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”
ETUI, March, 29th, 2011 6
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.)
ETUI, March, 29th, 2011 10
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
ETUI, March, 29th, 2011 11
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’
ETUI, March, 29th, 2011 13
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
Papers available on my personal web page
www.centre-cired.fr
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