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France Plans to Quadruple Carbon Tax

2 min readBy: Gavin Ekins

After a year of parliamentary debates the French Parliament adopted an Energy Transition for Green Growth plan on Wednesday the 22nd of July. As part of this plan the carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. will almost quadruple for the current rate of €14.5/tCO2 to €56 by 2020 and increase to €100/tCO2 by 2030. The increased taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on carbon is expected to sharply increase the price of energy, which in turn should increase the price of most goods and services in France.

In addition to the carbon tax the plan calls for a gradual reduction of nuclear power generation by limiting production to 63.2 gigawatts but also promises not to phase out operating nuclear plants. The limitations placed on nuclear power and the carbon tax is expected to bring the mixer of renewable energy up to 32% of the energy market.

Taxes on energy are strongly regressive. Lower income households tend to spend more on energy as a percent of their budget than higher income households. Thus, taxing energy disproportionately affects lower income household.

As such, some tax economist have suggested implementing a reduced payroll or lower personal income tax as a means of compensate for the regressivity of a carbon tax. They argue that pairing the two taxes would not only reduce the regressivity of the tax but also reduce distortion in the labor market.

The problem with this argument is that labor is less responsive to tax changes than capital. Since most capital requires an energy source to operate, a tax on energy is often captured in the price of capital. As the price of capital increases, capital deepening and economic growth slows. In turn, productivity of labor falls, and wages fall along with it. This becomes a second layer of regressivity often overlooked.

As an alternative to reducing the payroll or individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , the impact from carbon taxes could be offset with a tax reduction for capital. Several taxes directly affect the price of capital, including business income taxes, property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es, and estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. es. Reducing these taxes, while increase energy prices though the carbon tax, would mitigate the distortionary effects of higher energy prices on the economy.

In addition, green energy production tends to be more capital intensive than fossil fuel alternatives, such as gas turbines. Reducing the price of capital through reducing taxes on capital can encourage green energy production without necessarily targeting green energy through subsidies. In turn, the price of energy should also fall as more capital is used to generate energy.

If a country values lower emissions and is willing to pay the cost of higher energy prices, then smart tax policy can be used to reduce the economic pain. To lessen the pain of transitioning to green growth, France may want to be as ambitious with its tax code as it is with its energy policy.