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Carbon Taxes at the Barricades

The "Yellow Vest" protests in France have been an eye-opening experience for those who advocate carbon taxes as a means to combat global warming. Unless political leaders demonstrate greater sensitivity to the distributional impact of climate-change policies, public support for them will be difficult to sustain.

LONDON – For governments everywhere, the shadow of the gilets jaunes (“yellow vests”), whose protests wracked France for several Saturdays before Christmas, now looms over policies to combat climate change. In the face of street violence, President Emmanuel Macron has canceled a planned increase in the diesel tax. Other countries’ officials will take note, and auto and oil industry lobbyists are – no surprise – urging them to be warier.

But many of the demonstrators are avowedly not opposed to action on climate change. Among the multiple demands of this bottom-up and disparate street movement is a call for higher taxes on aviation fuel rather than on diesel. Action to address climate change, participants argue, is being pursued at the expense of those least able to bear the cost.

They have a good point. Macron’s policy was a perfect example of how not to impose higher carbon taxes. It was introduced with insufficient consideration of its impact on income distribution and the wider economic and political context.

The policy combined a gradual increase in taxes on both gasoline and diesel with additional short-term increases in diesel tax to reflect adverse local pollution effects. Together with rising crude oil prices, by November this had driven French diesel prices up 16% from the year before. The announcement of a further increase in January 2019 threatened to take that rise to 23%.

This was a huge increase to impose on owners of already existing vehicles, which could not be immediately replaced. And the impact was greatest for people living in rural areas and small towns, where travel distances are typically longer and public transport is less available. Moreover, the benefits of improved air quality in these areas are less relevant than in Paris or other big cities.

To the protesters, these seemed to be policies imposed by an out-of-touch metropolitan elite, many of whose members had recently received a large cut in wealth taxes, which was introduced following business leaders’ successful lobbying of the finance minister at a conference held alongside the Aix-en-Provence Opera Festival. It is difficult to imagine a more politically tone-deaf approach to policymaking.

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Experts and policymaking elites must avoid repeating in relation to climate change the mistakes that distorted their approach to globalization. Economic models told us that freer trade and immigration would increase global economic efficiency and per capita income. But sound economics should also have told us that there were bound to be losers as well as winners, with the losers – and potential populist voters – often concentrated in the same smaller towns and rural areas that form the backbone of the gilets jaunes movement.

Similarly, analysis tells us that the costs of achieving a zero-carbon economy by 2060 will be less than 1% of global GDP, and that the average impact on consumer prices will be trivial. But within that aggregate global total and those price averages, important distributive and transition effects will require careful management.

High carbon prices are a crucial policy tool to drive emissions reductions and limit harmful climate change. Far greater auto fuel efficiency in Europe than the US reflects much higher gasoline and diesel taxes. In industrial sectors such as steel, cement, and chemicals, we need carbon prices to unleash a market-driven search for least-cost emission reductions. In aviation, higher prices for conventional jet fuel would drive the rapid development of green alternatives. But imaginative policy design is essential to overcome political resistance and avoid adverse distributional effects.

Three ways forward should be considered.

First, to make carbon taxes popular, their economic benefits must be visible to all citizens. A large share of any further increase in gasoline or diesel taxes, or of the revenues derived from economy-wide carbon prices, could be used to fund a “carbon dividend.” If paid equally to all citizens, this  would offset the regressive effects that new taxes alone might in some cases produce.

Second, we should pay attention to specific distributional effects and perceptions of fairness. As the demands of the gilets jaunes imply, it is unacceptable that the diesel they use to travel to work is far more heavily taxed than the jet fuel that business leaders will use to travel to Davos this January. If the global business elite is serious about action on climate change, it should advocate for an international agreement to impose a carbon price on conventional jet fuel, whether via an explicit tax or through a green-fuel mandate requiring a gradually rising proportion of zero-carbon bio or synthetic fuel. And if international agreement is impossible, they should support unilateral domestic action.

Third, governments must carefully manage the transition to higher carbon prices, in particular where taxes interact with volatile commodity prices. Within ten years, shifting to more efficient electric cars will almost certainly reduce the costs of road transport, benefiting rural and small-town car owners even more than city dwellers. And higher fuel taxes can speed the transition to that end point. But, as some of the French protestors argued, their focus is on financial survival until “the end of the month,” not on benefits a decade from now.

Governments must therefore focus explicitly on the pace of total price rises. Intended increases should be gradual and declared far in advance, and they should be delayed when oil prices and thus pre-tax fuel costs are sharply increasing. France’s possible 23% increase in diesel prices in only 15 months should have been interpreted as a political red flag; effective climate change policy does not require such rapid price increases.

The precise mix of policies must of course vary by country; but without more thoughtful approaches than what was attempted in France, action to address climate change will be dangerously constrained.