Climate policy design and the competitiveness of the French industry: A Computable General Equilibrium Analysis

The Intended Nationally Determined Contributions (INDCs) announced during the COP21 in Paris involve pursue with domestic climate policy implementation. However, globalization drives concerns about unilateral actions. In particular, preservation of the competitiveness of energy-intensive and trade-exposed (EITE) industries and the risk of carbon leakage in the case of asymmetric action still represent a barrier that must be lifted. Although the value-added of these industries represents a small fraction of the industrialized countries' GDP, their production remains highly strategic, and the power of industrial lobbies has proven to be decisive regarding any attempt to implement ambitious environmental taxation or quantitative control of greenhouse gas emissions. Depending on how the tax revenues are used, unilateral carbon tax represents a great potential of action to appropriately balance macroeconomic, equity and competitiveness concerns. Numerous studies, based on either partial equilibrium models or computable general equilibrium models (CGE), examined the impact of alternative policy design on competitiveness and leakage issues. One the one hand, partial equilibrium models bring high details on some keys EITE sectors (in particular cement and steel sectors) and use relevant empirical information to analyse specific competitiveness constraints facing by those sectors. On the other hand, CGE models often embark poor details on EITE sectors, as by representing the economic system in a more aggregated way. However, CGE models reveal all feedback effects on the economy, and therefore can be used to estimate both industry and economy-wide effectsThe paper proposes a method to keep benefits from both sectorial and general equilibrium analysis. This method has originally been developed to build a hybrid Input-Output Table (IOT) at a regional. The approach consists in combining economic and physical data from sectors analysis with monetary input-output data from national accounts within a consistent and comprehensive "hybrid" accounting system. We analyse the effects of a unilateral French carbon tax reform using a country-scale CGE model. In order to analyse disaggregation consequences, the model is calibrated either on IOT with aggregated mineral and metal sectors, or on an hybrid IOT which isolates cement from other minerals, and steel and iron from other metals. Finally, we proceed to comparative static exercises by implementing a unilateral carbon tax and compare the macroeconomic and distributive effects of policy options regarding the use of carbon tax revenues. The numerical results show that the macroeconomic outcomes of a carbon tax are very sensitive to policy design but much less to the level of sectorial description on which the model is calibrated. However, keeping aggregated heterogeneous industrial sectors can be misleading when exploring distributive consequences of a carbon price policy. Lowering the labour tax with the carbon tax revenue preserve most of economic activities, and leads to better macroeconomic outcomes. However, it is not enough to avoid important profitability losses for major industrial stakeholders. Some accompanying measures are expected to preserve these industries and to reconcile competitiveness issues with macroeconomic efficiency