Carbon Tax: the French case raises EU concerns

The ambitious target of the French government to implement a CO₂ (carbon) tax from 1 January 2010 has been thwarted by the Constitutional Council ruling that the proposed tax would infringe the principle of equality before public charges and, as such, be unconstitutional.

This ruling must retain the attention of European observers as the main reason for the infringement is the exemption granted to industries falling within the scope of ETSⁱ which will still, for a time, receive free allowances. The debate is emotionally and politically charged in France and the question arises whether a similar controversy is not bound to explode at European level, where the European Commission is considering introducing a carbon tax for sectors not included in the ETS and, in some Member States, such as Ireland (Carbon tax introduced in 2010 budget measures in December 2009), where similar provisions have been adopted.

One thing is clear to all industry observers: it is of the essence of the ETS as a market-based instrument that no additional tax is being superposed on CO₂ emissions included in the scheme. The European manufacturing industry, the competitiveness of which is already significantly affected by a unilateral ETS, cannot conceivably and could not possibly cope with double taxation, one tax at a fixed rate, the carbon tax, in addition to a tax with a variable rate (under ETS auctioning).

If the two mechanisms cannot be superposed then, clearly, a choice has to be made! Either an exemption – even if unpopular – is granted to the ETS sector or, as suggested by Michel Rocard (the former French Prime Minister and MEP, who recently led a panel reporting to President Sarkozy on the proposed carbon tax), France should take up the matter courageously at EU level and propose that the ETS be scrapped to be replaced by a European carbon tax covering all emission sources including those currently in the ETS. How emissions linked to imported products would be treated should then perhaps be more easily defined.

Is that likely to happen ...? The worst situation would be a compromise that would imperil the protection against double taxation in the rush to find a solution, announced for April/May 2010 in France. Such solution would not provide an example to be followed in the EU and its Members States. European eyes will have to stay focused on France as the debate may well spread throughout EU.