FRENCH SERIOUS ABOUT CARBON TAX PROPOSAL

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TAGS: ETRD ECON EIND SENV PGOV WTRO FR
SUBJECT: FRENCH SERIOUS ABOUT CARBON TAX PROPOSAL


1.(SBU) Summary: In a November 13 speech before the GOF's
Inter-ministerial Committee on Sustainable Development, Prime
Minister de Villepin indicated that France would propose to its
European partners a "carbon tax," to be imposed on industrial
imports from countries that refuse to engage in the Kyoto process
beginning in 2012. Francois Bordes, climate change advisor to
France's environment minister, told Embassy on November 24 the
carbon tax idea was not new, and had been raised previously in
various EU fora. Bordes said French industry, notably cement, was
feeling the pinch of foreign competition as a result of EU CO2
emissions quotas instituted in 2005. The carbon tax would level the
playing field and encourage developing countries, as well as
apparently developed countries not adhering to Kyoto-like framework,
to engage on the climate change problem. End summary.


2. (U) In November 13 remarks to the GOF's Inter-ministerial
Committee on Sustainable Development, PM Dominique de Villepin
unveiled a series of measures to further France's "climate plan" in
combating global warming. Noting that the 2007 budget provided for
one billion euros in tax credits in support of energy efficiency
efforts, Villepin underscored the central role of fiscal incentives
and eco-taxes to France's strategy. He announced the creation of a
"coal tax" of 1.19 euros per megawatt hour of energy produced, as
well as new taxes on industrial pollution and waste, with receipts
earmarked for efforts to combat global warming. Villepin also said
France would work with its European partners to include the freight
transport market in Europe's CO2 quota scheme.


3. (U) But Villepin's proposal on carbon tax garnered the most
attention. The PM said that the climate change conference then
underway in Nairobi had showed how "certain countries" would be
tempted to refuse to engage in new efforts once the Kyoto protocol
expired in 2012. Europe must refuse to countenance "this form of
environmental dumping," Villepin said. France would study "together
with our European partners" the principle of imposing a carbon tax
on industrial imports from countries that refused to back the Kyoto
process after 2012. The GOF would make concrete proposals to its EU
partners in the first quarter of 2007.

Environment Ministry Says CO2 Quotas Hurting Industry
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4. (SBU) On November 24 Francois Bordes, climate advisor to Minister
of Environment Olin, told us that Villepin's carbon tax proposal had
not originated with the GOF. The idea had been considered by
various EU institutions, including the High Level Group on
Competitiveness, Energy and the Environment, for some time. French
(and European) industry -- in particular the cement sector -- had
lost market share to imports from China and Egypt as a result of the
EU CO2 emissions trading system (ETS) instituted in 2005. Given the
need to level the playing field, Villepin had engaged "very
diplomatically" by suggesting the tax be imposed only after 2012.



5. (SBU) The GOF would prepare a memo for European partners in early
2007, with France's Ministry of Finance, Economy and Industry taking
the lead in an interagency process that would flesh out the idea.
Bordes claimed Villepin's initial proposal had generated positive
feedback from EU Environment Commissioner Stavros Dimas, among
others, and said it was downright modest compared to Swiss President
Moritz Leuenberger's call for a global CO2 tax.


6. (SBU) In response to probing, Bordes said a Cambridge University
study had indicated that a carbon tax could be instituted in a
WTO-consistent manner. (Comment: We assume he refers to Ismer and
Neuhoff in Cambridge Working Papers in Economics CWPE 0409. End
comment.) That view was shared by environmental economist Olivier
Godard of the French National Center for Scientific Research (CNRS),
who would play a role in designing the French proposal. In the
course of conversation on U.S. efforts on climate change technology,
and the various paths to lowering CO2 emissions, Bordes said the
real challenges for the future -- and the target of the French
initiative -- were China and other emerging economies.


7. (SBU) Comment: We find little statistical evidence to date that
would back up Bordes' claims that cement firms have lost market
share to imports as a result of ETS. However, many economists
believe that cement -- among other energy-intensive industries --
may be particularly prone to import competition as firms factor the
opportunity cost of carbon into production process decisions, and
ultimately raise prices. Although Europe's ETS may not yet have
proven itself, comments from Elysee advisors and others indicate the
GOF is clearly serious about following through on the PM's proposal.
We will follow this closely as the GOF fleshes out its views.

STAPLETON