The Climate Conferences - What solutions are possible to meet the obligation of result ?

Session 4

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

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Where are we now?

After having, during the first three sessions, stated the need for an obligation of result concerning the carbon footprint of European and French society and evaluated the current difficulties of measuring this footprint (session 1), acknowledged the political will of the European Union to put the fight against global warming at the top of the political agenda but noted that to date European policy has taken into account neither the obligation of result nor the total carbon footprint of European society (session 2), We then examined the legal reforms needed to ensure that all the players are truly co-responsible for global warming (session 3). From this fourth session to the eighth, we examined and debated the various solutions that could be envisaged for the effective implementation of the obligation to achieve a result, both at European and French level. It implies a cap, and therefore a rationing, of the carbon footprint with a reduction of the cap of 5 or 6% per year to meet our responsibilities and commitments to the climate.

The specifications common to the various solutions

The first three sessions allowed us to draw up a set of specifications in six points :

1. We must reduce the carbon dioxide emissions resulting from society’s lifestyle, known as the « total carbon footprint », at a defined annual rate of 5-6%.

2. This reduction must be the subject of an obligation of result, enforceable in particular on the public, European and national authorities, who must put in place the mechanisms to ensure that all actors contribute to this reduction.

3. The reduction must be based on the total carbon footprint and not on national inventories, which implies taking into account the « imported » production of greenhouse gases, because they are incorporated into the goods and services we consume, which implies the traceability of carbon emissions throughout the production chain.

4. The proposed solutions must combine the obligation to achieve results with the imperative of social justice.

5. They must achieve a decoupling of the development of the well-being of societies from the consumption of fossil energy.

6. Finally, it must be ensured that the proposed measures are physically, technically and financially feasible, taking into account the fact that the global mechanisms put in place will be a powerful stimulus to innovations of all kinds.

Comparison of three families of solutions

In his introduction, Pierre Calame proposed to classify the solutions envisaged into three main families :

Family 1 : the price signal. Gradually reduce demand by setting a higher and higher price per ton of carbon dioxide emitted into the atmosphere and by redistributing, according to modalities to be defined, the revenues derived from the high price of carbon, so as to respect a principle of social justice.

Family 2 : the combination of sectoral policies aiming at defining reductions of the carbon footprint in all areas by setting quantified objectives for each of them and by implementing prohibitions, obligations, incentives, public investments, technical innovations and taxation to achieve them.

Family 3 : allocation of quotas. Allocate the total footprint between actors according to a predefined key. This is the most direct management of rationing. This family can be broken down into two very different sub-families :

• family 3.1. : quotas are allocated to sectors of activity and companies ;

• family 3.2: quotas are allocated to people considered as the final beneficiaries and clients of economic activity and of the activity of administrations.

The speakers

We had initially planned to divide the speaking time between the promoters of the different families of solutions. For reasons linked to the agendas of the various parties, the first family of solutions, through the price signal and carbon taxation, addressed by the first four speakers, was given priority in this first session: Christian De Perthuis, founder of the Climate Economics channel ; Géraud Guibert, Senior Advisor to the Court of Auditors, founding president of the Ecological Factory ; Bettina Laville, State Councillor, President of the Comité 21, involved for more than thirty years in political action on global warming, Director of the cabinet of the Minister of the Environment Brice Lalonde from 1988 to 1992, environment advisor to two Prime Ministers, Pierre Bérégovoy and Lionel Jospin, and to the President of the Republic François Mitterrand, and as such having actively participated in the Rio (1992), Kyoto (1998) and Johannesburg (2002) conferences; Christian Gollier, Director of the Toulouse School of Economics and President of the European Association of Environmental Economists.

However, through their interventions, the solutions of the second family, sectoral action, and of the 3.1 family, action through quotas allocated to companies, were addressed.

Three other speakers provided a counterpoint: Denis Payre, serial entrepreneur, founder of the Nature and People First association and promoter of the « global contract »; Maxime Blondeau, lecturer at Science Po and Mines Paris and founder of the « Ecological Spring » union; Armel Prieur, president of the association for carbon-free employment, retired from the European Council and leader of the « carbon account » network.

The following sessions will balance the presentations of the different families :

• session 5 will debate the solutions of the first family, the price signal ;

• Session 6 will be devoted to the solutions of the second family, sectoral actions,

• Sessions 7 and 8 will focus on the third family, and more specifically on the individual quota system.

Current policies favour sectoral approaches despite their contradictions and failures

Both at the French and European levels, the policies implemented to date have belonged to the sectoral policy family, and to the 3.1 family with the EU ETS, which has been in place since 2005 and is the world’s largest ETS.

If we opt for continuity, it is necessary to examine the current limits of these two forms of policy and to assess the possible transformations for greater ambition and efficiency.

These limits have been highlighted by Géraud Guibert and Maxime Blondeau.

First of all, they observe that these sectoral policies, which can be described as « obligations of means », are not very effective. Indeed, instead of conceiving a global solution that would guide the behaviour of all the players over the long term, policies are fragmented and, in so doing, lobbies are awakened in each sector, each of which generally tries to limit the scope of the measures taken, especially since in each field, such as housing, the automobile industry, agriculture, etc., the challenge of combating global warming will compete with other objectives.

Christian Gollier also notes the risk that these sectoral policies will continue to foster illusions. Reducing society’s carbon footprint by 5 to 6% per year, when all growth and increases in living standards since the industrial revolution have been based on the substitution of fossil fuels for human and animal energy, implies a profound upheaval in society. The addition of sectoral measures suggests that all this will be painless and will create millions of skilled jobs. Nothing is less certain.

These sectoral policies, based on obligations of means, are moreover often accompanied by weak controls and sanctions that are not very dissuasive, which deprives them of effectiveness and credibility. Géraud Guibert cited examples such as lifts. Maxime Blondeau pointed out that the law requires private and public players of a certain size to assess their total carbon footprint, which goes in the direction of assessing the company’s carbon footprint, but that this law has remained a dead letter in the vast majority of cases, as non-compliance is accompanied by derisory penalties. This observation is in line with the more general observation made by the environmental lawyer Laurent Neyret : as things stand, not complying with regulations can bring great benefits for very little risk.

Christian Gollier also pointed out that sectoral policies very often lead to the promotion of costly actions for a limited result and to the neglect of actions whose cost-benefit is much better. He gave the example of replacing coal-fired power stations in Europe with gas-fired power stations, which would represent a cost of 40 euros per tonne of CO2 saved, since gas-fired power stations emit half as much carbon dioxide as coal-fired power stations for the same amount of energy produced. He contrasted this measure with the subsidies allocated in France to the installation of photovoltaic panels, which represent 350 euros of subsidies per tonne of carbon dioxide saved, i.e. almost ten times more.

Bettina Laville pointed out that because of the current « taboo » surrounding the idea of raising the price of carbon, a taboo that we will come back to, the Citizens’ Climate Convention (CCC) has found itself locked into this sectoral approach. The idea of acting on the price of carbon was immediately discarded and, as we saw in session 3, the idea of quotas was set aside by the organisers. The result was to give the impression that «  the people  » do not want a global solution to the problem of global warming. And, in fact, the Convention’s proposals are a juxtaposition of sectoral measures, which Bettina Laville points out, moreover, have introduced 7 or 8 fiscal niches or carbon taxes in addition to those that already existed.

Scope and limits of the market for allowances allocated to companies

Christian De Perthuis, Géraud Guibert and Christian Gollier all expressed their interest in carbon allowances allocated to companies (family 3.1). These allowances are currently limited to the 11,000 largest emitting industrial installations in the European Union. Together they account for 45% of territorial emissions. According to the European Commission, they have enabled a 21% reduction in emissions over the last fifteen years. The quota market was revised in 2013 with an auctioning mechanism and the objective was to reduce emissions by 2.2% per year from 2021.

In the view of stakeholders, the scope of this carbon market has so far been reduced by three factors :

• they only cover 45% of territorial emissions on European soil ;

• their ambition, even after 2013, is irrelevant to the average rate of emissions reduction that must be achieved now ;

• and above all, in this approach, it is not the entire carbon footprint that is concerned : the relationship with the rest of the world is limited to the question of the risk of European companies losing competitiveness to competitors who do not have the same constraints. Hence the allocation of free allowances to all European industries facing international competition, which limits the idea of the value of carbon.

Christian De Perthuis believes that this system has great potential: if, in his opinion, it has not been very effective over the past 15 years, it is above all because the objectives assigned to it were themselves too modest. As he says: «  the judgment on the tools is in fact a judgment on the objectives ". He envisages two ways of improvement :

• widening the scope of the quota system, particularly in the direction of the building and transport sectors, in order to gradually approach a rationing of all territorial emissions ;

• a border adjustment mechanism, on the one hand to integrate the total carbon footprint and on the other hand to tax CO2 imports at the same level, which is also a condition for abolishing the free allocation of quotas to various industries, which he believes is the greatest current support for fossil fuels. He urges, «  rather than inventing new systems, to push for the reform of the European quota system which has the merit of existing ".

Christian Gollier naturally adds a third objective: a 5 to 7% year-on-year decrease in quotas, a condition for compliance with the obligation to achieve results.

These proposals nevertheless raise a series of questions that will have to be clarified during the following sessions :

• the focus remains on territorial emissions and «  imported energy  » is seen only from the angle of the competitiveness of European companies, not from that of taking into account the entire carbon footprint ;

• Border adjustment » is the euphemism used to tax imported carbon dioxide and the question of compatibility with the World Trade Organisation is seriously raised, to the point, as Denis Payre pointed out, of compromising the implementation of effective solutions on European soil. He illustrated this with a very eloquent case study: since renewable wind or solar energy is intermittent, solutions for the temporary storage (over several hours a day, several days, several months) of the energy produced in order to match this production with its use are at the heart of its development. Studies show that the best efficiency is obtained by storing the energy in the form of hydraulic energy (the water is pumped up with the excess energy, and the water is turbined to produce electricity when it comes down). However, in the concrete case of the project he took as an example, this solution is less profitable than storage by Chinese batteries, which are much more damaging to the environment, because the hourly price of labour in China is only one sixth of the French price and the massive environmental damage, particularly linked to rare earths, is simply not taken into account, not to mention the energy cost of producing these batteries. This makes him say that as things stand  » we are importing both carbon and unemployment ". He therefore believes that the system can only be rebalanced if an alliance of liberal democracies leads to a radical reform of the WTO, the « global contract » he calls for.

In all these examples, it is the European Union that is in the front line.

Why has action through carbon pricing, which is the consensus of classical economists, become so difficult to defend?

The first four speakers showed themselves to be fervent supporters of the first family of solutions, that of action through the price signal. But, before detailing the conditions for success, they acknowledged that the multiplication of mistakes has, at least temporarily, made this solution politically indefensible.

To understand what happened, it is important to remember a fundamental fact: the elasticity of direct fossil energy consumption as a function of income is positive but less than 1. In other words, the richer you are, the larger your carbon footprint, but the growth of this footprint is slower than the growth of your income: the poorest households have many ‘constrained’ energy expenditures in their daily lives, particularly for heating and for travel. They also have a constrained consumption, for their food and clothing, but in this case it is difficult to distinguish between territorialized and imported emissions. The percentage of these essential consumption items in their budget is much higher than for the richest households, which explains the importance of fuel poverty : the poorest households are among those with the longest commutes to work, less economical cars (at least in relation to their engine capacity) and high heating costs, particularly due to poorly insulated housing.

However, policies to reduce the carbon footprint by increasing the price of carbon have so far been sectoral policies. This is already the case with the TICPE, the domestic tax on the consumption of petroleum products, which mainly affects fuels for cars and heating, while large companies, agriculture and many other economic sectors benefit from exemptions or free quotas. These taxes are therefore « regressive » taxes (the opposite of a « progressive » tax). (the opposite of a progressive tax whose rate rises with income): they penalise the poorest and increase social inequalities. It is already this consideration that led the Constitutional Council in December 2009 to «  retoquer  » the «  contribution climat énergie ", which following the Grenelle Summit, the Sarkozy government had wanted to introduce, with a progressivity announced in advance to go from 17 euros to 100 euros in twenty years. The Constitutional Council ruled that this contribution did not respect two fundamental principles: equality before the tax and the general interest.

As Bettina Laville pointed out, these two arguments must be examined differently :

• the inequality in front of the tax was obvious, only 48% of territorial greenhouse gas emissions were concerned, and more than 60% of the contribution fell on households. At the end of the day, this new contribution amounted to an annual increase in the domestic tax on petroleum products. A regressive tax, therefore.

• The second argument of the Constitutional Council was that this contribution was not in the general interest. On this point, Bettina Laville made an observation that ties in with the debate in session 3: because legal thinking has lagged behind the new realities, « general interest », like responsibility, only concerns relations between people in the minds of lawyers today. It is necessary to move from the idea of general interest to the idea of «  defence of the common good " : the maintenance of our life balance has become vital and, she adds, «  what does equality before the tax mean if in its name our living conditions are destroyed ? ".

To all these unpopular attempts to tax energy in this way - the fuel tax planned for 1 January 2019 was the trigger for the yellow waistcoats movement - two aggravating factors have been added :

• no serious redistributive measure was planned ;

• this tax was simply, like the TICPE, added to the State budget according to the old principle of unicity of this budget. This removed all visibility from these tax increases, leaving only the aspect of aggravating social inequalities. As Bettina Laville reminds us, without visibility, there is no consent to taxation¹.

As we shall see, the supporters of the first family of solutions, through the price signal, are unanimous in promoting an approach that is radically different from the one that has prevailed until now.

The fundamental principles of the « price signal

Among the four speakers who presented their vision of Family 1, the « price signal », there is a broad consensus on a number of fundamental principles and some divergences that will have to be debated in the fifth session.

Fundamental principles :

1. It must be a global measure fixing in advance an increase in the price of carbon of 5 to 7% per year, which excludes exempting any particular use of fossil energy or any economic sector in the name of social imperatives or international competition.

2. The proceeds of this tax must be fully redistributed, on a basis of equality between all, which makes it a progressive tax, shifting the bulk of the transition effort to the highest incomes.

3. This predictable increase and transparent redistribution allows all public and private actors to adopt long-term strategies for transforming lifestyles, production systems, land-use planning and to develop technological innovation.

4. Ideally, such a carbon price should be global. This is probably out of reach for the moment. But in order to integrate the entire carbon footprint and avoid a high price having as its first consequence the relocation of economic activities, it must be established at the European level, a carbon traceability of the sectors must be put in place and a reform of the World Trade Organisation must be achieved, making it possible to take into account the full carbon value of imports at the same price as the European value.

5. The reform of the carbon tax must be the occasion for a general review of taxation, according to the principle «  taxes contribute to social justice and the common good ".

6. Both sides rule out the idea of « earmarking » the tax revenue for a particular sectoral policy: it is the overall dynamics of the increase in the price of carbon that will bring about the desired changes.

7. We must be very explicit about the fact that this rationing managed by prices will lead to structural transformations of society that must be announced, assumed and accompanied.

The main divergence that emerged between the four speakers concerned the question of whether there should be a single carbon price or differentiated prices. Christian Gollier felt it was imperative that there be a single price. Géraud Guibert was of the opposite opinion, because of compulsory consumption. This essential question will have to be clarified during session 5.

The principle of individual tradable quotas

Armel Prieur gave a brief presentation at the end of the meeting. Sessions 7 and 8 will be devoted to it. Only a few essential points will be retained here :

1. Individual quotas are distributed equally to all citizens, with an annual allocation of carbon points that will decrease from one year to the next, for example by 5 to 6%, in order to meet the objective of reducing the carbon footprint by 80% in 2050, in accordance with the figures of the Climate Council.

2. This carbon account creates a real currency : each purchase is debited in euros and carbon points.

3. The production cycle of companies must be carbon-neutral, so they integrate the carbon content of the entire production chain into the « carbon » content of their products. This means that households receive an annual allowance while companies only receive an initial allowance. The same rule applies to public administrations, with taxes and duties paid in both euros and carbon points (which will raise awareness of the fossil fuel consumption of public services).

4. The development of digital money makes it easy to have both currencies on the same card.

5. In order to make the necessary investments, especially to increase energy efficiency, it is possible to borrow carbon money on the same terms as current euro borrowing.

6. Frugal individuals and households that are able to reduce their carbon needs have the opportunity to sell their surplus to those who have maintained a more expensive lifestyle. The corresponding carbon market is organised at a first regional level, then at national level and then at European level.

7. The system is conceivable at the level of a country like France, but because of the freedom of trade in the single European market, it is at the European level that it is desirable to organise the system.

Are price signals and individual tradable quotas one and the same thing?

This is an essential point of debate for future sessions. Géraud Guibert believes that price signals (family 1) and individual allowances (family 3.2) are two sides of the same coin, since the allowance market actually gives a « price signal ». Without an allowance trading market, there would automatically be a black market. The allowance market, like the carbon price, has the same merit in his eyes, giving an increasingly strong value to the tonne of carbon dioxide emitted. The price signal and allowances allocated to companies are very similar. In fact, the four speakers in favour of action through carbon prices are also in favour of extending the system of trading allowances between companies. On the other hand, there are very profound differences between family 1, the price signal, and family 3.2, individual tradable allowances.

• The first difference is that the performance obligation associated with the price signal remains indirect. In order for actors to have the necessary visibility on the price of carbon to make medium and long-term decisions, the relationship between the annual increase in the price of carbon and the reduction of the carbon footprint are not equivalent. Christian Gollier pointed out that in the immediate future and on the basis of international comparisons, the price elasticity of direct energy consumption is 1 : the price of fuel for cars in Europe is double that of the USA and the consumption of European cars is half that of American cars. However, it is dangerous to extrapolate as we get closer to essential consumption, the reduction of which requires fundamental changes in society. The advantage of individual quotas is their immediate readability and therefore their long-term predictability. This legibility, as Bettina Laville reminded us, is a major condition for acceptability.

• In an area where symbolism counts, the difference between the two is essential. In the case of the price signal, it is a redistribution of tax revenues among all households that gives an advantage to the most modest households and to those who make frugal efforts. But the price mechanism, and this is the reason why there is a consensus among economists in favour of it, stems from an economic science that was contemporary with the industrial revolution and that was based precisely on the idea of infinite growth. Quotas are based on a different symbolic model: rationing is totally assumed, as an expression of the finiteness of the planet, and the equality of quotas expresses the equality of citizens before a scarce good.

• The third difference is the relationship with the carbon footprint. In the absence of a global agreement on the price of carbon, the « price signal » does not provide a direct mechanism for tracing the carbon chain outside European territory, and the balance is only re-established by means of the principle of border adjustment, implying a renegotiation of the World Trade Organisation. In the quota system, companies must take into account the carbon content of what they import, in order to charge it to their customers, without taxing the imports, which makes their application immediate, without the need to renegotiate trade agreements.

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At this stage we can foresee more than exciting future debates…

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