The Climate Conferences - Can action through price signals lead to an obligation of result and under what conditions?

Lessons learned from the fifth session - Session 5, part 1

Pierre Calame, Géraud Guibert, Bettina Laville, Christian Gollier, Sandrine Rousseau, Christian de Perthuis, March 2021

In the face of global warming, how can we move towards an obligation of result? This is what this series of public debates is all about: getting to grips with the idea of an obligation to achieve results, exploring the different ways in which this obligation can be met, and challenging public authorities on how to assume their responsibilities in this respect.

The fifth session consists of two distinct parts : the first is devoted to the capacity of « price signal » policies to achieve the obligation of result in the fight against global warming, the second to the modalities of corporate contribution to the fight against global warming.

To download : intro-session5_pcalame.pdf (65 KiB), dla-assises-climat_strategies_climat_grandes_entrerpises.pdf (1.2 MiB), imo_assises_climat_les_entreprises_se_decarbonent.pdf (2.5 MiB), presentation-lumo-comptabilite_ecologique.pdf (2.3 MiB), re-conceptualise_and_re-integrate_climate_related_finance_into_society_throug_ecological_accounting.pdf (970 KiB), db_stranded_assets_contexte_mondial.pdf (640 KiB)

On the basis of the terms of reference drawn up at the end of the third session, Pierre Calame proposed that the speakers deal successively with four questions :

Five speakers contributed to this first part of the discussion :

With the exception of Christian Gollier, the speakers often straddled several of the issues. The present text is therefore a recomposition of their interventions according to the proposed questioning.

In order to understand the overall logic of the discussion and to shed light on the debates of the following sessions, a certain number of general considerations must be kept in mind :

  1. the measures advocated in this first family, called « price signals », have been debated practically since the origin of policies to combat global warming. This is what Christian De Perthuis called during the fourth session: mechanisms already exist, in particular the carbon market between European companies, known as the EU-ETS, which have shown many weaknesses, but it is better to improve them than to abandon them for a new system;

  2. These mechanisms are directly derived from classical economic theory. As Christian Gollier reminds us: «  pricing deals with a problem of externalities, not with a problem of scarcity ". In a way, the idea of a scarcity created politically by capping emissions, and therefore of a rationing of fossil energy, is outside the scope of this economic school. According to this school of economics, global warming produces undesirable effects, the « externalities », as a result of the development of the economic system and changes in lifestyles; a price, a carbon value, must therefore be associated with it, so that all economic agents, companies, administrations and households integrate this fact into their decisions;

  3. A third hypothesis follows from these two hypotheses, which emerged clearly in the discussions, and which clearly distinguishes the measures advocated in the framework of this first family from those advocated in the framework of individual tradable quotas. During the fourth session, Christian Gollier had suggested that the two systems were equivalent, since in both cases the objective was to assign a value to carbon. But, as we shall see, the fundamental differences gradually became apparent.

The schemes designed in the framework of the « price signal » are part of the international negotiations as they have been conducted so far, where each country is responsible for the greenhouse gas emissions on its own soil, which was called at the first session « the territorial footprint ». It follows from this, which had not been perceived until this fifth session, an important consequence : to study the territorial footprint, we look directly at the actors at the source of the various emissions : companies, administrations and households. And within companies, the various major economic sectors, from direct energy production (refineries, power stations, etc.) to agriculture, and including economic sectors that are very high emitters, such as cement plants or the steel industry.

It follows that the measures adopted aim to act separately on the behaviour of these different types of actors, who are held responsible for their emissions. On the face of it, this is an unstoppable argument, but it is in fact fraught with endless debate: is it the responsibility of the supply side or the responsibility of the demand side? The debate is not only theoretical: when in California big oil companies were sued for « climate action », they replied that the responsibility lay with the consumers of their products. This way of approaching the actors separately, even if Christian Gollier strongly emphasises the need to adopt at least a uniform floor price for carbon, has largely dominated policies in Europe up to now and has been reinforced by the respective competences of the Member States and the European Union : Member States remain sovereign in the area of taxation; on the other hand, as far as companies are concerned, the European Union has developed a system of emission allowances allocated to the large production units with the highest emissions (currently 11,000 industrial installations in the European Union).

This methodological choice to work on emissions actor by actor has two major consequences :

  1. the focus is on the emissions of each company and not on the whole sector ; these emissions themselves distinguish, according to international terminology, between three levels : the first level, «  scope1 ", includes the direct emissions of the activity, the second level, « scope2 », includes the indirect emissions linked to the consumption of energy supplied elsewhere, and the third level, «  scope3 ", is interested, often in a rather imprecise manner, in the periphery of the company’s activity, such as the life cycle of its products or upstream and downstream transport ;

  2. In an increasingly unified world market, the focus on activities on national or European soil leads to a direct dialogue between political authorities and different branches of activity, with particular attention paid to the conditions of competitiveness of European industrial units in relation to competitors from other regions of the world. This is a decisive element for understanding what follows.

What we must remember from this preamble is that the debate on the nature of the footprint to be taken into account, « territorial footprint » or « consumption footprint » associated with our way of life, to use the terminology of the first session, has not only a quantitative consequence in determining the rate of reduction of the footprint, and therefore the extent of the transformations to be made to our ways of living and producing. It also determines, and one could almost say above all, the nature of the mechanisms put in place and the nature of the considerations that play a decisive role in the dialogue between the actors. One might even add that the dialogue with industrialists is about optimising their production processes or the cycle of their products and not about overturning the economic system. Hence the persistent feeling that there is a gap between the nature of the dialogue that is being established and the extent of the reduction in our carbon footprint that is required to meet our commitments.

A) Capping and performance requirements

In practice, the reasoning tends to favour an evolution of the carbon price «  susceptible  » to ensure the obligation of result of a rate of reduction of the carbon footprint, but with a lot of uncertainties on the relationship between the two. For Christian De Perthuis, this is unavoidable, so an iterative process is needed to set a rate of increase in the price of carbon, the real effect of which on the reduction of consumption is analysed and the evolution of prices is adjusted according to the result actually obtained. Christian Gollier suggests, on the basis of DICE simulations by the American economist Nordhaus, winner of the Nobel Prize in Economics in 2018, that the carbon price should increase by 3.5 to 4% per year in constant currency, on the assumption that the technological innovations introduced by this growth will enable emissions to be reduced more quickly. But he also points out that the different models contradict each other «  the models show great heterogeneity on the future carbon price compatible with the quantity targets. Some models show prices well above 1000 euros per tonne of CO2 in 2050, while others show a carbon price of almost zero given the extrapolation of productivity gains in renewable energies. It must be recognised that this creates major uncertainty which should be limited by the introduction of a floor price on the ETS market, increasing over time at a predetermined rate. But this replaces a quantity target with a hybrid target in which it is accepted that the EU will exceed its quantity target (when the price is locked in) at the price floor  »

It is difficult to say more clearly that carbon pricing is a difficult way to achieve the performance obligation. We have seen the reasons for this above : the price approach does not address the issue of rationing head-on ; indeed, it can be said to exclude it as outside mainstream economic theory.

How can we prevent the price of carbon from being modulated by lobbies and competing interests?

Christian Gollier has an answer that remains theoretical: «  we must move towards uniformity of carbon pricing ". But Christian De Perthuis, referring to the recent negotiations in Europe on the evolution of the EU ETS market, is not very optimistic. This negotiation has caused the political authorities to give in to the industrial lobbies, which have introduced, in the Parliament’s opinion, the maintenance of the allocation of free quotas for industrial sectors exposed to international competition. Furthermore, he points out that this issue of resistance to competing interests and lobbies is not specific to carbon pricing : it arises for all components of a climate policy. As pointed out in Session 4, the direct emissions approach of the different categories of actors opens the door to all kinds of lobbies, which, as the different speakers in Session 4 had pointed out, has been the source of the failure of policies so far. Christian Gollier pointed out that it would be much more appropriate and effective to have a single carbon price on the one hand and direct state aid to this or that threatened economic sector on the other, provided that this direct aid is compatible with European legislation.

How can we avoid a change of political majority compromising the continuity of the process?

This is a crucial point, and one that applies to all policy families: a profound transformation of society’s economy can only be achieved if there is good predictability and transparency regarding the evolution of the price of carbon or the ceiling on the quantities emitted. This is the prerequisite for all players, whether companies, households or public authorities, to integrate this development over ten, twenty or thirty years into their strategy. Insofar as everyone agrees that the system is most relevant on a European scale, some speakers, notably Christian Gollier, put their hope in the stability that could be provided by the collective commitments of member countries. He mentioned two hypotheses, which are probably complementary : a political agreement by the Member States on the long-term evolution of the price of carbon, including a floor price for trading allowances between companies, and the creation of an independent Central Bank for Carbon, based on the model of the European Central Bank. This idea of a Central Bank also has an advantage: by managing the allowances it would be a first step towards the idea of a fully-fledged « carbon currency ».

Bettina Laville, for her part, says that the commitment at national level on the evolution of the price of carbon should be at least a ten-year commitment, which corresponds to two five-year terms. Behind this statement lies the more general question of the capacity of democracies to carry out long-term structural transformations: this nagging question is obviously at the heart of the current crisis of democracies, in contrast to the capacity of authoritarian regimes like China to carry out very long-term strategies.

B/ Total footprint of societies

How do we take into account emissions along the entire value chain?

Because of the assumptions mentioned in the preamble, this question is largely assimilated to the question of carbon adjustment at the borders in order to level the playing field. This implies, says Christian Gollier, that importers must buy the corresponding permits on the ETS market. And Christian De Perthuis pointed out that in the absence of precise knowledge of the carbon traceability of a sector, it is possible to establish this taxation at the borders on the basis of a « benchmark » of reference emissions, such as those discussed in the first session to measure the total footprint of the lifestyle, with the onus on importers who would like a lower taxation to prove, through traceability in the sector, that their emissions are indeed lower than the benchmark. This is a fruitful idea that also applies to the other families, in particular to family 3 of tradable individual quotas.

How are companies led to ensure the traceability of fossil energy consumption throughout the value chain?

This question is related to the previous one, but Bettina Laville also noted that companies are increasingly required to produce extra-financial statements, if only because of pressure from investors. Regardless of the family of solutions chosen, it can be assumed that this traceability throughout the chain will gradually be imposed. The Citizens’ Climate Convention has come out in favour of displaying a carbon score for products : initially for information purposes only, but contributing to an awareness of the consequences of each act of purchase.

How to make the carbon tax included in imported energy compatible with WTO rules ?

Christian De Perthuis and Christian Gollier agree that it is not strictly incompatible with the WTO. Christian Gollier notes that several GATT articles (2 : 2.a, 3 : 4) can be invoked to justify a border carbon adjustment mechanism at the WTO. But they both specify «  that such a mechanism can only be envisaged if Europe gives itself a uniform and transparent carbon pricing system, by abolishing the free quotas currently offered to the most carbon-intensive sectors exposed to international competition« . This is certainly a prerequisite for successful negotiations at the WTO, for which the non-discriminatory nature of the global pricing proposal will be key, » says Christian Gollier. Before the implementation of a border carbon adjustment mechanism, the scope, price stability and intensity of the ETS must be reformed. To justify fairness with external competitors to the WTO, it is essential to first organise the fairness and transparency of a uniform carbon price internally} ". However, as Christian De Perthuis noted in disillusion, with the negotiations that have just taken place in Brussels, we can hardly be optimistic.

Let us note a strong convergence on the ideas of extending the ETS mechanism to all sectors of the economy, abandoning free quotas, setting a floor price for quota trading that increases from year to year.

C/ Social justice, tax reform and decoupling welfare development from fossil fuel reduction

How to make visible the decoupling of welfare from fossil energy consumption?

This question has been little addressed. Nevertheless, it is approached by Sandrine Rousseau who defends the idea of a «  carbon card  » given to households to manage their direct fossil energy expenditure,  » similar to the telephone cards of the past so that there is no copying of consumption ", which would, according to her, have the merit of making people aware of the impact of each purchase.

How to reconcile the increase in the price of carbon with social justice?

This reconciliation is, in everyone’s opinion, the sine qua non for implementing a price signal policy. On the other hand, it follows from the initial hypotheses that carbon taxation remains one tax among others. Sandrine Rousseau recognises that this will remain a delicate issue for the upcoming French presidential elections, especially since, adds Bettina Laville, the Citizens’ Climate Convention did not take this hypothesis into account from the outset, so that it seems to have been delegitimised by the citizens themselves.

Contrary to the proposals of the Citizens’ Climate Lobby (CCL), all of them, treating the carbon tax as one tax among others, only envisage a partial redistribution of its proceeds to households. Christian De Perthuis recalls the proposal made to the government in 2013 as President of the Committee for Ecological Taxation, which was to redistribute a third of the tax’s proceeds to the 40% of the least well-off households (the Rocard Commission, of which he was one of the rapporteurs, recommended a green cheque for all households, modulated according to where they live). This also explains why the speakers propose coupling this redistribution with a universal income that would be decoupled from the price of carbon.

Sandrine Rousseau insisted that, like the income tax reform, with the deduction at source, « solidarity must precede taxation »; in other words, the proceeds of the tax in year N, which will hit the poorest households hardest, must not be redistributed until year N + 1.

The fact that the carbon tax is one tax among others, like the current domestic tax on petroleum products, has a direct consequence at the European level: in the current discussions, the carbon adjustment at the borders, which is supposed to bring in 20 billion per year, would be used first and foremost to repay the debt contracted by the recovery plan and not to finance the transition.

What kind of global tax reform could this carbon tax be part of?

All the speakers agreed that the priority is the fight against inequalities. Bettina Laville goes even further by talking about « the battle of the century »: the last major tax reform dates back to 1914 and led to the permanent introduction of an income tax. As a reminder, this battle was a Homeric one, and the supporters of the income tax were criticised for promoting an « inquisitorial » approach: exactly the same criticism made by those who fear that a « carbon currency » would lead to the policing of consumers.

For Bettina Laville, this battle of the century is aimed this time, as she reminded us in session 4, at preserving the global commons. In fact, both sides, in addition to the question of the fight against inequalities and the introduction of a universal income, are in line with a perspective, stated for a long time, according to which tax reform should hit labour less and resource consumption more, in particular non-renewable resources.

In our perspective of an obligation to achieve results on a European scale, this need to include carbon taxation in a global reform of taxation poses a serious political problem since this reform would have to be carried out in a more or less concerted manner in the various European countries, since they retain sovereignty over their tax systems.

Should there be a single carbon price or several prices?

The positions of Géraud Guibert and Christian Gollier are divergent on this point. Christian De Perthuis proposed a « single minimum price » as a summary motion. But another question is raised, that of redistribution. While everyone recognises that the carbon price should be European, or even national, but in no case modulated from one region to another, as some regional presidents envisaged, there is no unanimity on the question of differentiating compensation according to the situation of households. Indeed, while it is undeniable that some households, due to urban sprawl and poor insulation of their housing, are in more difficult situations than others, taking this specific situation into account by modulating the redistribution in their favour would be tantamount to … endorsing and encouraging urban sprawl.

D/ Mobilisation of all actors

This issue was the least well addressed during the session. Some interesting points were nevertheless made.

How are actions to transform the economy and society designed?

Sandrine Rousseau approached the question from the angle of the necessary conversion of jobs as a consequence of structural changes in the economy. She puts forward the idea that the State should guarantee everyone five years of study to be taken at the desired time, recreating a balance between those who have been lucky enough to have a long education and those who have not, and giving the latter the possibility of ensuring their retraining.

How are the territories mobilised to lead the low-carbon transition?

All the above shows the weak role of territories in the organisation of carbon taxation. Their specificity should be addressed from three angles :

How are the energy costs of public administrations and services treated?

Naturally they should be subject to the same carbon price as other sectors.

Sources

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