Les Grands de ce monde s'expriment dans

The Carbon Tax Conundrum

Special issue : n°170 : Freedom of Movement in a Zero-Carbon World

Politique InternationaleCan ecological taxation, which is aimed at financing energy transition, be anything other than punitive? That in any case is the impression it gives. In your opinion, could it open up other, more positive horizons?

Christian Gollier — The carbon tax is considered punitive in the sense that it weighs both on household purchasing power and on the investment capacity of companies. This tax is like all taxes: it captures a part of one’s revenues and, inevitably, is bound to be poorly received. The “yellow vests” crisis in France is just so symbolic of this discontent. At the current price of 44 euros a tonne of CO2, a litre of super was going to include a surcharge of 12 centimes. And that is something a large number of households could not tolerate. Even less could they tolerate the fact that they had no option but to fill up regularly at the petrol pump, particularly to go to work. The severity of this crisis, which is not in dispute, ought not to stop us from thinking independently of the economic and social context. What I mean by that is that we also have to keep the climate emergency in mind. Whether we like it or not, the verdict is there and it’s beyond appeal: we are emitting too much CO2, much too much CO2. If nothing is done to stem this excessive expansion, the planet faces immense dangers. Let’s not beat about the bush: in the long run, the very survival of the human species is at stake. Under these conditions, there aren’t three dozen levers to pull in order to give up CO2, or in any case to limit our emissions. Two big spheres of activity require urgent rethinking: energy and agriculture.

The first is by far the most important: whether coal, petroleum or gas, fossil fuels are enormous sources of CO2. In trying to eliminate them, renewables offer an alternative, but one that turns out to be costly: where a kilowatt hour (kWh) of fossil fuel costs 5-6 centimes to produce, a kWh of wind or solar power varies between 10 and 25 centimes. In short, energy transition requires significant investment, and consumers are going to have to sacrifice some purchasing power to help achieve it. One problem: people in their vast majority do not – or only with difficulty – understand that they are being asked to make an effort, sometimes a substantial one, to contribute to the protection of the planet.  

P. I.Do households necessarily have to be in the forefront of financing the transition towards a less carbon-dependent economy? Which other parties could play a role? How can we ensure that the effort is evenly shared? 

C. G. — The natural temptation is to call for help from the government. Proponents of this idea readily say that we could nationalise the energy sector and that the State is best placed to finance fields of windmills and solar farms, especially when it comes to large-scale projects. Indeed, there is no lack of detail when it comes to the scale of these areas: to replace a coal-fired power station, a few windmills are not going to do it. Not only are several dozen needed, you also have to be able to cover for intermittence in the supply of renewable energy. In short, one industry replaces another. Nationalization is a short-sighted solution to supporting this effort: if the government takes on the burden of financing it, sooner or later it will pass it on to households, with tax increases as a bonus. Carbon tax or not, there will always be an increased fiscal burden that will bring people out onto the street.

To better understand these matters, we need to educate ourselves: our worries about future generations will be in vain if, when we ask people to make an effort for those coming after them, they tend to be rather unwilling. That is why the Citizen’s Convention on Climate (launched in 2019 and presenting its conclusions in the spring of 2020 – editor’s note) is an interesting initiative. The environmental issue must not remain a debate among experts. The sample of 150 people who were able to hold hearings with a number of actors (climatologists, economists, companies…) covered the worries among the population well. We can always discuss proposals, but the more interactions there are between the different social strata, the more the fight against CO2 can take root in the collective mentality.

P. I.Since you have spoken of education and mentioned the crisis of the “yellow vests”, one of the major criticisms of the carbon tax concerns the absence of signposting. Is it difficult to direct the sums collected towards one aspect of the energy transition or another? 

C. G. — Here we get to the essence of the carbon tax and of ecological taxation in general. The purpose of this tax is not to finance one precise project or another, whether it’s the planting of 150 windmills, an energy efficiency gain in a factory or greater thermal comfort in a group of buildings. The scope of the carbon tax is much more global: it’s a matter of reminding people and companies that when they emit CO2 they are inflicting damage on the planet that has to be repaired. The principle is that the polluter pays: you pollute, therefore you pay, so as to force you to take the harm you are causing into account in the choices you make. In making people pay a tax that is equal to the damage, each individual will internalise this damage as if he himself were the victim. That allows private and public interests to be aligned. What applies to households is equally valid for companies: from the moment their activities produce CO2, dedicated sums have to be able to offset the harm to the environment. Company or individual, you’re a polluter? Then you pay the price of the damage.

P. I.The carbon tax is also experienced as something profoundly unequal, in the sense that only the most affluent households can afford innovative solutions, based for example on intelligent networks or on renewable energy sources. To equip your home with solar panels, to travel by electric car or manage your energy consumption at a distance is not within everyone’s reach. On the contrary, precarious households remain largely dependent on traditional energy – like super, diesel or domestic fuel – that is heavily taxed.

C. G. — That is a real issue. Low-income households are in a way twice penalised: they do not benefit from the advantages of energy transition, and their limited budgets keep them dependent on fossil fuels. This is a different situation from that of income tax, where the wealthiest households are taxed at a higher rate. When it comes to energy, the poorest are punished the most. Do we have to accept this situation as irreparable? Obviously not. But the carbon tax generates fiscal revenue that the State can use to compensate, or even overcompensate, the lowest-income households. A “green cheque”, in this case, that in an ideal situation would not just restore purchasing power, but would also allow low-income households to equip themselves in ways that are more virtuous for the environment. This system of redistribution already exists, but it has to be strengthened. If not, the image of responsible energy risks clinging most readily to trendy Parisians who have no hesitation in paying more for green electricity. 

P. I.You say that people often have trouble understanding the importance of the fight against climate change. And that, by extension, they don’t take on board the need to accept making a financial effort to preserve the planet. How is it with companies? Are they more ready to put their hand in their wallet?

C. G. — Many people misunderstand the climate emergency, but there are as many companies that know that action is necessary. As president of the European Association of Environmental and Resource Economists (EAERE), I meet a great many leaders of big energy companies and others from the world of finance. They are all convinced of the necessity of fighting CO2 emissions and, in consequence, of defining efficient price mechanisms for carbon. Despite the negative impact on their margins, this conviction can be explained quite easily: companies hate uncertainty. Not knowing how the State will impose actions or policies that are necessary for reaching CO2 emission-reduction targets is a source of worry for companies, their employees and their shareholders. Announcing a credible carbon-pricing policy for the next thirty years would be a relief, while offering the transparency and predictability that companies need for building their long-term industrial strategy. Without that, there will be no energy transition!

And yet, on the industrial level, the technological uncertainties are considerable. Who today can predict what the energy mix will be in ten years? No one. We can only construct scenarios. This is why companies would like to see the clear outlines of the carbon market: that would be one less uncertainty for them. At the Association of Environmental Economists, we have strongly backed a petition calling notably for a very clear price signal for CO2. This petition is directly inspired by an initiative taken by the Climate Leadership Coalition in the United States. Across the Atlantic, numerous participants – industrial firms, banks, service companies… – stepped forward to support this position. This broad agreement is very significant in a region of the world often singled out for its lack of urgency in protecting the planet.

P. I.Where does the difficulty in creating a carbon market stem from? Seen from a distance, it looks a little like mission impossible. At least there seems to be a gap between the grand declarations of principle, which evoke the necessity of reaching agreement on the regulatory framework, and its translation into operational terms, which is still very inadequate. Is the carbon market destined to remain an ultra-theoretical mechanism, with a few initiatives here and there but no backbone?

C. G. — For climate policy to be effective, you need a single and universal price for CO2.  A big world market for emission permits would, in theory, allow us to achieve that goal. If we don’t keep to that goal, the market will be totally inefficient. For the moment, from one country to the next, we’ve noted considerable price differentials. In France for example, drivers face a price at the petrol pump of 44 euros a tonne for CO2, whereas drivers in Germany or the United States pay nothing. The latter therefore have no incentive to choose smaller vehicles that emit less CO2. You can see the consequences in terms of car fleets and emissions! I’ll come back to these distortions, which necessarily create a competition problem between countries. In the meantime, in Europe, the application of a single carbon tax would be the best solution for giving the system coherence. It would be the same for everyone. The problem is that the European Union does not have fiscal powers, with the levying of taxes and duties under the jurisdiction of national authorities.

I’m thinking on a Europe-wide scale, since the first plank of a carbon market is continental. We therefore have to come up with another plan for building this market. Fortunately, another mechanism is already in the works: that of tradable emissions permits, even if there too, for the moment, we run up against the issue of price differentials. When this market (EU-ETS) was created in 2005 to cover European industrial and energy emissions, a tonne of carbon was traded at around 30 euros. At the end of the decade, it fell sharply to 4-5 euros. The financial crisis that shook the Western world starting in 2007-8 extinguished most of the vague desires to fight against global warming. Today, the much greater exposure of German industry to the risk of rising prices for CO2 permits is creating real tension with France, which would like Europe to be more ambitious on climate.

P. I. — You don’t envisage a carbon market outside Europe, but isn’t there a risk that the competitivity of the countries of the European Union (EU) will suffer because of that?

C. G. — The facts speak for themselves. At the end of COP21 in December 2015, the Paris agreement gave rise to great hopes for a real consensus in the fight against global warming, and a precise goal with regard to limiting the increase in temperatures. But the United States distanced itself very quickly. As for China, it did nothing to continue the momentum that had begun. Among the big countries, only Japan gave the impression of wanting to support Europe in the framework of a coordinated policy with regard to a decarbonised economy. Getting back to the United States, the country is not yet completely out of the game. Across the Atlantic, the rise of shale gas has made the gas price tumble, and allowed the United States to free itself significantly from the burden of coal. This reduced dependence must be chalked up on the side of climate benefits, since natural gas emits practically half as much CO2 as coal per kWh produced. In the meantime, distortions in climate policy between countries make the competitivity gaps very serious, both for the countries themselves and for the climate. At this rate, what is stopping the big companies from relocating their operations to regions of the world where they will be less financially affected by the fight against carbon? Not much, at least at the moment. But that can change: a commercial weapon is conceivable, with the possibility of a tax at the borders that would take a product’s ecological footprint into account, and penalise those whose manufacture was the most polluting. This mechanism is surely complicated to set up, but we have to find a system that rewards the most virtuous countries.

P. I. — Are you optimistic about putting these various mechanisms into operation? What role can environmental economists play in this regard?

C. G. — In France we are lucky in that public debate moved several years ago beyond the point of knowing whether man was responsible for climate change. But a tortuous question remains: how to organise society to face up to our individual and collective responsibility to future generations? It must be said that the debate has only just begun, while we are living in the utopia of a successful energy transition. France, like many Northern countries, has already set up a lot of climate-oriented micro-policies: feed-in tariffs for green electricity, norms for cars and for insulation, the bonus/malus system, mobility plans… As I explain in my book, Le Climat après la fin du mois, these policies have a fairly limited impact on our CO2 emissions, but a major impact on our purchasing power. Public spending has to be rationalised so that each euro spent generates the maximum impact for the environment. As economists have been explaining for the past century, that is exactly the goal of carbon pricing!

P. I.What is the impact of the Covid-19 pandemic on the political dynamic in support of ecological transition?

C. G. — The coronavirus crisis teaches us first of all that when there is the political will, it is possible to mobilise the country to combat a danger of this size. Even young people, who aren’t at great risk with this virus, have agreed to sacrifice their freedom and their learning opportunities in order to save senior citizens in the main. Frankly, that was heroic, particularly in the spring. Everyone in France could see the positive effects of their behaviour. When it comes to the climate, and contrary to coronavirus, a failure in the policy of prevention has no impact on the re-election prospects of our representatives. In consequence, there is no political majority in favour of imposing the necessary sacrifices on the country. The widespread impoverishment of the nation that lockdown generates will be translated into a huge increase in public debt, which will also reduce our capacity for investment. We are probably going to have to throw the brakes on numerous projects for public spending on green investments. With regard to public opinion, we can expect a surge similar to the “never again” of 1918. Will it be persistent, powerful and structured enough to mobilise a large spectrum of our society and to assume our responsibilities towards humanity? History shows that in France, as elsewhere, centrifugal social forces are capable of rapidly annihilating most altruistic movements.

P. I. — What’s your assessment of the French and European recovery plans decided over the summer?

C. G. — Did we have to come to the rescue of the automobile and aeronautical sectors? Politics today has two goals: saving jobs and greening the economy.  Economists know we need one mechanism per objective: a recovery plan to save jobs and, simultaneously, a European carbon-tariff mechanism to green the economy. We don’t need to sink the economy with an immediate increase in the price of petrol. On the other hand, announcing that a credible mechanism had been decided that would rapidly drive up the price of carbon would prompt the private sector to reallocate its investments in accordance with the climate ambitions of the continent. These recovery plans are indispensible to soften the enormous economic shock and save jobs in the short term. The European plan, as a proportion of GDP, is three times the size of the Marshall Plan! The real difficulty is going to lie in allocating this money effectively. At this stage it is difficult to have an opinion on the issue, given how unclear the distribution rules are. But the fact that the States have agreed to help those countries worst hit by the pandemic is in fact an historic event. So is the creation of a common debt. We are perhaps at a turning point in the construction of Europe. Nevertheless, one day we are going to have to reimburse this debt. And when I saw we, I mean of course the future generations, the same ones who will also have to face the consequences of our irresponsibility with regard to the climate.

This interview was conducted in November 2020.