Carbon tax: What environmental and economic impact in the French manufacturing sector?

CARBON TAX : WHAT ENVIRONMENTAL AND ECONOMIC IMPACT IN THE FRENCH MANUFACTURING SECTOR?

Damien Dussaux Launch at France Stratégie February 4th 2020

Climate policies get more and more ambitious • French climate-energy law: carbon neutrality by 2050 • Industry: GHG emissions must decrease from 80 to 20 Mt between Carbon tax in euros per tonne of CO2

• Two carbon pricing instruments: 1.

EU-ETS (75% of French industrial emissions)

2.

Carbon tax on fossil fuel combustion (remaining 25%) Source: article 266 quinquies B of 2018 and 2019 draft finance laws

2

Amplifying the rising trend of manufacturing energy cost

Average energy cost euros / toe

• Average energy cost in €/toe in the French manufacturing sector: +80% between 2001 and 2016 1200 1100 1000 900 800 700 600 500 400 300 200

Source: Enquête Annuelle sur les Consommations d’Énergie dans l’Industrie (EACEI, Insee)

3

Manufacturing jobs in France: -26% in 16 years Food products Basic metals and metal products Transport equipment Other manufacturing industries Rubber, plastics, non-metallic minerals Motor vehicles Machinery and equipment Textiles, wearing apparel, leather Electronics Chemicals Electrical equipment Pharmaceuticals Coke and refining

4% 28% 21% 29% 28% 35% 27% 58% 32% 24% 34% 6% 26% 0

Job in 2016

Source : Insee

100

200

300 400 500 Jobs (thousand)

600

700

Loss since 2001 4

The paper • Do carbon pricing policies successfully reduce carbon emissions? • If yes, with what economic impact?

1. Firm-level quantitative analysis 2. Industry-level quantitative analysis 3. Impact of the carbon tax since 2014 and simulation of potential increase in its rate Data: 8,000 French manufacturing firms 2001-2016 Econometrics: fixed-effects model with instrumental variable

Empirical issue: Breaking the reverse causality Average energy cost â‚Ź/toe

Fixed weight energy price index

Energy use, Economic outcome

Instrumental variable also used by [Linn, 2008] and [Sato et al., 2015] 6

Data 1. Fuel quantity and expenditure: Enquête Annuelle sur les Consommations d’Énergie dans l’Industrie (EACEI, Insee) 2. CO2-eq emissions: combining (1) with emission factors from Ademe 3. Economic activity: employment, output, investment (FICUS & FARE, DGFiP) 4. Controls: firm age (Insee), under EU-ETS (CITL)

Main results – Average firm • If the average energy cost increases by 10% Variable

Estimated effect

Energy use

-6% (***)

CO2 emissions

-9% (***)

Energy intensity

-5% (***)

Workers

-2% (***)

Real output

-0.1% (not significant)

Investment

-4% (not significant)

• Important environmental impacts and weak economic impacts • The energy use decrease while output remains constant  firms are cleaning up

Small, Medium, and Large firms • If the energy cost increases by 10% Variable

Small (< 50)

Middle (50 - 250)

Large (> 250)

Energy use

-3% (***)

-6% (***)

-8% (***)

CO2 emissions

-7% (***)

-9% (***)

-11% (***)

Energy intensity

-5% (***)

-5% (***)

-6 %(***)

Workers

+1% (**)

-3% (***)

-5% (***)

Real output

+1% (**)

-1% (ns)

-3% (***)

Investment

+3% (ns)

-4% (ns)

-3% (ns)

• Small firms reduce less their energy use but increase their employment • Middle-sized and large firms reduce their energy use more but also their employment

Interpreting these differences 1. Large firms are more energy efficient (economies of scale and greater capacities to invest in energy efficient equipment) 2. Large firms can pay the fixed cost to offshore part of their production abroad reducing employment locally 3. Small firms which stay in the market capture market shares of firms exiting the market

Results at the industry level • The firm level analysis focuses only on « surviving firms » and ignores: – Market entry and exit of firms – That energy cost also varies for other firms – Reallocation of market shares and employment between firms

• The industry level analysis:

– The energy price has not statistically significant effect on aggregate manufacturing employment – Why ? Markets shares and workers are reallocated from energy intensive firms towards energy efficient firms

Measuring the impact of the carbon tax Average energy cost â&#x201A;Ź/toe

Estimed

Energy use, Economic outcome

Simple calculation To measure

Carbon tax 12

The carbon tax in the manufacturing sector • Specific rate for each fuel according to their emission factor • 45 €/t of CO2  8,5 €/MWh of natural gas  0,16 €/litre of heating oil • Reduced rates for natural gas for firms consuming large amounts of energy (CLAE) : – 1,52 €/MWh if firm under EU-ETS – 1,60 €/MWh if firm exposed to carbon leakage • Exemption for heating oil and butane propane for firms CLAE (EU-ETS or exposure to carbon leakage)

13

The impact of the carbon tax on the French manufacturing sector (2014-2018)

Carbon tax (euros per ton of CO2)

50 45 40 35 30 25

Carbon tax (left axis)

20 15 10 5 0 2013

2014

2015

2016

2017

2018

50

3%

45

2%

40

1%

35

0%

30

-1%

25

-2%

20

-3%

15

-4%

10

-5%

5

-6%

0 2013

2014

2015

2016

2017

-7% 2018

Tax impact (on jobs or emissions)

Carbon tax (euros per ton of CO2)

The impact of the carbon tax on the French manufacturing sector (2014-2018)

Carbon tax (left axis) Impact on emissions (right axis)

-5% ou -3.6Mt CO2-eq

50

3%

45

2%

40

1%

35

0%

30

-1%

25

-2%

20

-3%

15

-4%

10

-5%

5

-6%

0 2013

2014

2015

2016

2017

-7% 2018

Tax impact (on jobs or emissions)

Carbon tax (euros per ton of CO2)

The impact of the carbon tax on the French manufacturing sector (2014-2018) +0.6% jobs (not significant) Carbon tax (left axis) Impact on jobs (right axis) Impact on emissions (right axis)

Simulating an increase in the carbon tax fro 45 € to 86 € per tonne of CO2 2018

Scenario

45

86

Full rate (€/MWh)

8.5

16

Reduced rate if under EU-ETS (€/MWh)

1.52

2,88

Reduced rate if exposed to carbon leakage (€/MWh)

1.60

3,03

15.62

26.65

0

0

15.90

28.32

0

0

Carbon tax (€/t CO2) Natural gas

Heating oil Full rate (€/hectoliter) Exemption EU-ETS or carbon leakage exposure Butane propane Full rate (€/100 kg) Exemption EU-ETS or carbon leakage exposure

17

Impact of a carbon tax increase from 45 € to 86 € per tonne of CO2

CO2 emissions: -6.2 Mt CO2-eq (-8.7% of 2018 manufacturing emissions)

Impact of a carbon tax increase from 45 € to 86 € per tonne of CO2  Reallocations due to the tax increase: 6 400 (0.24% of the workforce)  Small compared to the 47% industrial workers who changed job between 2012 and 2015 (Insee, DADS)

Conclusion and Policy implications 1. Carbon pricing policies effectively reduce industrial energy use and carbon emissions 2. But can reduce employment in large and energy intensive firms 3. If total employment is not affected at the manufacturing sector level, the carbon tax generates winners and losers â&#x20AC;&#x201C; Transaction and transition costs for laid-off workers and firms

4. Complementary labour and training policies are necessary to accompany the losers

More information, questions? damien.dussaux@oecd.org oe.cd/2qX