Carbon tax: let's not discredit a promising idea (1)
« The climate will be saved when active or retired American workers would demonstrate in the street to demand higher gasoline taxes so as to sustain their pension benefits without killing employment.»
William Nordhaus Professor at Yale University
After the recent “Grenelle” conference on environment, the French President announced that he is willing to consider setting up a carbon tax. It is a good news for me, but as we saw a coalition of various opponents rising against the european proposal of a carbon/energy tax in 1992, against Clinton’s Btu tax in 1993, against the ecotax of Prime Minister Jospin’s administration in 1998, I know that the door that has been opened could be shut very soon, especially in a context of high oil prices.
That coalition has each time succeeded in hindering any serious discussion on a carbon tax by combining with justified fears the defence of contradictory ideological positions. It will succeed again if the carbon tax is extolled as being a magical recipe for a new ecological era, without taking into account the common difficulties that ‘people’ experience every day. Nicolas Hulot’s perseverance could be quite insufficient if we are confronted with a flood of declarations and street interviews that would once again incite our fellow citizens to answer in opinion polls : « no, we don’t want it » : fishermen, taxis, truckers at breaking point, inhabitants from the suburbs and the country who depend on the automobile to reach supermarkets and workplaces, poor households unable to pay the heating bill…
This endless list enumerates real problems and I would surely not militate to make it harder for instance for those who fight for the survival of villages in the Pyrenean valleys I was born in. Whatever we think about it, the hunger strike of a man such as Jean Lasalle revealed a true distress, and there are many others in the list I just started. My fear is that they might be once more manipulated with demagogy in order to hold the carbon tax hostage. Anti-ecology reflex making the carbon tax a green right-thinking idea, ecologists’ reflex seeing it as a risk of favouring nuclear energy, anti-tax reflex against Bercy [French Ministry of Finances], compassion reflex towards the impoverished classes affected by the loss of an essential good, anti-free-trade reflex by which the ecotax is shown as a market policy instrument that avoids real constraints to firms, anti-state reflex against a state-controlled tool, anti-religious reflex, suspecting a will of punishment, to make up for our mistakes, trade unions’ reflex to protect jobs, employers’ reflex to defend competitiveness.
I would like to help avoid these attempts to misuse real concerns in order to discredit a good idea or to implement it insignificantly. The key is certainly to consider that environmental policy instrument in a context of bigger challenges such as energy supply security and the saveguard of high social protection in a situation of globalization of the economy and ageing of our populations. This provocative quotation from William Nordhaus by which we started this note suggests that the instrument of a tax enables to define environmental policies in the context of a wider society project and economic policies. Of course, the image is boldly evocative, but it summarizes well what is at stake.
1. A tool that is an object of misunderstandings and lack of information. (2)
- « Oil price reaches once again its record level », is the shock news we hear on TV and in the radio, and that information is now to easily associated with the so-called evidence that car drivers are the State’s “docile milch cows”. Now, I suggest that we have a look at some rough figures :
- The nominal oil price has been multiplied by 23,78 between 1960 and 2006. But if we take into account variations in currency exchange rates with the dollar, and after deduction of inflation, its real price in today’s dollars and in annual average has only been multiplied by 2,8 during these 46 years. In fact, after a first maximum in 1982, it decreased dramatically and the average price in 2006 was still 23% inferior to that peak, in spite of the recent years’ increase. (cf. diagram 1)
- The announcement of « spot » prices everyday in the medias (especially when they rise), doesn’t mention the existence of long-term contracts. If the « spot » price reached 100$ in december 2007, we would hardly be over the average price of 1982, but let’s bet that in average in 2007, the price of the oil barrel imported in France will remain under that peak. All the same the 19,24% increase per year since 1998 hurts but it is important to understand why we cannot stand today price levels that we could live well with, 25 years ago.
- The real price of fuel sold in France has risen by 9,5% since 1960, far less than rents (a little more than 85%) and the price for the purchase of ancient lodgings (476%) which is a good index of the growth in real estate owners’ incomes in towns and of what incites us to look for lodgings outside our cities, which requires more forced mobility (cf. diagram 2). Considering progress in motors efficiency, the cost of fuel per 100 km has been reduced by 25% while that of the 2 zone-“orange card” in Ile-de-France has grown by 60%. (cf. diagram 3). Six hours of work were needed at the minimum wage (SMIG) in 1960 to afford the amount of fuel to drive 100 km, whereas only 1 hour of work was necessary in 2005 (SMIC) for the same distance (cf. diagram 4). Mobility purchasing power has therefore grown with revenues. This is no surprise : the better off one gets, the more one wishes to move. But it is important to keep these proportions in mind.
- Between 1978 and 2005, the percentage share of household revenues assigned to the payment of the domestic tax on petroleum products (taxe intérieure sur les produits pétroliers, TIPP) has decreased by 12,5 points, due to the growing part of diesel fuel in the overall consumption. The social contributions percentage share in the total wage cost has grown on the contrary by 11 points, with a maximum of 26 points in 1996. If one keeps talking about anything like a « docile milch cow », it would be better not to keep talking only of the car user as it is no longer “the right cow”.
- Is the carbon tax a penalty for « guilty consumers » ? These terms lead reflection to a dead-end. The truth is that where markets fail, public policies are necessary to make sure that prices reflect long-term social costs. The purpose is not to punish, but to make the costs we associate to environmental risks more explicit and to make production, innovation, consumption and location choices evolve consequently. Our current demand for goods depends on the range of equipments that are available today, the stock of these equipments being constituted according to signals received during the last decades by households as well as by firms and engineers who design new products and by the city planners who build on our territory : a car lasts 5 to 12 years, a heating system 2 decades, an apartment or a house over 40 years, an urban architectural concept more one century. We are now in 2007 being trapped by low energy prices up to 1973 and in the 1985-2000 period.
- Can we refuse to heed or to use such price-signals, and just wait for technical progress? Allocating more funds to R&D in low-carbon techniques is a major precondition to any climate policy, especially after a twenty-year decline of investments in R&D in the energy sector. But there is no innovation without a strong link between research, development and diffusion, and without bets made by industry leaders on low-carbon techniques to make their price lower. A price on carbon simply encourages such bets. Moreover, technical progress alone is not enough to reduce greenhouse gas emissions. At constant fuel price, the improvement of engines in a more fuel-sparing way favours the competitiveness of road freight compared to railway freight. It lowers the cost of car and truck use and incites households to more road-mobility. This rebound-effect exists in other sectors but not with the same strength as in the transport sector. A price-signal would prevent it.
- Can we use “friendlier” signals, such as building renovation programs, railway infrastructure programs, consumer information programs. Such disposals make investments safer and further innovation on technical objectives. But presenting these programs as alternatives avoiding the constraints of a carbon tax and claiming that we could solve everything by such instruments is dissimulating the risks of generalizing rather arbitrary standards: technical standards have no major negative effect in cases where pollution is diffused by a limited number of firms and where replacing technologies are known (3). But on the short-run, there is no mass substitute for fossil fuels. Trying to give a regulatory frame to decisions made by households, firms, administrations and laboratories is giving way to uncontrollable lobbying: standards for processes and products can be adjusted in order to disadvantage any group of competitors; environmental quality standards can help hindering any alternative to fossil energies (windmills might affect landscapes, there may be risks with biofuels for biodiversity). As far as allocation of research budgets is concerned, it often depends on persuasion about future potential of different competing technological projects, that cannot by the present time be proven.
- Is the carbon tax unable to change behaviours? It is often said that a carbon tax is useless because we all keep driving as much even though fuel prices rise. But this only stresses the fact that at a given time, we are all trapped by past choices that we have made. But a carbon tax has the quality of guiding us in our future equipment and location choices and helping us to anticipate such traps. That is why economists say that long-term price-elasticity is greater than short term price-elasticity. By the way, there are good reasons to think that elasticities measured by now (between -0,2 and -0,5) don’t enable to assess correctly the long-term-impact of a carbon tax. They are drawn from historical records of highly fluctuating energy prices, the growth of which has been slow, as we have shown it. Why investing in energy savings or worry about transport costs related to outlying lodging if energy prices decrease? On the contrary, with a steady and predictable signal, households and industries would make their choices in a more persevering way.
- Has the carbon tax a weak basis, since it is supposed to destroy itself by reducing consumption? This argument (4) is symmetrical to the previous one. It consists in saying that carbon taxes are no reliable fiscal instruments because they tend to destroy their fiscal base. This is not a relevant argument, because the logic of a carbon tax is to make its rate grow progressively: if it extincts, that will be at the end of the century. In short: the last tons of CO2 emitted will surely be emitted by planes. They could be all the more taxed since future generations will be better off and will not pay any carbon tax on the rest of their spendings.
- All things considered, the real choice is between transparency in costs and letting hidden costs thrive behind the myth of costlessness. Beyond a certain level of ambition, all step taken has costs that are payed at the end by consumers (the impact of rises in production costs on the price of goods) or by citizens/taxpayers (subsidies, exemptions, administration costs). Therefore, it is important not to go over the point where the will to give a regulatory frame to all micro-behaviour would unable us to control generated overcosts and advantages of situation acquired by firms that would more easily cope with standards than their competitors. The caricatured confrontation of a "Gosplan" tendency to generalize rules and standards and the belief in pure market mechanisms must give way to a reflection on a hybrid incentive structure, associating a carbon tax and non-fiscal instruments, in order to:
- offset some negative effects of climate policies (we will see that in detail): industrial competitiveness, impact on low incomes.
- control economic rents. Consumers' associations fear for instance that a carbon tax would become a pretext to quick and arbitrary price rises. But such a price surge can be caused by new standards as well, and in that case, as overcosts are not obvious it is not easy to find any reliable object of protest. On the contrary, a tax makes protest against “unjustified” price rises easier.
- preventive measures taken through "ill-advised compromises" or administrative process from spoiling investment resources by creating too big differences in abatement costs: aggressive measures might induce 100€/tC abatement costs while potential abatement costing 10€/tC are neglected. Besides, a carbon tax does not allow that some sectors escape an equitable common effort simply by a capacity to negotiate soft standards (5).
2. A tool to bind environment, employment and energy supply security.
- A carbon tax gives the worth we grant to prevention of climatic risks, a little as the price of bread represents the nutritional value brought by it. But the price of bread is meant for paying for work made by the baker, the miller and the farmer. There is no such thing for a carbon tax. We can of course (and we must) use a part of collected income to invest in new technologies, but if the signal is strong enough to change behaviour, an important of collected revenues will remain available (except if they are misused in technological projects with no chance of success). The central question is than how we use the funds collected
- If revenue-neutral, an ecotax enables to reduce taxes and social security deductions affecting work. In the European and French context, it is generally considered that the most socially effective way to use the revenues of a carbon tax is to lower deductions on work, that can only increase (it is the trend) due to the evolution of our "age pyramid" if we don't change the ways of financing our pensions and health insurance system(6). Diagram 5, which gives a synthesis of existing studies in Europe in the years 1995-2000, a synthesis made by the IPCC in its third assessment report, shows clearly that other ways of "recycling that money" are socially less efficient.
- A carbon tax lowers the costs of climate policies and can in certain conditions be favourable to employment. The carbon tax is often thought of as favourable to employment, by enabling tax cuts on work. In fact, it is quite a complicated mechanism because taxing consumption turns out to be the same as taxing the revenue that makes it possible: if the whole tax cuts benefit to employers, than the purchasing power of employees is diminished. On the opposite if the latter get pay rises to offset the fall of their purchasing power caused by higher spending on energy, than the total cost of work for entrepreneurs won’t change and they won’t hire more people. But that mechanism by which a carbon tax eventually affects work anyway is associated to four others that do have a positive effect on growth and employment:
- compared to a regulatory policy, a carbon tax leads to a much less important increase of production costs for industries: by paying a y amount of carbon tax, they will benefit from an x amount of social contributions exemptions. It is less prone to cost increase transmission from one industry to another (rise of energy costs,--> rise of price of materials --> rise of automobile prices, and so on...) and down to consumers.
- it improves the balance of trade by reducing consumption of imported energies and makes us less vulnerable to oil and gas crises. On the long-run it slows down the increase of oil exporting countries. As an illustrative slogan, we can say that taxing imported hydrocarbons is equivalent to helping build new hospitals and schools and making it more difficult to build ski resorts in the desert, like in Dubai.
- it widens the fiscal base and affects non wage revenues, like for instance land and real property rental income. Consequently it reduces the tax burden on the whole productive system.
- for firms it reduces the risks taken by hiring: every hiring is a potential risk for them because they are never sure that sales will be high enough to pay for wages. But concluding that it is necessary to change laws on work to make it more flexible is forgetting the economic cost of distrust from employees towards their employers as well as the fact that competent workers are great advantages that a firm must keep till the economic situation improves. Besides, when a firm cannot immediately adjust the number of its employees to the turnover, the difference between overall wage costs and net wages is a permanent tax on overmanning. The cost per unit of production of social deductions grows when business is not good, which forces firms to underemploy by anticipation in good periods, in order to avoid that disadvantage in case of bad economic contxt. By reducing the difference between wage costs and net wages, that negative effect would be limited, as energy consumption is closely related to the level of activity. Replacing today’s social contributions by a carbon tax is equivalent to replacing an implicit tax on overmanning by a tax that adapt to sales volume. This would prevent the tendency to underemploy and consequently would reduce temptation of moonlight work.
- Can we now assess the result of such a reform ? Diagram 6 shows variations in households consumption. We obtained these data about France in 2000. It shows small gains (benefits) for tax levels that grow progressively (on ten years) up to 153 and 230 € per ton of carbon. For such values, the corresponding number of jobs created is estimated to 200 000 to 400 000. The more optimistic we are on the emission reductions made possible by technical improvement and capacity of diffusion to other fields of technical knowledge acquired through “decarbonisation” efforts, the more optimistic results are, even though they are moderate. These results date from the end of the nineties, and research on these topics has been more than neglected since then because of the lack of interest from decisionmakers. These data have two main limits. Firstly they overestimate the overall gain by taking it for granted that the revenues of the tax are only used to lower social contributions, but a part of it will be used to give compensation to those affected by the operation (cf. infra). Secondly they also under-estimate the gain because the model used doesn’t include any potential impact of reduction of the hiring risk on employers’ behaviour. This stresses the fact that analysis must go further (7), but whatever the effect of these new elements may be, we already now that the final result depends, as we will see, on the whole context this reform will be integrated in. We take as evidence of this dependence the fact that, supposing permanent full-employment (with total flexibility on salaries), the small environment-economy “double dividend” that we find turns into a small cost (but lower than strictly regulatory measures).
3. When things get complicated: the issue of competitiveness.
- Shifting a part of deductions on work revenues on energy consumption reduces the total fiscal burden (direct or indirect) on the productive system.(cf supra). It enables to offset the effects of the tax, but that compensation is very variable, depending on the sectors: sectors with high labout intensity will take advantage of a reduction of social contributions that is larger than the increase of energy consumption costs, whereas industries with high energy intensity and low labour intensity will see their tax load grow, the reduction of labour costs being insufficient to offset the carbon tax. These industries represent about 4% of industrial value added, compared to 70% for « winning » industries.
- The problem is considerable for some energy intensive activities facing international competitionas long as countries undergo unequal constraints. Some of these industries are protected by very high transportation costs and will simply pass it on the price for post-production activities. The industrial sector actually affected therefore represents only 1 to 2% of total value added (cf. diagram 7). This must not lead us to minimize the effect of relocation of these activities on some regions’ industrial network can be important and the loss of mastership on some links in the industrial chain can have a strategic cost. But let us keep some sense of proportions and not make carbon-pricing responsible for difficulties in these industries. They have suffered in the last 40 years from strong variations of €/$ currency exchange rate, a lot more than what we now imagine for a price on carbon. These variations had an impact on every element of production costs and not only energy: - 53% from 1980 to1985, + 79% from 1985 to 1996, - 30% from 1996 to 2000, + 53% from 2000 to 2007. In the same way, overcapacities of steel production in China (between 10% and 20% in 10 or 15 years for example) would have a depressive effect on prices much more threatening for the survival of european steel industry than any significant level of a carbon tax.
We can deal with risks for competitiveness of sectors weakened by a carbon constraint ; these risks, that come from the drop in profits and from the loss of worth on the stock exchange more than from the loss of market shares, can discourage them to invest in new production capacities in France. We can then define exemptions for a part of the amount of emissions (industries will make technological choices taking the tax into account, but their gains will be protected), or go further in the direction of tradable emission permits implemented in Europe. Success in that second option mostly depends on whether we can agree on a clear process of quotas allocation, a process that would avoid too big inequalities in constraints on each sector. It is indeed very important to preserve some industries that can be trapped both by upstream agents who pass on them overcosts caused by the tax or TEP and by clients whom they cannot pass anything on given international competition. This difficulty would be lightened by auctioning a growing part of emission allowances.(revenues from these auctions would help these industries be granted total or partial social contributions exemptions) but industrials argue that it would be the same as a tax. Anyway, the solution of optional possibilities, by which industries would have the choice between a tax and a permits system (the tax being the maximum price on carbon market) must be discussed.
On the long-run challenges are quite different, depending on international negotiation on climate: it is hard to imagine France and Europe committing themselves on unilateral drastic objectives without participation of the USA and great developing countries. We therefore have to face a transition period. It can of course be long, and last till an international framework for coordination of climate policies is set up, but the problem will mainly vanish by itself. The effect on competitiveness could reverse since a global decarbonation policy would contribute in favouring local production against competing long distance imports by making transportation costs higher.
4. When things get tougher: the social justice issue.
- In a context of mediatized use of the topic « defence of low incomes’ purchasing power », I would like to emphasize that sending untruthful signals to weakened populations is not a great help to them.. Letting people think in the sixties and the middle eighties that a low energy price is good for low classes, led them – and the rise of rents reinforced that effect -,to leave towncenters and seek for housing in more distant areas, without taking account of transportation costs and resigning themselves to a rise of work-to-home distances. They were indeed deceived by following the illusion that energy prices would not rise, they were misinformed on the difficulty to organize public transport (8) and pubic services everywhere, and the very quality of their houses
- Caring for working classes is anticipating on what can trap them; the same arguments as those used in the eighties are today often referred to to defend them. These arguments were used in a period of low oil prices, to contradict the idea of a tax on energy (9) or a carbon/energy tax. But the latter would have helped not to slow down the effort of energy efficiency and innovation triggered by both oil crises. Had we decided then to launch the right signals, would we not have let fishermen, car drivers, inhabitants of the suburbs get trapped. We would have further developed energy efficiency in buildings, we would have thought of alternative transportations forms, and innovated in naval propelling systems and we would have had enough clearsightedness to question real estate market and urban policies. Some anti-tax critics act like doctors saying to a mom: your son is fat, he drinks a lot of Coke with hamburgers and French fries? Why deprive him of that? When he grows up everything will get back in order. Just tell him to drink Fanta
- The short-term distributive effects of carbon taxes is ambiguous : of course high revenues pay the biggest part of it since they consume more energy (the richest 5% of households consume twice as much energy than the poorest 5% of households (10), without even counting air transport spendings. (cf. diagram 8). But purchasing power of the 35% of households with the lowest revenues ist the most affected because they spend 60,84% more to buy energy than the richest 5% of households (cf. diagram 9). In fact, the households most affected by a carbon tax are those that are both poor and dependent on fossil fuels, which is why the 30% of French people with modest revenues who own and use a car more often than the poorest 5% (79,5% compared to 64,8%) are more vulnerable in case of a tax. It is important to notice how heterogeneous each of the 5 revenue-classes are (cf. diagram 10), which means that distributive effects of a carbon tax cannot only be considered on a poor/rich criterion. Considerations on climate, space (location in the countryside, distance to public transportation or to town center), and professional aspects are in question (fishermen or farmers whose profit margins are low and whose oil dependence is high), as well as the type of housing (apartment or detached house) or of heating system.
This effect can be made globally positive :
- by tax rebates in order to exonerate basic needs: to give an idea of what is possible, considering that 30% of energy spendings of the worst off in our population are made to meet such basic needs and making them free of carbon charge for all (which corresponds to 4500 km of car transport for example), the reduction of the load on low income households would be about 43% (cf. diagram 11). The 30% spending share could be raised and the carbon tax exoneration could be concentrated on low incomes, but the final trade off must keep a significant incentive for all and not lessen the benefits of a fiscal switch from labour to carbon.
- through financial and especially technical support for energetic efficiency of buildings and energy using equipments. This assistance could come from the Agency for Environment and Energy Control (ADEME) and be meant for low income households, who generally live in the worst insulated houses and have the most inefficient equipments. To be efficient, it must be distinct from the necessary assistance for new buildings or long-term improvement of existing buildings.
- by a parallel action on household housing budget We should act against its increase in the past years, which has been much higher than the energy budget increase. Beyond emergency measures for individuals, several types of measures should aim to mitigate the real estate and rent price increases on the medium to long run , because these high prices are a major cause for the urban sprawl, forcing people to build or to rent on the outskirts of cities, and thus to commute. Combined to this housing policy, a public transport policy should try to counterbalance the trend towards more social and spatial segregation.
- by the creation of jobs made possible by lowering social contributions. The unemployment rate of the poorest 5% of French people was about 44% in 2001 compared to 10% on average, and only 4% for the richest 5%. Assuming that the distribution of job creations is proportional to the initial unemployment rate in each social layer, and assuming that 200 000 jobs can be created at the national level, then the poorest 5% of households have their revenue increased by 1,1%. (cf. diagram 12). This figure goes up to 2,23% for 400 000 jobs created. This is the very mechanism by which a carbon tax could eventually be profitable for the poor classes. But this estimation quite approximate and can only give an idea of what can be obtained. In fact, everything depends on the functioning of labour market and on the future of negotiation between trade unions, employers’ organizations and the State.
5. A good tool that unfortunately cannot be used in a context of high oil prices?
- The response to high oil prices is certainly not to reduce TIPP (interior tax on oil products) and the absolute level of VAT on energy, but it is to anticipate future rises (11). One must now have the courage of saying that reducing taxes on energy would be a disastrous signal sent to oil producing countries. It would be like saying: “the more you raise prices, the more we reduce taxes on your products, and, no problem, you can make a dent in our budget, till our taxes on energy collapse to nothing.” The price to pay will be for us whether less hospitals, less schools or public services built in France or more taxes on work or capital (12). Of course we can claim that it won’t happen because France only represents a small part of world oil demand. But it is important to realize what it would mean on the geopolitical level. France would then give a sign of weakness in Europe: in whole Europe the tonnage considered is much bigger than for France alone, and it would be quite difficult to keep accusing America of jeopardizing the world’s energetic security and climate by an excessive consumption of energy encouraged by low taxes on fuels (13).
- The response to high oil prices must use other means than hiding the marginal cost of energy (and carbon). Knowing the true prices is essential to influence behaviours on the long-run and cheating on these prices is preparing our future disappointment. We must keep a price signal and strengthen the set of measures previously evoked.
- The answer is to adopt today a tax assumed to rise when oil prices decrease. As the past fifty years show, the real level of oil prices fluctuates. It can go down tomorrow and up again the next day. Let us assume that OPEC countries worry about the efforts made by the OECD to develop substitutes to conventional oil and gas. They can lower their prices like they did in the eighties by pushing up their production capacities, in order to discourage all of our innovation efforts. This is a risky operation for them, and it is improbable on the short-run but possible on the long-run in case of strong constraints in importing countries. A tax is a way to deter them from making a price war but also to reduce their ability to push prices up by underinvestment in exploration and exploitation, and to show our determination to defend our own well estimated long-term interests
- The mode of enforcement of a carbon tax must be discussed and cannot be totally defined once and for all.
- Ideally, as Henry Prévot (14) emphasizes, what really counts is not the price of carbon in isolation, but the overall cost of carbon use for consumers, all taxes and production costs –transformation- distribution included. We could set the rule that the general trend must be a slow growth of that cost, we could raise the carbon tax in case of decreasing oil prices and diminish it in the opposite case. But in an indirect way, it would have the same flaws as reducing TIPP. It would tell producers how far we can go in paying for carbon (we would then have a tax reduced to nothing!) The difference, however, is that the world oil market depends too little on France’s attitude for OPEC countries to try to set their prices at the maximum level of our declared willingness to pay for carbon. Moreover, in case we would set up a ratchet effect device in which the government could only raise the tax, such a move would prevent any risk of being accused of discouraging our European partners’ urge for the strictest carbon discipline.
- Another option to consider is the Swiss system. That country correlates the rise of their carbon tax with their capacity to keep the pace in reaching their annual emissions abatement targets in the frame of Switzerland’s Kyoto commitment: no tax if annual targets are respected, a tax reinforced every year in the opposite case. This is an option that is really coherent with the spirit of Kyoto (that gives quotas of emissions) and helps avoid a never-ending debate between supporters and detractors of taxes, regulation measures or voluntary agreements by which some industrial sectors could get exempted from any tax. Besides, to prevent any suspicion (of a tax paralysing industry or on the contrary offering gifts to employers by reduction of social contributions), the system implies that firms receive by a reduction of social contributions the amount of carbon tax they have globally paid (except firm that have chosen the option of voluntary agreements, which makes this type of agreement less interesting) and also that employees will see their social contributions decrease in proportion of what will be globally deducted. In other words, we assure firms on one side and workers on the other side that they won’t be unreasonably put under pressure.
6. A good tool, but impossible to adopt because of the European Union?
A difficult question remains: what can we make independently from other countries and independently from Europe. The first wrong idea to sweep aside is that there may be in that matter a European prerequisite. We have fortunately the choice in our tax system and the British for instance didn’t ask for any permission to raise their taxes on road transport by means of a road duty escalator. The only relevant question is that of the industrial sector which now takes part in the negotiated emissions permit system EU-ETS. In fact we can undoubtedly make a tax coexist with such a system for industries wishing to participate (it would then be fair that they may not benefit from social contribution exemptions as long as the permits they have been granted are for free. Therefore, only one issue remains: the principle of border tariffs to protect ourselves from competition with countries that have less constraints (or not any constraint) to abate greenhouse gases emissions. In these conditions the debate is about justifying such measures in the frame of the World Trade Organization and the fear that it might hinder developing countries’ growth, at least as long as European Community protections on agricultural markets are not loosened. By introducing a carbon tax, France would put itself in a stronger diplomatic position in Europe in an issue in which the country is now a little marginalized for several reasons that I won’t evoke here, and in a discussion that often takes a very ideological turn, far from calm scrutiny of legal and economic arguments. So could France influence the process of defining a post-Kyoto system that would preserve its spirit (commitments between states and permits markets as flexibility instrument), heeding at the same time the fact that the possibility of making a general world market for carbon including every sector of activity is a myth.
In conclusion: ecological tax reform, social contract, Europe and international negotiation.
One can, I hope, understand why the idea of a carbon tax by its consequences cannot be discussed separately from today’s economic constraints and from the future challenges of our country.
Its first purpose is of course to further a transition to energies and ways of development that would prevent us from making a risky bet on our planet. But only by evocation of problems related to its implementation, we realize how important it is to consider it as a part of social negotiations: protection of low income populations living in outlying urban or rural areas; considerations on the specific issue of heavy industries, of weakened sectors such as road transport or fishing, as well as agriculture (especially for non-carbon taxes). Protection of consumers from excesses from producers, industrials or marketers tempted to put prices up in order to improve their profit margin is also at stake. Apart from that and in a positive way, that reform represents the only powerful means to tackle the challenge of our energy supply security, in a situation of growing polarization of oil and gas stocks, and also the challenge of save-guarding our social system in a context of increased international fight for competitiveness.
How to finance pensions, stabilize State deficit, keep a labour legislation that doesn’t give way to total flexibility. How to guarantee to workers a fair balance between wages and profits, maintaining at the same time wage costs that are compatible with international competition? A carbon tax makes it possible to reduce the gap between net wages and wage costs without discharging employers from their responsibility in funding our social systems, but binding their contribution to the changes in their turnover instead of maintaining constant contributions that deter them from taking risks by hiring. But we clearly see that such a shift in the financing of our social contributions immediately raises the question of the link between the reforms of the pension financing system, of the work contract and of the regime management by both employer and labour organisations. Following the path of significant carbon taxes is making it a real part of the re-negotiation of our Social Contract.
I would conclude by coming back to the quotation from William Nordhaus. It contains perhaps between the lines an implicit message that is as much important as the explicit one: in that issue, we must define mechanisms –modest at the beginning, but mechanisms that we get so familiar with that we eventually want them to be reinforced. So, that means we must not create ab initio too big or precise systems, but we must launch a process of social learning on the challenge of binding our care for the long term and the reality of short term constraints.
Post Scriptum
Having seen twice the role that the unsaid about nuclear energy has played in climate negotiations, and as I want to keep the central message of that note quite clear, I would like to add the following remarks:
- That there are in the world very honest people who sincerely think that there won’t be any successful fight against climate change without resort to nuclear energy. They have good arguments for that, except when they present nuclear energy as a panacea, since the latter can only meet a minor part of global needs in predictable prospect.
- That there are in the same world other very honest people who sincerely think on the contrary that nuclear energy is by nature a dangerous energy, by those times of international terrorism (15). These people fear that a carbon tax might make that sector definitely more competitive than the others. Part of them would even ban nuclear energy (which I find unreasonable). They state that we can strongly “decarbonize” the economy and get rid of nuclear power at the same time, but they are too little convinced about the existence of soft energies in sufficient quantity that they don’t think a carbon tax can speed up their introduction. Fearing that such a tax would favour nuclear power, this part of public opinion can even stand up against that very idea at the time of decision, in France maybe, and certainly in Europe.
- That there is almost no chance that these two visions of the world find any agreement on the short-run. It would thus be quite useful not to exclude the idea of an energy tax or a carbon/energy tax like the one proposed by the European Union (Rippa di Mennea) between 1990 and 1992, that France rejected at that time partly because it was seen as contradictory to tax an energy that almost doesn’t produce any CO2, with the purpose of reducing carbon emissions. Even if it is technically right, that reasoning is not complete because in the objective of reducing energy risks, a tax on carbon only makes possible a shift from climatic risk to nuclear risk.
There are too many potential tensions on that subject for us to trigger fierce competition in Europe, between catastrophic scenarios and political blockage, which would not give France any chance for leadership. It would be welcome that nuclear power advocates would take that into account. After all, defending a carbon/energy tax is admitting that there is no definitely clean energy at all (even nuclear energy, that requires a “zero failure” policy for decades, even wind energy, that causes problems with landscapes), it also means encouraging technical progress on the demand side. Acknowledging its fair principle is showing that we are able to listen to others people’s arguments and make a part of the trip together, without expecting any conversion.
TO KNOW MORE ABOUT IT …
• BOEMARE, C., QUIRION, P. (2001) « Implementing Greenhouse Gas Trading in Europe – Lessons from Economic Theory and International Experiences », Ecological Economics, 43(2-3), pp. 213-230.
• BUREAU, D. GODARD, O. HENRY, C. HOURCADE, J.- Ch. et LIPIETZ, A. (1998). « Fiscalité de l'environnement » (Rapport du CAE n° 8), La Documentation Française.
• COMBET, E. (2007) « Evaluation des effets distributifs de politiques publiques dans un cadre d'équilibre général calculable - Application au cas de réformes fiscales environnementales : le double dividende revisité », mémoire de Master EDDEE, CIRED.
• DEMAILLY, D., GRUBB, M., HOURCADE, J.- Ch., NEUHOFF, K. and SATO, M. (2007). « Differentiation and dynamics of EU ETS competitiveness impacts ». Climate Strategies, Interim Report.
• GHERSI, F., HOURCADE, J.- Ch., QUIRION, P. (2001). « Marché international du carbone et double dividende : antinomie ou synergie ? », Revue française d'économie XVI(2) pp. 149-177.
• HOURCADE, J. Ch. Second rapport du GIEC (SAR), 1995 Working Group « Economic and social dimensions of climate change » : Convening Lead Author, Chap 8 « Estimating the Costs of Mitigating Greenhouse Gases » et 9 “A Review of Mitigation Cost Studies”, - Lead Author du chapitre 2 « Decision-Making Frameworks for Adressing Climate Change », Auteur du résumé pour décideur.
• HOURCADE, J. Ch. Troisième rapport du GIEC (TAR) 2001 Working Group III « Mitigation » : Coordinating Lead author, Chapitre 8 « Estimating the Costs of Mitigating Greenhouse Gases ».
• HOURCADE, J.C., (2002), - "Dans le labyrinthe de verre. La négociation sur l'effet de serre ", Critique Internationale, Fondation Nationale des Sciences Politiques, n° avril 2002, pp. 143-159.
• HOURCADE, J.- Ch. et GHERSI, F. (2000), « Le Rôle du Changement Technique dans le Double Dividende d’Écotaxes ». Économie et Prévision (143-144), pp. 47-68.
• HOURCADE (J.-C.) (2000).- "Le climat du futur au risque de la négociation internationale ?", Le Débat, 8 p., septembre. Repris dans Problèmes économiques, 2.710, du 25 avril 2001, pp. 1-7
• HOURCADE (J.-C.) (2000).- "Le climat est-il une marchandise ?", Etudes, septembre, pp. 161-171.
• HOURCADE (J-C.) (1992).- "L'effet de serre : des bons et mauvais usages d'une provocation".- Etudes (3765), mai, pp. 635-645.
• HOURCADE (J.-C.), (1979), "Choix énergétiques et choix de société: mythes et réalités des sentiers énergétiques doux", Futuribles 2000, n° 22, avril, pp. 15-30; repris in Problèmes Economiques.
• SALLES, J.-M., HOURCADE, J.C., (1992), "Les difficultés d'un accord international".- Economie Méridionale, 40, (4), pp.35-50. Repris dans Problèmes Economiques, 2 juin 1993.