in carbon emissions: thanks to it, France will have decreased its emissions by 7 million tons over the decade while China will have increase its by 7 billion tons… Is it really worth it?
At the same time, the cost of such tax is high in terms of industrial competitiveness. Expenses dedicated to reduce carbon emissions in France would raise the relative price of French goods that involve CO2 consumption. This would encourage industries to discharge abroad and consumers to buy foreign-made products. The result is counterproductive: a continuous rise in CO2 concentrations in the world and factories closing in France.
A taxation headache
How to introduce a tax without fiscal performance
The “contribution climat-énergie” is an incentive instrument meant to modify individual behaviours and to disappear once those behaviours have been corrected. Therefore, this tax does not primarily aim at generating a revenue. It does not influence households’ purchase power for it is fully compensated by a reduction of income tax or a “green check” for those who do not pay this tax (the poorer). The amount of the compensation depends on the family size, the living area (urban, rural) and the presence or absence of public transports. So introducing the French carbon tax would boil down to create also a new public expense, and in combination with a tax reduction, this could even bring about a new cause of public deficit.
Another problematic dimension of this carbon tax would emerge in the long term if it was decided at the same time to decrease taxation on production factors – social contributions and local taxes on businesses. Insofar as a carbon tax must generate less and less revenue (since the aim is to change behaviours in an ecological way), it would be risky to transfer part of the financing of social protection and local authorities to the “contribution énergie-climat”.
After the withdrawal of the carbon tax, a tax void that reinforces the public deficit
The withdrawal of the French carbon tax was supposed to avoid heavy costs in terms of competitiveness. But in terms of public deficit, the effect is strongly negative. The carbon tax was meant to generate 4,5 billion euros in 2010, and would have risen every year – from 17 euros a CO2 ton to 100 euros in 2030 – and thus improved its fiscal performance. Households would have paid the greatest part (2, 65 billion euros), but the latter would have been compensated by a tax credit or a “green check”. What French public finances would miss is the part paid by companies (1, 9 billion euros). Among the main winners of the carbon tax withdrawal are fertilizer, plastic material and milk producers.
But a “fiscal void” has been created because the carbon tax was conceived as a compensation to the suppression of the local tax on businesses in February 2009 (a suppression which represents 6 billion euros per year of tax reduction), in the context of an “intelligent tax system” . The failure of the “contribution climat-énergie”, weakening the tax system, is making all the more difficult the French objective to bring the public deficit to 3% in 2013…
The case for a European carbon tax
In principle, a European carbon tax has distinctive advantages due to its scale. First, the EU has a sufficient economic weight to efficiently promote global ecological standards: it is the first importer and market in the world (representing about 20% of global GDP). As a result, a European tax system penalizing carbon-intensive products would really influence exporting industries all over the world. Second, the problem of national competitiveness is weakened: member states realize the majority of their exports and imports within the EU, so if the carbon charge is evenly applied, no country would be a priori disadvantaged (though national economies are shaped in different ways: for instance, Germany and Poland consume proportionally more coal than Nordic countries). In addition, European exports could be de-taxed so as to preserve their competitiveness on international markets. Last but not least, such a European tax would generate important revenues, which is particularly relevant at a time when nearly all member states face a deterioration of their finances.
True, some concrete problems remain to be solved. When it comes to the tax base, one might ask: how to determine the carbon content of finished products, when you have no information concerning the carbon intensity of the whole fabrication process? It is quite unrealistic to expect that exporting countries will provide such information. Moreover, some studies have shown that Europe is not necessarily “carbon competitive”. For example, it exports proportionally more carbon-intensive products than the US, simply because the latter tend to export more services and high-technology products (that are less carbon-consuming than other exports). As a consequence, a European carbon tax could well trigger trade reprisals from its partners.
Now that the French version has been given up, owing to its inherent contradictions, it is time for the project of a European carbon tax to prove its relevance. The unanimity voting procedure is not likely to favour this new European step. Indeed, the project of European tax proposed by the Commission in June 2010 was voted down. Among other causes of disagreement, the United-Kingdom and Ireland opposed any European tax by principle, Germany and Poland feared being more penalized because of their important coal consumption.
These days, in the context of a lack of tax revenues, both the French government and Brussels are launching again their initiatives. Will the new drafting of the projects take into account all the constraints they were confronted to in the past?
 Estimations by Rémy Prud’homme, former deputy director of the OECD’s direction of Environment, in « Les trois péchés de la taxe carbone », Les Echos, 5 January 2010.
 The weight on the added value would have been 18,4% for fertilizers production, 5,7% for chemical material, 5,6% for mineral chemistry…
 « Plus nous taxerons la pollution, plus nous allégerons les charges pesant sur le travail » (Nicolas Sarkozy, 22 June 2009). The more we will tax pollution, the more we will lower the tax burden on work. It is clearly the sense of the Swedish "green shift" policy set up since 2001.
 Delgado, Juan, « Why Europe is not carbon competitive ? », Bruegel, 19th November 2009.
To go further
On the internet
- “France eyes new carbon tax in 2012 budget”, Euractiv.com, 29 September 2011
- “EU carbon tax proposal delayed”, Euractiv.com, 25 June 2010
- Rapport de la conférence des experts et de la table ronde sur la contribution climat et énergie sous la présidence de Michel Rocard, July 2009.
- Projet de loi de finances pour 2010. Rapport sur les prélèvements obligatoires et leur évolution, September 2009.
- Le dossier taxe Carbone : la France s’engage sur le climat, on the public website dedicated to sustainable development (http://www.developpement-durable.gouv.fr/article.php3?id_article=5839)
- Official website of the French government « Le chef de l'Etat fixe la taxe carbone à 17 euros la tonne de CO2 », 11th September 2009
- DE PERTHUIS, C., « Le débat sur la taxe carbone », Futuribles, n° 356, 2009-2010
- LAÏDI, Z, La norme sans la force, Paris, Presses de Sciences-Po, 2008
- PRUD’HOMME, R., « Les trois péchés de la taxe carbone », Les Échos, 5th January 2010
- QUINET, A., La valeur tutélaire du carbone, éd. la Documentation française 2009
- Lucie ROBEQUIN, « Un manque à gagner de 2 milliards d’euros », Les Échos, 24 mars 2010
- SCHUBERT, K., Pour la taxe carbone. La politique économique face à la menace climatique, Paris, Éditions Rue d'Ulm, 2009
- Focus taxe carbone, dossier Alternatives économiques, February 2010. In particular, CANFIN, P.,« Ce que changerait une taxe carbone », Alternatives Economiques n° 269, May 2008
Source photo : CO2 emissions, by freefotouk, on flickr