Ecological transition deserves a new social contract

Since 2021, Europe has suffered painful energy price shocks resulting from the combination of several factors: the recovery of economic activity after the Covid-19 crisis, the war in ukraine which has constrained gas and oil supplies, the effects of this conflict on the European electricity market.

This context of scarce and expensive energy is painful, but it gives a strong political and economic signal: it underlines the importance of diversifying supplies to ensure our energy security and the interest of sobriety to reduce our needs. These efforts will lower bills and preserve our investment capacity; but they will also drive down the prices of fossil fuels, at the risk of slackening the efforts to profoundly transform our modes of production, consumption and life, necessary to achieve our climate objectives.

Today, how to maintain this strong political and economic signal, in a fair and economically viable way?

The crisis of "yellow vests" as a trigger

Before the revolt of the "yellow vests" (2018), which led to the freezing of the carbon tax, it is the progression of energy taxation that should play this role of signal.

This policy was taken in isolation and considered as a rather technical subject: its value was determined by the experts, its modalities established by the administration, its increase voted by parliamentarians.

The episode of the "yellow vests" has highlighted the limits of this approach: the value of carbon, which makes fossil fuels more expensive and encourages us to reduce our consumption, renovate, buy new equipment, restructure our production systems and respect the new norms and obligations, has very broad economic, social and political implications. These must be considered and debated collectively.

Remember that "carbon value" means the value that the economy and our society give to the actions implemented to reduce greenhouse gas emissions, in particular through taxes, subsidies, quotas, standards and regulations, etc.).

Diagnose problems and solutions

To find more complete answers to these difficulties, the French Environment and Energy Management Agency (Ademe) organized throughout 2021 a series of seminars on the social, economic and legal conditions and policies that would allow for an increasing and equitable carbon price.

This collective work, which involved more than thirty stakeholders and 250 participants, aims to offer a shared diagnosis of the difficulties, possible solutions, main trade-offs and possible ways of compromise between our social, economic and ecological.

As a result of these consultations, the document "For a transitional social contract. Proposals for an equitable carbon pricing reform" proposes 4 principles and 10 recommendations to build a coherent policy for reconciling these objectives. These proposals are based on a in-depth review of the available literature and a detailed analysis report.

Several issues emerge from this diagnosis.

The value of carbon must increase

The first issue concerns the need to increase the value of carbon. If, over a long period, cheap fossil fuels have allowed a democratization of energy services, they have built our current dependencies. And it would be counterproductive to keep prices artificially low.

Since the 1960s, the real price of fuels and the taxation of fossil fuels have in fact been remained broadly stable, even though the energy efficiency of vehicles has greatly improved.

One hour of work at the minimum wage is enough today to finance the gasoline to travel 100 km. It took six in 1960. On the other hand, old housing in the city center today costs seven times more expensive than then.

The fall in the price of mobility, long seen as a form of social progress, has become a trap for populations heavily dependent on the car, for air quality and for the climate. A trap for those who have atypical schedules, who live outside the city centers; for farmers, truckers, fishermen, whose way of life is still based on the daily use of fossil fuels.

Paying the rent of fossil fuel exporting countries

A low carbon price is also costly in macroeconomic terms and for public finances. The fossil energy import bill is high and the subsidies to limit price increases are significant.

The external energy bill has thus more than doubled, going from 45 billion euros on average before 2021 to more than 100 billion in 2022.

The share of French income that has been devoted to paying the rent of exporting countries had already practically doubled during the first decade of the 2000s. The "tariff shield", which aims to limit the increase in energy prices for French consumers, will cost around 45 billion in public funds in 2023, i.e. 1,7 points of GDP, after having cost nearly 35 billion in 2022. In total, there are as many billions of public money that are no longer available to consume, invest, finance the ecological transition or our social protection.

As a reminder, the report Quinet (2019) estimated that the value of carbon (expressed in euros per tonne of CO₂) should increase to around €250 in 2030, €500 in 2040, €800 in 2050, in order to achieve the carbon neutrality objective.

Reconciliation policies

Whatever the combination of taxes, standards and obligations to be introduced, this is the order of magnitude of the costs that businesses, households and public administrations will have to assume to reduce emissions and finance the necessary investments. For all these reasons, the discussion must focus on the least costly socially and economically way of raising the price of carbon.

The public policies to be favored are therefore those that gradually eliminate fossil fuel subsidies and increase the value of carbon, while reconciling these objectives with those of protecting vulnerable households and businesses, financing low-carbon alternatives, controlling costs output, inflation and deficits.

Three major subjects of negotiation are at the heart of these "conciliation policies"

Consider all public finances

A good balance must be found between new resources – provided by increases in environmental taxation, reductions in fiscal and budgetary expenditure that are unfavorable to the environment – ​​and new expenditure needs.

In this context, limiting ourselves to considering environmental taxation and the use of its revenues is not enough. For example, an increase of €18/year in carbon taxation from 2023 to reach €230/tCO2 in 2030 would bring in approximately €5 billion more per year, which is insufficient to finance all the new expenditure.

The Think Tank I4CE estimates that the additional public investment needed to achieve the objectives of the second national low-carbon strategy would be around 24 billion more by 2030.

The revenue from a (still hypothetical) increase in carbon taxation will therefore not be sufficient to support this investment effort while also financing measures to control production costs and support the most vulnerable. The budgetary leeway is also dependent on more global objectives on the evolution of public finances.

Supporting the most vulnerable

A balance must also be found between aid allocated broadly, which has a significant budgetary cost and generates windfall effects, and highly targeted aid, which increases the cost of management and risks missing out on certain audiences.

This involves considering a decentralized aid management system, with local authorities and social partners, which would favor the targeting of vulnerable households that do not yet have an alternative to the use of fossil fuels.

The analysis conducted by Ademe shows that the level of vulnerability only partially overlaps with the level of wealth. For example, a quarter of households in the poorest 10% emit more fossil fuels than a quarter of households that are among the richest 10%. Among the poorest 10%, the additional expenditure due to the carbon tax increase and the catch-up in diesel taxation in 2018 was practically nil for the 10% least consuming fossil fuels, while the 10% who consumed the most must have face an average additional expense of €227.

There are in fact very heterogeneous situations depending on the locations, types of housing and heating systems, without a few variables being sufficient to summarize this vulnerability. However, the existing aid systems (energy voucher, vehicle conversion bonus, interest-free loans, etc.) are now differentiated only according to the income level criterion.

This is a major topic for improving equity and the possibility of advancing the value of carbon.

Lift exemptions and derogations from environmental regulations

Many sectors of professional activity now benefit from reduced rates and partial refunds of environmental taxation (aviation, fishing, road transport, agriculture, etc.), or free quotas for installations subject to the European market for tradable quotas (industry that consumes large of energy).

These derogatory regimes are applied to preserve the competitiveness of these sectors, for example because of their exposure to international competition. Tax expenditures unfavorable to the environment were thus assessed at 19,6 billion euros in 2023..

The evolution of derogatory regimes should not increase the difficulty of companies and branches which are particularly economically vulnerable and which do not have alternatives to the use of fossil fuels in the short term (industry, agriculture and fishing, road transport, etc. .).

Whether initiated at national or European level, the gradual lifting of these regimes will require targeted negotiations of employment and protection contracts between the State and the professional branches. These negotiations will have to cover all taxation and the obligations to which these sectors of activity are subject, but also the public aid from which they benefit.

Towards an integrated process

In addition to the desire to quickly open broader negotiations on all the issues raised here, the construction of a reconciliation policy will require a multi-year and long-term management and evaluation process.

In fact, it is not a question of creating yet another parallel process or a new institution, but rather of including the question of reconciling the issues in all of the general policy processes: the governance of public finances, the negotiations of contracts between States and regions, but also between State and branches of professional activity.

The trade-offs and compromises made in this context must be shared transparently with stakeholders and the general public. This is nothing less than ensuring not only the fairness and effectiveness of public action, but also its readability and credibility.

Emmanuel Combet, Doctor in Economics (Phd), Senior Economist at Ademe, Associate Researcher at the Energy and Prosperity Chair, Ademe (Ecological Transition Agency) et Patrick Jolivet, Director of socio-economic studies, Ademe (Ecological Transition Agency)

This article is republished from The Conversation under Creative Commons license. Read theoriginal article.

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