​French lesson shows why governments shouldn’t fear a carbon tax

French President Emmanuel Marcon has paid the price for getting the balance wrong. His 2018 fuel-tax increase sparked the Yellow Vest protests over the cost of living, ultimately forcing him to backtrack and implement billions of euros of tax cuts to restore calm. Image: Flickr

France’s recent industrial history may have a lesson for governments balancing climate change and economic demands: carbon taxes can cut greenhouse emissions, and aren’t that bad for jobs either.

Analyzing 15 years of data from 8,000 French manufacturers, economists at the OECD found that when energy costs rise 10 per cent, emissions decline nine per cent. Crucially for governments worried about the political costs of climate policies, even if carbon taxes cause job losses at individual firms, there is no net loss of employment in the sector.

The findings could encourage policy makers struggling to balance growing demands from citizens to do more to address climate change with warnings that punitive taxes and regulation will hurt jobs and growth. In the European Union, which has an ambitious carbon-neutral aim, some lawmakers want more analysis of the economic impact of that target.

The tensions were also front and center at the World Economic Forum last month. U.S. President Donald Trump blasted those warning of a climate crisis as “prophets of doom,” while German Chancellor Angela Merkel described it as a “matter of survival.”

But there’s little doubt that dramatic measures can be a hard sell, and fallout through job losses or higher prices can lead to political blowback.

French President Emmanuel Macron knows this too well, and has paid the price for getting the balance wrong. His 2018 fuel-tax increase sparked the Yellow Vest protests over the cost of living, ultimately forcing him to backtrack and implement billions of euros of tax cuts to restore calm.

According to the OECD paper, the current carbon tax on French industry at 45 euros per ton of CO2 meant 2018 emissions were five per cent lower compared with a no-tax scenario. The net effect on jobs is much smaller and may even be positive at around 0.8 per cent, said Damien Dussaux, lead author the OECD working paper.

A further increase in carbon tax to 86 euros a ton would reduce carbon emissions 8.7 per cent, according to simulations.

“The analysis shows that the rise in energy prices triggers a reallocation of production and workers from energy-intensive to energy-efficient firms,” Dussaux said.

Still, he warned that governments should be better prepared to help workers, particularly as the damaging labor-market effects aren’t evenly distributed.

“These transition costs are typically highly localized in regions specialized in polluting activities, they can also translate into potentially significant regional effects and thus political costs,” Dussaux said.

© 2020 Bloomberg L.P.