Emmanuel Combet

Frédéric Ghersi

Jean-Charles Hourcade

Camille Thubin

Carbon Tax Reform as Social Policy Lessons from a CGE modeling exercise applied to France

Center for International Research on Environment and Development

Paris, France

ETUI, March, 29th, 2011

Behind the French failure: fears about social impacts

ETUI, March, 29th, 2011

Disagreement about the best way to limit the social cost

priority to reduce the adv. impact on activity & employment

priority to reduce the adv. impact on the purchasing power of consumers

… therefore about how to use the carbon tax revenue

Local taxes on invest. or Payroll tax cuts (Rocard report, Jun.09)Trade unions agreed with a broad social negotiation

Direct compensations (sudden rise of the “I want my money back”, Jul.09)Consumer NGOs protest, media overstatement & the “Chèque vert” proposal

... and ultimately: unacceptable inconsistencies

Invalidation by the Conseil Constitutionnel (Jan.10) / Government abandon (Mar.10)

2

Tensions between two opposite views

A short term, partial & static view: adverse social impacts

A Carbon Tax is regressive: The “rich” will pay more… … But the budget of the “poor” will be more affected

Other vulnerable populations: rural, farmers, lorry drivers...

A long term, macro & dynamic view: positive social impacts

Lower energy dependency & poverty / Resilience to future oil shocks

Higher employment in a green economy / Alleviation of the public finance difficulties (pensions, oil bill...)

How to induce a fair transition towards a low-carbon economy?

ETUI, March, 29th, 2011 3

A comparative static analysis

Evaluation of long term impacts (20 years) of revenue-recycling schemes on a same set of criteria

A standpoint: a study of ‘the worst case’ to cover misunderstandings

Unilateral CT without border adjustment, based only on the carbon content of all consumptions, and reaching 300€/tCO2 in 2004.

We simulate ‘counterfactual France-2004’ that are compared to a same reference situation: actual 2004-France without carbon tax

ETUI, March, 29th, 2011 4

IMACLIM-S: Key features of a ‘2nd best world’

20 income classes

4 productions(3E + 1 ‘Composite’)

Public administrations

Rest of the worldFlows of products & funds

Cst public expenditures / GDPCst public debt / GDP

Transfers indexed on average wage

TaxesFinaldemand

Prices,Incomes

Exports

Imports

Transfers

Factor substitution limited adaptation

capacity(technical constraints)

Equilibrium unemployment

(sticky nominal wage negatively correlated

to unemployment)

Payroll & other taxes

International trade competitiveness function of the production costs

Price and income elasticitiesfor energy consumption

Limited adaptation capacity

(basic needs)

2004-France in open economy

ETUI, March, 29th, 2011 5

Simultaneous equilibria in monetary and physical units (MTOE)

Let us start from two polar schemes

Revenue-recycling under the same « budget neutrality » principle

1.Lower payroll tax

2.Extended “green check”

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An equity-efficiency trade-off

Employment

Bottom twentileconsumption

GDP

InvertedGini index

€0/tCO2 - Actual 2004 France

€300/tCO2 - Lower payroll tax

€300/tCO2 - Extended green check

0.94

1.06

1.06

1.06 1.06

The 2 schemes reduceCO2 emissions by 34%

ETUI, March, 29th, 2011 7

Contrasted impacts on the production costs

€300/tCO2 and Green Check Lower payroll tax

Total variation +3.7% -1.0%

energy costs variation +1.6% +1.6%

net wages variation +0.1% +1.5%

Payroll tax variation id. -3.6%

• Same direct impact on the energy bill

BUT when payroll tax are lowered:

• Limited propagation of the costs increases

• Slight alleviation of the tax burden on production

• Higher progression of nominal net wages

ETUI, March, 29th, 2011 8

The mechanisms at play in a field of constraints

Higherdomestic

consumption

Higher production

Higheremployment

Highercompetitiveness

Carbon Tax – Lower payroll taxes

Increase inemployment

intensity

Lower production price

= tax burden transfer

If the sharing of the payroll tax cuts actually reduces the relative labour costs

If part of the reallocated tax burden does not ultimately fall back on production costs (rents, transfers, oil exporters)

ETUI, March, 29th, 2011 9

Poverty alleviation… at cost of higher disparities

€300/tCO2 & Lower payroll tax

Direct impact on the energy bill

Unemployment

(% points)

DisposableIncome

Gini inequality index

Bottom twentile +78.3% -12.2 +5.4%

+2.0%Top twentile +72.0% -0.9 +7.3%

Main determinants:

1) Budget share devoted to energy, energy saving potential

2) Initial unemployment rates, jobseeker’s allowance-wage gap

3) Relative weights of income sources (activity, property, transfers, etc.)

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Three compromise schemes

• Mixed recycling• Firms: what they paid in lower payroll tax• Households: what they paid in uniform green check

• Generalised tax credit (TC)• lump-sum rebate covering some levels of ‘basic needs’

(communing by car + similar share of residential consumption)

• Targeted TC & measures• same tax credit limited to T1-16• remaining proceeds to payroll tax reduction• any budget margin in other accompanying measures to T1-T16

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1.04

€300/tCO2 - Gal tax credit (TC)

€300/tCO2 - Mixed recycling

€300/tCO2 - Targeted TC & measures

1.04

The 3 schemes reduceCO2 emissions by 34%

A space for reconciling efficiency and equity

Employment

Bottom twentileconsumption

GDP

InvertedGini index

1.04

1.04

1.040.96

ETUI, March, 29th, 2011 12

0%

20%

40%

60%

80%

Why the TC is ‘more equitable’ than the green check

INSEE 2001 data, authors’ calculation

Living standard

Annual energy budget share Energy vulnerability

ill-explained by ‘income’

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Conclusion: Social dialogue and cooperation

A carbon tax reform can produce different socio-economic outcomes

It can constitute a core for a social policy (conciliating long/short views)

IF - Compensation policy (CP) is limited to the most vulnerable

- The propagation of higher production costs is slowed down

A broad social negotiation linking climate policies with other social and economic challenges is needed to determine:

- A set of vulnerability criteria to define the ‘recipients’ of the CP

- A set of public priorities to define the best use of the C tax revenue

Prospective studies that link carbon mitigation, ageing, and public deficits can be helpful to frame the debates (ongoing research)

ETUI, March, 29th, 2011 14

Contact: Emmanuel Combet

combet@centre-cired.fr

Papers available on my personal web page

www.centre-cired.fr