Aborted Fuel Tax Initiative in France: Its Ramifications for Green Growth

• by Mizan Khan, Dereje Senshaw (paris)
• Thursday, December 27, 2018
• Inter Press Service

As part of the package Macron initiated the new tax on gasoline to finance ecological transition and reduce budget deficit. France was set to increase the diesel tax by 6.5 Euro cents per liter and the gasoline tax by 3.9 cents per liter, which had already increased its gas and diesel taxes by several cents this year, and this shift came after years in which France, and Europe, had encouraged the use of diesel fuel as being better for the environment. Macron defended the Contribution Climat Énergie (CCE), a French version of the carbon tax, whose steady increase in recent years has brought about a growing dispute over rising fuel prices. Since its adoption in 2013, the CCE has increased from year to year, putting pressure on fuel prices. In 2019, a ton of CO2 would have cost of €55 in France, the second highest in Europe.ⁱⁱ The CCE was decided when oil prices were still low. But it is way up now. Still fuel taxes are calculated lower than their social costs.ⁱⁱⁱ

The increase this time was resented by the French voters, initially by the rural constituencies and then the city dwellers including the Parisians joined. The result was violent protests for two weeks led by the Yellow Vest Movement. Finally, the government gave in, with declarations of some concessions, both by the President and his Prime Minister, to deflate the protests and assuage the public. But the rating of the President has plummeted to the lowest since he occupied the Presidency. Finally, the proposed tax has been shelved at least for 2019.

Why was the reaction so violent? What has gone wrong?

Introduction of different types of eco-tax, or fuel/carbon tax is decades old in Europe and they have not met the same fate. Why? Media reports and post-mortem of the episode point to a range of factors:

1. Macron's government is viewed by a large segment of general public as elitist, which bank on support from technocrats and business leaders. The voters at large feel they are marginalized from any consultations. Even the CCE is reported to be little-known among French people, many of whom have only recently discovered it when they are already feeling disgruntled with this year's tax rises.

2. It is the increase in the price of oil this year that has added to the tax's impact. The price of petrol in France is already the highest in Europe. The €55 cost of a CO2/ton in France compares with the European price of €17/ton.^iv The French CCE affects both private individuals and businesses, generating almost €7 billion a year through the prices of all fuels, including fuel oil, gas, petroleum, diesel and coal.^v

3. These tax inequalities are a problem, according to experts. The tax disproportionately hits those on the lowest incomes, who receive an ‘energy cheque' of €150 if they do not pay any tax.^vi So the CCE, a French version of the carbon tax, whose steady increase in recent years has brought about a growing dispute over rising fuel prices. Macron's tax policies have alienated many in the middle class — and analysis of the 2018-19 budget showed incomes of the poorest households would get worse under his plans.^vii

4. The target of spending the revenue generated by this new tax was misplaced – it was mostly meant for reduction of budget deficit. Of the €34 billion the government will raise on fuel taxes in 2018, a sum of only €7.2 billion is earmarked for environmental measures.^viii

5. The most polluting industries are viewed to be paying less, and many industrial sectors are exempted, including agriculture, all of the industry sectors enjoy emissions allowances, including road, air and maritime transport, agriculture and fish farming. The French ecological tax hits private individuals harder than businesses due to these exceptions. The Institute for Climate Economics (I4CE), a think-tank in a memo clarified that removing these exemptions would bring in twice as much money for France, around €14 billion.^ix

6. Analysts say the fuel tax will disproportionately affect residents of rural areas, fueling claims that Macron is out of touch with the French people. Most of the rural residents have to depend on private cars, and diesel fuel, unlike in larger cities served by central heating. This was the reason that the protests began in the provinces and then spread in the cities including Paris. The fuel taxes represent in the eyes of many an urban ignorance of the reality of life in rural areas relatively unserved by train lines or other forms of public transportation. At the same time the railway company is closing the non-TGV, less profitable lines in some routes. 7. So, a perception developed among the rural protesters that they have two Frances, Parisian France and the `other' France. So Macron has been dubbed "President of the Rich" by many working-class citizens who saw him remove the wealth tax from his rich Paris constituency, then propose a gas tax on his "other" constituency.^x Lionel Cucchi, a spokesman of YVM in Marseille, told BFM TV that protesters "demands are much bigger than this moratorium" … we have to stop stealing from the pockets of low-income taxpayers."^xi So, the issue here is about redistribution of income.

Experience in other countries

World Bank estimates that 46 countries and 25 sub-national entities charge some kind of carbon price, even if that policy applies to only one sector of their economy.^xii Sweden and the United Kingdom have successfully run carbon taxes for years. Sweden as the pioneer has taxed all forms of energy since the 1950s and adjusted the levy to account for carbon in 1991, well before climate change became a high-profile global agenda. The result is its emissions declined by 26 percent in the years that followed.^xiii

There are other examples of carbon taxes in Europe and beyond. Many European countries have imposed taxes on emissions of common air pollutants such as sulfur dioxide and nitrogen oxides. Also, a number of countries have imposed energy taxes or energy taxes based partly on carbon content. Some other green growth and climate-conscious countries have adopted carbon taxes, including Chile, Spain, Ukraine, Ireland and nations in Scandinavia. Others have adopted cap-and-trade programs that effectively put prices on carbon emissions. Many developing countries including Bangladesh, China, India and some others also have introduced different kinds of eco-taxes including carbon pricing. However, only around 12 percent of global emissions are covered by pricing programs such as taxes on the carbon content of fossil fuels or permit trading programs that put a price on emissions, according to the International Monetary Fund.^xiv

Britain may offer some relevant lessons. It only imposed a carbon tax on electricity generation in 2013, helping drive emissions lower. But climate policy has a long and cross-party history in the U.K with its parliament being almost unanimous in adopting an aggressive climate bill a decade ago. This cross-party commitment is the way to implement an enduring climate policy, which touches the very foundations of modern life. California, for instance, is the only U.S. state with a strong climate policy. Yet its first policies came in 2006 at the hand of Governor Arnold Schwarzenegger, a moderate Republican. Subsequent Democratic governments have built on that initial foundation.

But Canada is about to offer a test case, with its province of British Columbia leading a successful case of carbon tax for several years. In the rest of Canada, despite the success story in British Columbia, other provinces are dragging their heels. Prime Minister Trudeau has unveiled a "backstop" carbon tax of $20 a ton, to take effect in January, for the four Canadian provinces that do not already have one. Trudeau's policy, however, is designed pragmatically: about 90 percent of the revenue from the tax will be paid back to Canadians in the form of annual "climate action incentive."^xv Because of the progressive tax rates, about 70 percent of Canadians will get back more than they paid. If they choose to be more energy efficient, they could save even more.^xvi

However, by design, the British Columbia plan was the simplest: it slapped a tax on any fossil fuels used for heating, electricity and transportation. Each person and business was expected to shoulder the burden of pricing pollution; no loopholes, no exemptions. This revenue-neutral carbon tax was unbiased: tax was based on pollution intensity of products or services. This has induced behavioral change among consumers. The move, the first of its kind in Canada, placated both conservative economists and environmentalists.

So, based on experience we can say that the prospects of carbon taxes may depend on what happens to the money raised. In the British Columbia case, all the tax money raised went back to the people. The World Bank has called it the text book instrument. The economist William Nordhaus, winner of this year's Nobel Prize for economics, supported the British Columbian model as an ideal for export to other economies. Fears that the tax would have a negative impact on the economy quickly dissipated when the numbers came in, as reports suggest. The province grew its economy by 16%, far outpacing any other region of the country.^xvii

The revenue-neutral aspect of the tax is novel but has frustrated some environmental groups, who feel the tax does not do enough to reduce emissions. So the current British Columbia government is thinking of modifying the revenue-neutral aspect of the programme in order to allocate funding for green infrastructure, deviating from its original revenue neutrality. By 2012, when the tax reached its first maximum level ($30 per ton), 64% of the population supported it. By 2016, the support shot up to nearly 70% of residents.^xviii

So a big difference between Canada's carbon tax and France's carbon tax is where the money is going. In the provinces that will use Canada's carbon tax instead of their own plan, 90 per cent of the revenue from the taxes are expected to be refunded during tax time, the government says.^xix But in France the overwhelming share was supposed to go for reduction of budget deficit. Without substantive dialogue with the main stakeholder groups before designing the programme, it has backfired.

Use of French experience by sceptics

The unhappy experience in France obviously gave fodder to feed the sceptics like the French Far Right, or Presidents Trump, who still remains a diehard climate denialist. In a tweeter Trump had to say that Macron's setback showed he was right and justified again that US was not going to clean up pollution caused by others! Fuel taxes, however, generate revenue that stays inside home countries without going to pay for others' pollution. And the Paris Agreement placed much greater responsibilities on developing countries than ever before. President Trump's rugged nationalist tends to infect some other leaders at a time when there is the need for promoting multilateralism, as shown in the recent climate negotiations in Katowice.

Despite Trump's self-righteous justification, 10 east coast states have a `cap & trade' system for carbon emissions since 2009, under which companies have their emissions capped and then trade any surplus or deficit with others. But Barack Obama, while president, was unable to pass a nationwide system. Some prominent Republicans have backed for a revenue-neutral carbon tax, but with little success yet.

Future for green growth strategy

France's abortive attempt offers some sobering lessons, with a dilemma: how do political leaders introduce policies that will do long-term good for the environment without losing their chances of re-election? The challenge is to consider the equity and distributional aspects of introducing environmental/carbon tax, together with ensuring universal access to clean fuel and transport. Suh argues that this requires income-group and spatially-specific policies. This kind of policies aimed at transition to a low-carbon economy need to be grounded on local and national level stakeholder consultations for a revenue-neutrality system, particularly for the poorest. Such a consensus can gradually mature with intensive campaign of public education and awareness aimed at behavioral change. The median voters need to be placated in that in this age of environmental crises, what a society needs is to penalize the Bads, such as pollution and incentivize the Goods, such as hard-earned income by the working class. With this policy for some time, the revenue generated from environmental Bads can gradually be shifted to a green growth strategy nationwide.

The tax rises appear to fit within a pro-Green agenda espoused by Macron's government. His intentions were not bad in revamping the culture of polluting driving and the protesters are also not against climate change or green growth. Simply the time is bad for the working classes in France and elsewhere, where uneven globalization and lack of distributive justice do not provide any cushion to the poorest communities. So the climate-and green growth-friendly governments must remain in check in devising green policy instruments such a way that do not backfire & play into the hands of populist demagogue leaders around. Finally, we can say that whatever skepticism is there, the outlook for green instruments like carbon taxes looks bright: reports show that 88 nations, representing more than half of global emissions, say they are or will use carbon pricing to tackle climate change. Furthermore, some states have suggested they would impose carbon border levies on imported goods from nations that do not tax carbon. However, this policy should be applied to major emitters across the aisle.

Let us recall that Franklin D. Roosevelt's New Deal at a very bad time in the US was not a tax programme, even if it included taxes. Instead, it was the greatest of all stimulus and jobs bills. We now need to craft a Green New Deal based on growth and distributive justice.

ⁱ https://www.theatlantic.com/international/archive/2018/12/france-yellow-vest-climate-action/577642/

ⁱⁱ https://www.washingtonpost.com/world/europe/frances-protesters-are-part-of-a-global-backlash-against-climate-change-taxes/2018/12/04/08365882-f723-11e8-863c-9e2f864d47e7_story.html?utm_term=.70945e2904f8

ⁱⁱⁱ Suh, S. 2018. Low-carbon transition: changing urgently and equitably. Available at: https://www.linkedin.com/pulse/change-urgently-but-slowly-equitably-same-time-sangwon-suh/?articleId=6474975376325115904#comments-6474975376325115904&trk=prof-post

^iv https://www.washingtonpost.com/world/europe/frances-protesters-are-part-of-a-global-backlash-against-climate-change-taxes/2018/12/04/08365882-f723-11e8-863c-9e2f864d47e7_story.html?utm_term=.70945e2904f8

^v https://www.euractiv.com/section/climate-environment/news/french-dispute-over-carbon-tax-highlights-flaws-of-its-ecological-tax/

^vi https://www.euractiv.com/section/climate-environment/news/french-dispute-over-carbon-tax-highlights-flaws-of-its-ecological-tax/

^vii https://www.euractiv.com/section/climate-environment/news/french-dispute-over-carbon-tax-highlights-flaws-of-its-ecological-tax/

^viii https://www.euractiv.com/section/climate-environment/news/french-dispute-over-carbon-tax-highlights-flaws-of-its-ecological-tax/ ; https://globalnews.ca/news/4728184/france-carbon-tax-riots-canada/

^ix https://www.euractiv.com/section/climate-environment/news/french-dispute-over-carbon-tax-highlights-flaws-of-its-ecological-tax/

^x https://thefederalist.com/2018/12/17/carbon-tax-riots-may-breaking-point-frances-socialism/

^xi https://www.nytimes.com/2018/12/04/world/europe/france-fuel-tax-yellow-vests.html

^xii https://carbonpricingdashboard.worldbank.org/

^xiii https://www.theatlantic.com/international/archive/2018/12/france-yellow-vest-climate-action/577642/

^xiv https://www.washingtonpost.com/world/europe/frances-protesters-are-part-of-a-global-backlash-against-climate-change-taxes/2018/12/04/08365882-f723-11e8-863c-9e2f864d47e7_story.html?utm_term=.e7c114d785d3

^xv https://www.washingtonpost.com/world/europe/frances-protesters-are-part-of-a-global-backlash-against-climate-change-taxes/2018/12/04/08365882-f723-11e8-863c-9e2f864d47e7_story.html?utm_term=.e7c114d785d3

^xvi https://www.washingtonpost.com/world/europe/frances-protesters-are-part-of-a-global-backlash-against-climate-change-taxes/2018/12/04/08365882-f723-11e8-863c-9e2f864d47e7_story.html?utm_term=.24e04590073f

^xvii https://www.theguardian.com/world/2018/dec/04/how-to-make-a-carbon-tax-popular-give-the-profits-to-the-people

^xviii https://www.theguardian.com/world/2018/dec/04/how-to-make-a-carbon-tax-popular-give-the-profits-to-the-people

^xixi https://globalnews.ca/news/4728184/france-carbon-tax-riots-canada/

^xx Suh, 2018 (endnote ii).

© Inter Press Service (2018) — All Rights ReservedOriginal source: Inter Press Service

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