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

1. 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 Emmanuel Combet Frédéric Ghersi Jean-Charles Hourcade Camille Thubin ETUI, March, 29th, 2011

2. Behind the French failure: fears about social impacts • 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 “Chèquevert” proposal • ... and ultimately: unacceptableinconsistencies • Invalidation by the ConseilConstitutionnel (Jan.10) / Government abandon (Mar.10) ETUI, March, 29th, 2011

3. 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

4. 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 • UnilateralCT 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

5. IMACLIM-S: Key features of a ‘2nd best world’ Simultaneous equilibria in monetary and physical units (MTOE) Price and income elasticitiesfor energy consumption Limited adaptation capacity(basic needs) 20 income classes Factor substitution limited adaptation capacity(technical constraints) Equilibrium unemployment(stickynominal wage negatively correlated to unemployment) Finaldemand Taxes Prices, Incomes Rest of the world Flows of products & funds 4 productions (3E + 1 ‘Composite’) Exports Imports International trade competitiveness function of the production costs Payroll & other taxes Transfers Public administrations Cst public expenditures / GDP Cst public debt / GDPTransfers indexed on average wage 2004-France in open economy ETUI, March, 29th, 2011

6. Let us start from two polar schemes Revenue-recycling under the same « budget neutrality » principle Lowerpayroll tax Extended “green check” ETUI, March, 29th, 2011

7. An equity-efficiency trade-off Employment €0/tCO2 - Actual 2004 France 1.06 €300/tCO2 - Lower payroll tax €300/tCO2 - Extended green check Inverted Gini index Bottom twentile consumption 0.94 1.06 1.06 The 2 schemes reduce CO2 emissions by 34% 1.06 GDP ETUI, March, 29th, 2011

8. Contrasted impacts on the production costs • 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

9. Carbon Tax – Lower payroll taxes The mechanisms at play in a field of constraints 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) Lower production price = tax burden transfer Increase inemployment intensity Higherdomestic consumption Highercompetitiveness Higheremployment Higher production ETUI, March, 29th, 2011

10. Poverty alleviation… at cost of higher disparities 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.) ETUI, March, 29th, 2011

11. Three compromise schemes • Mixed recycling • Firms: what they paid in lower payroll tax • Households: what they paid in uniformgreen 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 ETUI, March, 29th, 2011

12. A space for reconciling efficiency and equity Employment 1.04 €300/tCO2 - Mixed recycling €300/tCO2 - Gal tax credit (TC) €300/tCO2 - Targeted TC & measures Inverted Gini index Bottom twentile consumption 0.96 1.04 1.04 The 3 schemes reduce CO2 emissions by 34% 1.04 1.04 GDP ETUI, March, 29th, 2011

13. Why the TC is ‘more equitable’ than the green check Annual energy budget share Energyvulnerability ill-explained by ‘income’ Living standard INSEE 2001 data, authors’ calculation ETUI, March, 29th, 2011

14. 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 challengesis 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

15. Contact: Emmanuel Combet combet@centre-cired.fr Papers available on my personal web page www.centre-cired.fr