Can France reach the Factor 4 objective? An assessment based on a stylised energy-economy model

Nicolas Maggiar is a graduate of the École Centrale Paris and holds a Master's degree in Economics from the Paris School of Economics. He is currently working in the Finance and Management Control Directorate. Previously, he was Deputy Head of Structural Policy Analysis Division (DGEI), where he worked on the economic impact of environment-related public policies. He was rapporteur of the working group "economic instruments for sustainable development" and of the Commission pour la libération de la croissance française chaired by J. Attali (2010).

Can France reach the Factor 4 objective? An assessment based on a stylised energy-economy model

 

What should be the level of the carbon tax to be introduced in the French economy to reach the Factor 4 objective, i.e. to reduce CO2 emissions by a factor of four by 2050? Fanny Henriet, Nicolas Maggiar and Katheline Schubert attempt to answer this question using a stylised model of the French economy, which is simple and transparent regarding the assumptions of technical progress and the possibilities of substitution between fossil fuel and the other goods and factors. They show that the Factor 4 objective cannot be reached using a carbon tax alone, unless extremely optimistic assumptions are made about energy efficiency and alternative energies.

 

"What should be the level of the carbon tax to be introduced in the economy to reach the Factor 4 objective?"


Like many countries, France has committed itself to reducing its greenhouse gas emissions by a factor of 4 by 2050 compared to the 1990 level. There are significant uncertainties about the cost of this ambitious objective and the combination of instruments to put in place to achieve it: instruments based on the increase in the fossil fuel prices, standards, public investment, Research and Development. Whatever the chosen combination, the introduction of mechanisms based on increasing fossil fuel prices seems inevitable, be it a tax or a permit market. A situation where the prices of greenhouse gas emitting energy would not increase seems incompatible with a significant decrease in their use. Fanny Henriet, Nicolas Maggiar and Katheline Schubert then ask the following question: at what level should the carbon tax be set to enable the economy to reduce its emissions by a factor of four by 2050?

 

"A stylised macroeconomic model with explicit substitution and technical progress assumptions"



In France, this question has already been raised, in particular in 2008 by the Quinet commission. This Commission had concluded that the introduction of a tax amounting to EUR 32 per tonne of CO2, and raised by about 5% per year, would be sufficient to ensure a four-fold reduction in emissions by 2050. These results are based on simulations carried out with three models, each integrating a very detailed representation of the energy sector. The complexity and sectoral disaggregation of these models reduce the clarity of the results and assumptions, such as the possibilities of substitution between energy and other goods or the average aggregate rate of technical progress leading to fossil fuel savings. Given the extent to which these assumptions affect the results, Fanny Henriet, Nicolas Maggiar and Katheline Schubert choose to build a stylised macroeconomic model, which is sufficiently aggregated to ensure that the substitution and technical progress assumptions are perfectly explicit.

 

"The Quinet tax cuts emissions by only 25%"


Fanny Henriet, Nicolas Maggiar and Katheline Schubert first look at the effect of the tax recommended by the Quinet Commission on CO2 emissions. Based on the emission rates of the various fuels and their relative consumption, they show that the tax of EUR 32 per tonne of CO2 corresponds to an additional cost of 15% to the price of fossil fuels excluding taxes, then of 100% in 2050, when the tax reaches EUR 200 per tonne. This additional cost comes on top of the existing energy taxes, which represent about 70% of the pre-tax price. Assuming that the rate of technical progress in the energy sector remains at its historical level estimated using French data, i.e. 2% per year, the authors show that this tax is largely insufficient as it results in a reduction in emissions of only 25% in 2050.

In order to cut emissions further, the first possible solution would be to raise the level of the emissions tax. Fanny Henriet, Nicolas Maggiar and Katheline Schubert find that the tax to be introduced should amount to EUR 832 per tonne of CO2, which is 25 times higher than the tax recommended by the Quinet Commission. Such a tax, which would be 400 times the pre‑tax price of energy, is obviously too high to be acceptable. The second solution would be to focus on improving the rate of technical progress applied to energy consumption. The authors find that this rate should be 7.4% per year, which is much higher than the 2% observed in the past.

 

"A carbon tax alone is not sufficient to trigger the necessary reductions"


Given these results, Fanny Henriet, Nicolas Maggiar and Katheline Schubert adjust their model by making the rate of technical progress applied to energy consumption endogenous, i.e. it is stimulated by the increase in fossil fuel prices. Introducing this mechanism substantially accentuates the emission reductions induced by the Quinet tax of EUR 32 per tonne, which amount to 40%, instead of 25% with an exogenous rate of 2% per year. However, even with this mechanism, the Factor 4 objective is not reached.

The results therefore call for caution about the feasibility of Factor 4: a carbon tax alone does not appear sufficient to trigger the necessary reductions. The objective cannot possibly be reached without implementing complementary public policies to foster technical progress and energy efficiency.

Henriet (F.), Maggiar (N.), Schubert (K), “A Stylized Applied Energy-Economy Model for France”, Energy Journal, Vok. 35, No. 4, 1-37, 2014

Mis à jour le : 08/01/2018 18:21