When fuel taxes don’t help the climate

Margot writes*

In Europe, most passenger cars run on diesel or gasoline, whose combustion pollutes the air and contributes to climate change.

One solution to address those “negative externalities” is to include them in the price of transportation fuel via consumption taxes. Higher prices should provide incentives for individuals to reduce their fuel consumption and modify their driving decisions.

Thus, fuel taxes have the potential to reduce carbon emissions. However, the French experience with fuel taxes sheds light on the limited environmental impacts fuel taxes can have. Indeed, in France, even if the fuel tax represented around 59% of diesel and 64% of unleaded petrol prices in 2018, it “consistently struggled to find its place as a catalyst for low-carbon transition” and has not yet significantly reduced French transport emissions.

Setting aside public resistance and socio-economic limitations, there are two main reasons why the structure of French fuel taxes provides limited environmental benefits.

The first reason comes from the use of the revenues from the fuel tax. Like many other European governments, the French government did not originally design diesel and gasoline taxes as an environmental tool to reduce emissions. Its first fuel taxes in the early 20th century intended to raise government revenues and finance regional projects which were not necessarily linked to climate action. Since then, the revenue goal has remained mostly the same. For instance, the government planned to use most of the additional revenues from the 2018 fuel tax increase to reduce the state’s budget deficit leaving a smaller share, only 21%, dedicated to environmental measures.

The second reason for the limited environmental benefits of French fuel taxes is that they contain many exemptions and reductions which mimic fossil fuel subsidies. Since the 2000s, carbon taxes (including fuel taxes) in France have exempted fossil fuel-intensive sectors such as agriculture and the road, air and maritime transport. In 2018, exemptions and reductions of energy-related taxes amounted to €13.6 billion. This forgone tax revenue acts as a fossil fuel subsidy because it reduces their fuel costs. The result is unchanged consumption and high transport emissions.

Bottom line: French fuel taxes have had limited environmental benefits because the government spends most of the revenues raised on non-environmental measures and because it exempts polluting industry sectors from the tax.

* Please help my Real Donut Economics** students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

** Why “Real”? In short, because (a) Raworth’s claims to being a “21st century economist” denies that all of her ideas were presented by others in the 20th century and (b) she presents no viable mechanisms (besides “be nice”) for achieving equality and sustainability. My students are more realistic. In long? Read this.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

2 thoughts on “When fuel taxes don’t help the climate”

  1. Great post! The main thing I’m left wondering is why in French policy are certain groups, such as agriculture as you mentioned, those that seem to hold the political power to get exemptions on fossil fuel taxes. I wonder if its merely the cultural power of these interests or whether there is some form of institutional design in the setting and enforcement of fossil fuel taxes that allows these sectors to gain exemptions.

    1. Thank you for your question! I would say that political power is mostly what allowed those sectors to gain exemptions. The agriculture lobbies are well organised and among the most powerful in France. They have exerted considerable influence over French governments since the late 50s. To a certain extent, their ability to get tax exemptions also has to do with the institutional mechanisms for passing such taxes: lobbies, with their social (with protests for instance) and political influence have the means to interfere and push for amendments during bill proposals. I hope it answers your question.

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