The European Union has been in the news recently with its proposal for a minimum carbon tax. Australia’s controversial carbon tax proposal has also been grabbing headlines. But most forget that just last year, France also was on the brink of incorporating a carbon tax. It was rejected by France’s constitutional court.
However, the proposal remains potentially attractive in several respects.
First, the tax targets emission sources outside of the EU Emissions Trading Scheme (ETS), e.g., fuel used in homes, small and medium companies, and motor vehicles, which together account for around two-thirds of carbon emissions in France.
With continued ETS participation, most possibilities for reducing carbon emissions would thus be exploited. Moreover, the proposed tax rate of €17 ($24) per ton of CO2 was in line with prevailing emissions prices in the ETS. Price harmonization promotes cost-effectiveness by equating the cost of the last ton reduced across ETS and non-ETS emissions. The emissions price is also broadly consistent with an estimate of the future damages from CO2 emissions by a recent review by multiple US government agencies.
Second, the tax would provide annual revenue of around €4 billion (about 0.2 percent of GDP). This revenue could be used to support the planned fiscal consolidation, or recycled to finance reforms aimed at reducing labor taxation. While any employment gains from revenue-recycling would tend to be offset as higher energy costs cause a slight contraction in economic activity,overall the revenue-recycling would keep the costs of the tax very modest.
Third, a carbon tax removes uncertainty related to the future emissions price. In contrast, volatile allowance prices in cap-and-trade systems may deter clean technology investments.
The 2009 carbon tax proposal was rejected on the grounds that it had too many exemptions and would have adverse distributional and competitiveness effects. However, the majority of exempt sources were already covered by the ETS. Helping low-income households and vulnerable firms through targeted adjustments to the broader tax and benefit system, is generally preferred to holding down energy prices below levels warranted on environmental grounds. Households could also be helped by eliminating the excise tax on residential electricity use, which is redundant with the ETS. In April 2011, the EU proposed a minimum carbon tax (for heating and transport fuels) of €20 per ton which is yet to be approved. Denmark, Ireland, and Finland already impose carbon taxes (mainly on transportation and heating fuels) of €12, €15, and €20 per ton respectively while Sweden imposes a much higher tax of €108 per ton.
Implementing the 2009 carbon tax proposal in France would initiate an economy-wide carbon pricing strategy that ramps up over time in coordination with the ETS. The tax would increase (by about €0.04 per liter) the burden on motorists, who already pay excise taxes of €0.61 per liter for gasoline and €0.43 per liter for diesel. However, fuel taxes should be partly replaced with more finely tuned taxes to address other side-effects of vehicle use (e.g., per mile tolls that vary with location and time of day according to the degree of road congestion).
