Carbon tax and substitution effects in the French industrial sector: an econometric assessment

Panel: Panel 5. Energy efficiency in industry

Authors:
Nicolas Blanc, ADEME (Agence de l’environnement et de la maîtrise de l’énergie), France
Gaël Callonnec, ADEME (Agence de l’environnement et de la maîtrise de l’énergie), France

Abstract

Within the political framework of the "Grenelle de l'environnement" in France, the French government is studying various fiscal measures to encourage actors to reduce CO ₂ emissions, among others a carbon tax on every fossil energy source. The efficiency of such a measure is directly linked to the price responsiveness of the actors concerned. In this paper, after a survey of the different possible forms for an energy demand function, we focus on the secondary sector of the French economy (after having removed the industrial sub-sectors concerned with double usage or non-energy use of fuels) and assess the likelihood of industrialists shifting from one energy source to another due to a change in the relative prices of different energy sources (coal, heavy fuel oil, heating oil, natural gas and electricity), besides the improvements in energy efficiency.

We conclude that with price variations of the magnitude that was observed between 1986 and 2004 the substitution effects remain low: industrialists were much more likely to improve the energy efficiency of their appliances and processes than to shift energy sources in response to a given increase in prices. Significant substitution effects, for example after applying a carbon tax, would probably only occur for greater price variations. However, the actors' response (interfuel substitution) to an increase in the price of coal is 5 to 10 times higher than for other energy sources. The study also gives us information about the speed at which industrialists adapt to variations in prices, and the results have already been used for the assessment of future fiscal measures in France.