Rhein on Energy and Climate

As of January 1, 2010, France was supposed to have launched its ecological tax reform, under which fossil energy would be taxed at increasingly higher rates and taxes on income and would be lowered correspondingly.

On December 27th, the Conseil d`Etat has, however, declared the envisaged legislation as unconstitutional, on the grounds that it contained too many exceptions, thus violating the principle of equal taxation for all.

Basically the draft bill aims at containing the level of C02 emissions by making the use of fossil energy more expensive. To that end, the existing excise tax rates on gasoline, diesel and fuel should be raised and cover also gas, coal and electricity. They should be based on their respective C02 content and a C02 price of € 17/ton, 20 percent above the prevailing C02 market price.

The price impact of the law would be less than 10 percent, highest on gas and coal, which had not been taxed so far and lowest on gasoline, with a low C02 content and already subject to high taxes.

With these elements, plus the envisaged reduction of taxes on low incomes, the bill represents quite a revolution in European tax systems. It exempts, however, major C02 emitters like power generation, heavy industries, cement and aviation, which are or will be covered by EU climate regulations. Nor does it include agriculture.

The government has reacted immediately to the court ruling and announce that it will submit a revised draft before the end of January, which should also include the energy-intensive sectors that had been excluded.

This shows that the French government is determined to use the carbon tax on all use of fossil energy as an additional tool for reducing C02 emissions.

There are, of course, limits to such a strategy. France will hardly dare to shoot at gasoline or fuel prices of € 2/litre or more. It needs to mind possible repercussions on the competitiveness of its industry and low income group.

But by applying a carbon tax and using the market price per ton of C02 as the reference, France would reach beyond the EU cap and trade system and distribute the burden of its climate policy on all everybody.

The constitutional ruling may in retrospect prove to be a blessing in disguise. It will impose carbon taxes also on the energy-intensive sectors falling under EU climate regulation, even if only temporarily.

All EU member states are due to submit their national climate programmes on how to implement 2020 emission before July 2010. The controversy on the carbon tax in France might induce several among them to follow the French example and also propose to introduce carbon taxation, as the outgoing Swedish Presidency had exhorted all of them to do last June.

Brussels 04.01.10 Eberhard Rhein

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