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REDISTRIBUTION,

INNOVATION,

COMBATTING

CLIMATE CHANGE:

THREE MAJOR

FISCAL CHALLENGES

IN THE AFTERMATH

OF THE PANDEMIC

Summary

February 2022

prélèvements

obligatoires

conseil des

Summary - Council of Mandatory Contributions

NOTICE

This document is intended to facilitate the reading and use of the

report by the Council of Mandatory Contributions.

Both the general report and the special reports are made public

and can be viewed on the website www.ccomptes.fr/CPO.

Only the text of the report is binding on the Council of Mandatory

Contributions.

Summary - Council of Mandatory Contributions

Contents

Introduction

Clarifying the debate on the redistributive effects

. . . . . . . . .

of compulsory levies

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Improving the effectiveness of innovation taxation

. . . . . . . .

Fostering consent to energy taxation

. . . . . . . . . . . . . . . . . . .

Conclusion .

Summary - Council of Mandatory Contributions

Introduction

This report attempts to draw the first fiscal lessons from a crisis that

has not yet come to an end. The Covid-19 pandemic, which broke out

in China at the end of 2019 before spreading to the rest of the world,

continues to take its toll on economies and societies. Although it is on

its way out, this crisis will leave deep marks on the global economy.

Firstly, the scale of the budgetary efforts made to cushion the effects

has led to an unprecedented increase in public debt. In addition,

the disorganisation of production resulting from the pandemic has led

to supply shortages, which have severely constrained supply in certain

sectors (electronics, automotive, etc.), contributing to the resurgence

of inflation. Lastly, the crisis has accelerated economic and societal

changes, some of which had been under way for several years but were

not yet very visible: a turning point in the awareness of environmental

challenges, the rise of remote work and the return of concerns about

the location of productive activities, particularly when they contribute

to establishing or regaining economic sovereignty.

In this context, tax policy, without being exclusive of other instruments

such as public expenditure or regulation, will play a decisive role in the

years to come. In this report, the Council of Mandatory Contributions

(

Conseil des prélèvements obligatoires

– CPO) has chosen to focus

three challenges that it considers crucial in the context of

exiting the crisis: social and territorial inequalities, innovation

and environment

. The common thread among the three subjects

selected by the CPO is that they are directly in the field of action of

fiscal policies: taxation is a key instrument of redistribution, whether

in terms of income or wealth; innovation is the subject of numerous

tax incentives, the most important of which is the research tax credit,

a tax expenditure whose burden to the central government budget

amounts to over €6bn, nearly twice the budget of the National Centre

for Scientific Research (CNRS); lastly, taxation is at the heart of

policies aimed at limiting climate change, by implementing a system

of incentives designed to limit carbon emissions and encourage the

use of alternative energy sources.

Summary - Council of Mandatory Contributions

Clarifying the debate

on the redistributive effects

of compulsory levies

Redistribution: a key function

of government finances

Inequality has become a major topic

of public debate in recent decades.

All opinion polls confirm the rise

in concerns over the distribution

of income and wealth. However,

the inequalities that French people

feel today do not just concern

income or wealth. They are increas-

ingly encompassing the country:

the metropolisation movement that

has characterised recent decades

have also led to a decline in the

attractiveness of other parts of the

country, in both rural and suburban

areas, sometimes fuelling a feeling

of relegation. To deal with this

development, the public authorities

have tools for taking action.

Public expenditure and revenue

have redistributive properties: they

modify the primary distribution of

income and wealth, depending on

Key

Category

Breakdown before and after transfers, for 2018

1 Rural cities

2. < 20,000 inhab.

3. 20 - 20,000 inhab.

4. > 20,000 inhab.

5. Paris

Individual in kind social

payments

Monetary social benefits

Net national revenue before

transfers

Levies on production

and consumption

Collective expenditure and

consumption of fixed capital

of which pensions

Income and wealth tax

Social security contributions

Euros per CU

-30,000

30,000

60,000

Note: Consumption of fixed capital (CCF) measures the investments necessary to

reconstitute capital (in this case, public assets).

Sources: 2018 distributed national accounts (ERFS, Ines-Omar, SNDS, DADS, Fidéli)

Summary - Council of Mandatory Contributions

Clarifying the debate on the redistributive

effects of taxes

Informing the democratic

debate on the redistributive

role of public budgets

It is not the CPO's role to issue audit

recommendations on the correct

level of redistribution implemented

by public budgets, which is a policy

choice. Conversely, the CPO's mission

is to shed light on the conditions

under which public choices are

made concerning the redistribution

of compulsory levies.

This is why the guidelines it has

adopted aim to improve the quality

of the available information on the

distribution of levies and, above

all, to better inform decisions on

redistribution choices by improving

knowledge of the various instru-

ments' redistributive impact.

Accordingly, the CPO makes the

following audit recommendations:

• Audit recommendation 1:

sup-

plement the tax data available

to researchers, particularly with

regard to the taxation of wealth

and inheritance.

• Audit recommendation 2:

make

the redistribution indicators of

the social and fiscal system as

a whole available to Parliament

on a regular basis, in order to

provide an objective basis for the

debate on redistribution and the

means to advance it; the CPO will

contribute to this information

by periodically publishing infor-

mation on the redistribution of

public budgets.

Summary - Council of Mandatory Contributions

Improving the effectiveness

of innovation taxation

Innovation is undoubtedly one of the

main economic challenges as we exit

the crisis. According to the INSEE,

it refers to the introduction onto the

market of a new product or process,

or one that is significantly improved

compared to those previously devel-

oped. This concept is distinguished

from

research

and

development

(R&D) by the requirement of being

aligned with a market and by the

existence of innovations in use that

are not purely scientific and technical.

Due to the positive externalities

that characterise innovative activi-

ties – where the return to society is

greater than the private return to

the originator –, governments seek

to implement public policies to sup-

port and accelerate them. Taxation

is one of the instruments to achieve

this: for example, Germany adopted

a research tax credit at a federal level

in November 2019, joining France

and several other European coun-

tries that had already implemented

this type of system. The pandemic

has reinforced this trend, emphasis-

ing the need to preserve an effective

innovation ecosystem capable of

rapidly fostering the emergence

innovations

meeting

societal

needs that are sometimes diffi

cult

to anticipate. In this context, the key

question is how to improve both the

effectiveness and effi

ciency of inno-

vation taxation in France.

Graph 4: Domestic R&D expenditure in OECD countries in 2019 (as % of GDP)

Mexico

Colombia

Chile

Latvia

Slovakia

Lithuania

Turkey

Luxembourg

Ireland

Spain

Greece

Poland

Portugal

New Zealand

Italy

Hungary

Canada

Estonia

United Kingdom

Australia

Czech Republic

Slovenia

Norway

Netherlands

France

Iceland

OECD

Finland

Denmark

United States

Austria

Belgium

Switzerland

Germany

Japan

Sweden

Korea

Israel

0.3

0.4

0.6

0.8

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.8

1.9

2.1

2.2

2.3

2.5

2.8

2.9

3.1

3.2

3.4

4.6

4.9

Source: OECD, 2021, Gross Domestic Expenditure on R&D (indicator)

This chapter draws in particular on the special report "Innovation taxation: improving the

effectiveness of existing systems, continuing their assessment", written for the CPO by Antoine

Comte-Bellot, auditor at the Court of Accounts, and Louis de Crevoisier, finance inspector.

This report can be found at the following link: https://www.ccomptes.fr/sites/default/files/2022-

02/20220209-rapport-particulier-fiscalite-innovation.pdf

Summary - Council of Mandatory Contributions

Improving the effectiveness

of innovation taxation

High-level research

but a persistently weak

innovation system

According to OECD data, France

spent 2.2% of its gross domestic

product (GDP) on R&D in 2019,

giving domestic expenditure on

research and development (GERD)

of €53.2bn, putting it in 13th place

in the OECD and above the EU-27

average (2.12%).

This research effort is reflected in

an innovation activity that ranks

France slightly above the European

average in this area, as shown by

the European Innovation Score-

board for 2021 published by the

European Commission. Although

France is one of the "strong innova-

tors", it is behind the four European

"innovation

leaders"

(Sweden,

Finland, Denmark and Belgium) and

behind five other countries in the

same category (the Netherlands,

Germany,

Luxembourg,

Austria

and Estonia).

However, the French innovation

system is characterised by per-

sistent

weaknesses,

particularly

in terms of non-R&D innovation

expenditure, links between research

Graph 5: Performance of EU Member States' innovation systems

EMERGING INNOVATORS

MODERATE INNOVATORS

STRONG INNOVATORS

INNOVATION LEADERS

2014

2020

Reading note: The dotted lines indicate the threshold values between the performance

groups, with the threshold values of 70%, 100% and 125% adjusted upwards to reflect

the increase in EU performance between 2014 and 2021.

Source: "European Innovation Scoreboard, Main Report", June 2021, p. 16

Summary - Council of Mandatory Contributions

and industry and patent production

in certain technology sectors.

In this respect, in terms of the number

of triadic patents

per million inhabit-

ants, France fell from 6th place in

1995 to 10th place in 1999, before

stabilising until 2009, then falling

again to 15th place in 2015.

These difficulties reflect French

industry's declining share of GDP

inadequacy of technology innova-

tions in all sectors and systemic

weakness in the mechanisms for

promoting public research, which

the reforms of the last decade have

not managed to erase.

Although there are

many tax incentives for

research and innovation,

their sharply rising cost

for government finances

is concentrated on the

research tax credit (CIR)

Tax incentives' share of innovation

support has significantly increased

over the last two decades. A 2016

France

Stratégie

report

high-

lighted that it had risen from 16.5%

Triadic patent families are a set of patents filed with three main offices, namely the European

Patent Office (EPO), the Japanese Patent Office (JPO) and the United States Patent and

Trademark Office (USPTO). Triadic patent family counts are attributed to the country of

residence of the inventor and refer to the date on which the patent was first registered.

This indicator is stated by volume (source: OECD).

Industry's share of French GDP (17.1% in 2019 according to the World Bank definition) is lower

than in Germany (26.2%), the US (18.2%) and the OECD average (22.4%).

Table 1: Change in the resources of central government and its operators

to foster innovation by financing method

Modalities

2000

Share in %

2015

Share in %

Change (%)

Tax

incentives

584

16.5

6,341

74.2

+ 810

Subsidies

2,854

80.9

1,636

19.2

- 52

Loans

0.0

198

2.3

Shareholdings

2.6

376

4.4

+ 246

Total

3,529 .3

100 .0

8,551

100 .0

+ 103

Source: CNEPI, 2015

Summary - Council of Mandatory Contributions

Improving the effectiveness

of innovation taxation

of total innovation support in 2000

to 74.5% in 2015. This share has

since stabilised.

This development is the result of

both economic and legal consid-

erations – the search for greater

neutrality in innovation support

schemes to comply with the central

government aid system and avoid

interfering with the functioning of

the market – and budgetary consid-

erations – tax credits having been

subject to less restrictive standards

in the preparation of the central

government budget than those

that apply to expenditure trends.

The overview of tax incentives

leads us to estimate their amount

at nearly €7.4bn in 2019. The CIR

represents 86% of this amount.

However, the expenditure taken

into account for the CIR does not

specifically

support

innovation

expenditure, concerning instead the

broader set of beneficiary compa-

nies' research expenditure. Support

more targeted at innovation (such

as the Young Innovative Businesses

Graph 6: Direct and indirect public funding of business R&D

(as % of GDP)

0.50

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00

Sub-national fiscal support for GERD

Tax incentive for GERD

Direct funding of GERD

Note: * Data on fiscal support not available; ** Data on sub-national fiscal support

not available.

Source: OECD R&D Tax Incentive Database, March 2021; CPO calculations

CNEPI and France Stratégie, 2016, "Fifteen years of innovation policies in France".

Summary - Council of Mandatory Contributions

(

Jeunes entreprises innovantes

– JEI)

scheme) represents much smaller

amounts.

Although France is not the only coun-

try to use tax incentives to support

innovation, it has the highest amounts

of incentives (R&D tax incentives

represent 0.29% of GDP, compared

with an OECD average of 0.1%).

Assessments that indicate

the need for an adaptation

of tax incentives for R&D

and innovation

The need to adapt tax incentives

for innovation is based both on

assessments of these tax measures

and efforts already made to reduce

corporate taxation.

Effectiveness of the CIR can still

be improved

Assessments of the CIR conducted

under the guidance of the National

Commission for the Evaluation of

Innovation Policies (CNEPI) con-

clude that the overall effectiveness

of the system is limited. Firstly,

they highlight

some positive effects

of the system. As such, the CIR

prompts businesses to increase

their level of R&D expenditure by

an amount roughly equivalent to

the

additional

tax

expenditure,

i.e. a knock-on effect of around 1.

Graph 7: R&D conducted abroad by foreign subsidiaries of US groups,

by region and by selected countries (in millions of US dollars 2010)

2000

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2005

2010

2015

China

United

Kingdom

Rest

of Asia

Germany

Least

developed

countries

Rest

of Europe

France

Latin

America

Japan

Source: EU Industrial R&D Investment Scoreboard, NEOMA-BS 2021 study

CNEPI, 2019, "The impact of the research tax credit".

Summary - Council of Mandatory Contributions

Improving the effectiveness

of innovation taxation

However, empirical studies con-

ducted by the OECD indicate that

this knock-on effect is greater for

small and medium-sized enterprises

(SMEs) than for large groups

According to these same assess-

ments

, the 2008 reform of the CIR

had positive effects on innovation

variables (such as the employ-

ment of engineers and the filing

of patents) and activity variables

(such as an increase in investment

or revenue) that only concern SMEs.

Conversely, the available data show

that the effects of the CIR have not

been suffi

cient to reverse France's

loss of attractiveness as a location

for foreign multinationals' R&D

Similarly, while

French

multina-

tionals have increased their R&D

expenditure

over

the

last

two

decades, they have done so at

a slower pace than the major OECD

countries.

In short, although they need to be

supplemented, the existing assess-

ments highlight the fact that the

effectiveness of the CIR can still be

improved.

OECD, 2020, "How effective are tax incentives for R&D? New evidence from the OECD

microBeRD project": the knock-on effect of tax credits for R&D expenditure is 0.4 for large

businesses, 1 for medium-sized businesses and 1.4 for small businesses.

L. Bach et al., 2021, "The impact of the research tax credit on the economic performance of

businesses", IPP Report no. 33.

S. Lhuillery et al. (2021) "French companies' R&D and the CIR", NEOMA BS workpaper.

Graph 7: Change in amounts spent on R&D by groups that invest the most in R&D,

by country (base 100 in 2005)

France

Sweden

Germany

Switzerland

Japan

United Kingdom

Netherlands

United States

South Korea

World

Source: EU Industrial R&D Investment Scoreboard, NEOMA-BS 2021 study

Summary - Council of Mandatory Contributions

The uncertain effectiveness of

other tax measures to support

innovation

With the exception of the CIR,

which was assessed in two phases

over five years by the National

Commission for the Evaluation of

Innovation Policies (CNEPI) using

microeconometric methods, recent

assessments of tax incentives for

innovation remain limited. Therefore:

• reduced taxation of income from

certain industrial property assets:

the French

"patent box" scheme

has

still

not

been

extensively

assessed,

despite

its

significant

amount (€586m in 2019) and the

fact that it is the second largest

tax

incentive

for

innovation

France by volume. Given that this

tax system was revised in 2019,

its assessment should be a priority.

As was the case with the CIR, the

assessment should focus on its

additional character, as well as

its direct impact on innovation,

through the quantity and quality of

the patents concerned;

• the JEI scheme

: assessments of

the JEI tax scheme have focused

on its effect on R&D employment,

but have not sought to measure its

impact on innovation;

• the exceptional deduction in favour

of SME investment in robotics and

digitisation

: the tax expenditure

assessment programme presented

in the PLF for 2020 provided for

the assessment in 2020 of the

exceptional deduction in favour of

SME investment in robotics and

industrial digitisation. This was not

the case.

Reviewing tax incentives

for innovation in terms

of efficiency, assessment

and steering

The review of fiscal instruments

related to support for R&D and

innovation should take into account

the need to step up technological

innovation across all sectors of the

economy to contend with climate

change and digital transformation.

The OECD estimates that $6.9 trillion

per year in green investment will

be needed worldwide over the next

15 years, a 10% increase on current

infrastructure

investment

flows.

In 2018, the European Commission

estimated that between €175bn and

€290bn per year would be needed

over

the

2030-2050

period

Europe to achieve carbon neutrality

by 2050. The report by France's

Ministry for Ecological Transition on

the national low-carbon strategy in

2020 put the additional investment

cost to be borne at nearly 2.5% of

GDP for all sectors combined.

In addition to this effort, the chal-

lenges of digital transformation

need to be taken into account. In

this respect, the degree of digiti-

sation of French businesses

comparable to that observed in

Summary - Council of Mandatory Contributions

Improving the effectiveness

of innovation taxation

Europe, both in terms of so-called

mature

digital

tools

(manage-

ment software, automated invoice

processing) and emerging technol-

ogies (cloud computing, mass data,

artificial intelligence).

Accordingly, the CPO presents the

following audit recommendations:

• Recommendation 3

: Include the

reform of the CIR and tax incentives

to support innovation in an overall

review of ways to strengthen the

innovation efforts of French busi-

nesses to contend with the dual

ecological and digital revolution.

• Recommendation 4

: Initiate a

reduction in the current cap on

the CIR.

The CPO favours a stricter progres-

sive cap on the CIR for the following

reasons: the context of the reduction

in the nominal rate of corporation

tax, which is already reducing the

intensity of this tax incentive; the

fact that all OECD countries that

have introduced a CIR have opted for

a cap that is much lower than the one

in effect in France (€4m in Germany

for example); the concern to give

priority to the stability of incen-

tives and to not alter a system that

remains, despite its limited effec-

tiveness, a tax attractiveness factor

for France. This scenario should be

accompanied by an adaptation of the

rules on central government aid, in

particular EU Regulation 1407-2013,

known as the de minimis regula-

tion

, to enable all stakeholders to

participate in the research and inno-

vation effort.

• Recommendation 5

: Extend the

JEI scheme to eligible expenses

for

the

innovation

tax

credit

(

crédit d’impôt innovation

– CII),

by eliminating the tax expenditure

associated with this scheme.

• Recommendation 6

: Integrate tax

incentives into the overall manage-

ment of innovation policy by setting

up a tool for monitoring public aid

for innovation and by using the Data

Hub project of the Directorate Gen-

eral for Enterprise (DGE) for central

government aid.

• Recommendation 7

: Ensure sys-

tematic assessment of the main

tax incentives for innovation (CIR,

reduced rate of taxation on income

from

certain

industrial

property

assets, JEI, exceptional deduction

for SME investment in robotics)

at intervals to be defined, based on

the

capital

taxation

assessment

model, which since 2018 has been

entrusted to a specialised commit-

tee attached to France Stratégie.

See Trésor Éco note no.271 – November 2020 – Digitisation of French businesses.

This European regulation limits to €200,000 over a three-year period public aid that is paid to

businesses and is not subject to prior authorisation by the European Commission. It is in force

until 31 December 2023.

Summary - Council of Mandatory Contributions

Fostering consent

to energy taxation

Ecology taxation includes all taxes

and charges based on a pollutant

or, more generally, on a product or

service that damages the environ-

ment. As such, it applies to actions

that

generate

environmental

damage: climate change, pollution,

consumption of scarce resources,

waste, etc. By making them more

expensive, it helps to limit pollu-

tion and environmental damage

and therefore represents a way

to modify the behaviour of stake-

holders, in accordance with the

"polluter pays" principle.

Few environmental policy instru-

ments seem to attract as much

resistance today as environmental

taxation. The two most unusual

social movements – and the most

costly for government finances –

of the 2010 decade in France,

namely the Red Caps in 2013 and

the Yellow Vests in 2018, mobilised

unprecedented forms of protest

with the aim of blocking environ-

mental taxes, the ecotax for heavy

goods vehicles in the former case

and the taxes that enter into the

price of fuel at the pump in the

latter, although these were not the

only reasons for these movements.

This lack of acceptance of energy

taxes is all the more interesting to

observe because it contradicts the

main tool promoted by economists

to combat greenhouse gas emis-

sions: the price of carbon, of which

the carbon tax is one of the two

main forms, along with emissions

quota trading schemes. This para-

doxical situation prompted the CPO,

without returning to the conclu-

sions of its September 2019 report

entitled

Environmental taxation and

the climate change challenge

, which

it still considers relevant, to look at

ways of making it more acceptable

to tax payers.

Three hurdles to the

acceptance of ecology

taxation in France

The freeze on the carbon component

of domestic consumption taxes

its

2018

level

(€44.6/tCO

)

since the Yellow Vests movement

is a major setback to the public

authorities' ambitions for incentive-

based energy taxation. Three years

after this freeze decision, several

blocking factors have been clearly

identified and explain why 2022 is

ultimately not the year of a switch

This chapter is based on the special report "Consent to environmental taxation" written for

the CPO by Jonas Anne-Braun, finance inspector, and Tristan Guesdon, intern, student at the

ENS (Paris), as well as on elements from an article, taken from this special report and written by

the same authors, entitled "Can energy taxation become acceptable?", no. 176, OFCE Review,

February 2022.

The special report can be found at the following link: https://www.ccomptes.fr/sites/default/

files/2022-02/20220209-rapport-particulier-consentement-fiscalite-environnementale.pdf

The article can be found at the following link: https://www.ofce.sciences-po.fr/pdf/revue/02-

176OFCE.pdf.

Summary - Council of Mandatory Contributions

Fostering consent to energy taxation

to a carbon tax of €86.2/tCO

planned in the 2018 Budget Act

The diffi

culties surrounding the

acceptance of environmental taxa-

tion have their roots in our country's

long history, and in particular

the

traditional unpopularity of indi-

rect taxes and duties

, among which

excise duties on energy are now in

second place after VAT. An interna-

tional comparison shows that rather

than being an isolated case, this

situation is instead the expression

of the long-standing unpopularity

of energy taxation shared through-

out the world.

second

well-identified

reason

for blocking an increase in energy

taxation is the

socio-spatial differ-

entiation of its impacts

. As such,

household location is usually put

forward as the main explanation

for the inconsistency in energy's

share of household budgets due to

its impact on transport times and

heating methods.

The analysis of the impact of place

of residence combined with the

analysis of income level has led

some

authors to

highlight the

existence of "energy prisoners",

a category of tax payers who are

Graph 9: Bills, energy effort rate and energy tax effort rate according

to household area of residence

20.0

effort rate as % of total household income

Housing bill incl. tax

Transport bill incl. tax

Residential area

Paris urban unit

(17%)

Urban unit with

200,000 to 1,999,999

inhabitants (25%)

Urban unit with

20,000 to 200,000

inhabitants (19%)

Urban unit with

fewer than 20,000

inhabitants (18%)

Rural city

(22%)

bills, in €

Average total energy effort rate

Energy taxation effort rate (including VAT)

4.5

3.9

3.5

3.3

2.1

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.8

7.1

7.7

8.3

9.4

4.0

2.0

0.0

Source: CPO (2019) based on the Promotheus model (MTES-CGDD,

updated 2017, January 2019 prices and legislation, 2018 income).

The threshold to cross was very high: the increase was €14.1 per tonne in 2018 followed by an

annual increase of €10.1 per tonne until 2022. The ambition to reach the €100 threshold in 2030

became more credible. In addition, there was a diesel-petrol catch-up. However, the impact assess-

ment did not base the increase in the carbon trajectory on a strengthening of the climate objectives,

but rather on a performance objective. The revenue surplus was put at over €15bn by 2022.

Summary - Council of Mandatory Contributions

highly dependent on energy, both

because of their modest social

position and their constrained resi-

dential situation. The Yellow Vests

crisis provided ample validation

for this analysis by creating polit-

ical visibility for this category of

the population, mainly comprised

of socially modest and geographi-

cally remote workers, for whom an

increase in energy taxation would

necessarily lead to an erosion of

purchasing

power,

rather

than

a reduction in the use of carbon-

based energy.

A third obstacle is the ambiguity of

the objectives pursued by environ-

mental taxation, between budgetary

performance and changing house-

hold behaviour. From the viewpoint

of tax payers' acceptance of energy

taxation, however, the dual func-

tion of an incentive tax such as

the carbon tax represents more of

a threat than an opportunity: the

accusation of a performance func-

tion can emerge very easily, and the

lack of convincing communication

on the use of the revenue generated

is likely to seriously compromise

the acceptance of the instrument by

giving substance to this accusation

and implying that the performance

function is primary.

The conditions for acceptable

energy taxation: three choices

to be made

Rather than being technical issues,

the parameters that determine the

design of energy taxation are funda-

mental policy choices that have not

always been properly highlighted

in the past. These policy choices

are essentially threefold: an energy

efficiency objective in addition to

a decarbonisation objective, the type

of allocation of environmental tax

revenues and the degree of uni-

formity of the carbon price across

sectors and products.

Increase the price of energy

overall or only the price of certain

types of energy?

The first dilemma concerns the very

nature of the energy taxation that

central governments want: should

energy

taxation

conceived

primarily as a tool affecting the

relative prices of energy sources to

create a switch, or also as a tool to

increase energy prices as a whole?

Sweden

offers

example

a strategy based on both a sharp

increase in the carbon tax and

the introduction of alternatives to

carbon-based energy. As a result,

it has a carbon pricing system

that is unparalleled so far. While

France set the carbon compo-

nent rate at €44.6/tCO

, Sweden

moved to a non-dispensation rate

of €120/tCO

. However, care needs

to be taken not to attribute all of

the credit for Sweden's climate

successes

taxation

alone:

because the public authorities were

able to make significant green invest-

ments further up the line, offering

Summary - Council of Mandatory Contributions

Fostering consent to energy taxation

concrete alternatives to carbon-

based consumption, the price signal

from taxation influenced consumer

choices, all the more easily because

they had access to untaxed alter-

natives. The case of the district

heating networks in which Sweden

invested hugely at the time of the

"green tax shift", and which were

promoted as alternatives to individual

heating, is a good example of this

approach

Alongside this model of taxation

aimed primarily at creating a clear

difference in price between carbon-

based and decarbonised energies,

there is a separate vision, at work in

France and in the European frame-

work of energy taxation, inspired

by the goal of

energy efficiency

The idea is that the role of energy

taxation is to limit the develop-

ment of economic structures overly

dependent on energy in general

and

not

just

carbon-based

energies,

promoting

energy-

efficient

production

methods.

The term energy efficiency is used

in the "energy taxation" directive

2003/87/EC, which sets legal floors

for the various energy excise duties

applied in the EU.

choosing

increase

the

carbon component according to

an ambitious trajectory without

significantly lowering other energy

taxes, France has implicitly chosen

an energy efficiency goal with an

increase in absolute prices, in addi-

tion to a decarbonisation goal that

plays on the relative prices between

energies. At first sight, this choice,

which in principle is more painful

for tax payers, may appear to be an

explanation for the failure of the

tax

However, its relevance seems

to remain intact for at least two

fundamental reasons:

• The first is that energy efficiency

is perhaps more than ever an

essential preparation for adapting

to a world transformed by climate

change;

• the second reason is that the

introduction of a switchover tax

between energy sources means

explicitly

designating

which

energies will be promoted by

tax cuts, at the risk of making

environmental mistakes. This is

the significance of the debates

about the ecological character

of electric cars, biofuels and even

nuclear power.

The Swedish and Icelandic experi-

ences therefore show the greater

acceptability

taxation

that

differentiates

between

energies,

as long as alternatives exist, even

though the objective of energy

efficiency – which is less socially

acceptable – would appear to have

the advantage of more effectively

planning

ahead

for

energy

uncertain future.

Pottier, A., 2016, How economists are heating up the planet, Seuil.

Summary - Council of Mandatory Contributions

Should the tax revenues from envi-

ronmental taxation be allocated to

"green" investments or to offsetting

the loss of purchasing power among

those on the lowest incomes?

International

comparisons

con-

ducted by the CPO show that

proper governance of the use (or

"recycling") of carbon tax revenues

is a condition that can significantly

improve

its

acceptance

tax

payers. The range of possible uses

of revenues is very wide, as shown

by the diverse foreign experiences

in this area. However, a pivotal

alternative is emerging: the choice

between

allocating

revenue

expenditure aimed at accelerating

the ecological transition and allo-

cating it to a mechanism to offset

losses in purchasing power, in the

case of households, or competi-

tiveness, in the case of businesses.

However, France is lagging behind

in this area since, with the excep-

tion of the energy transition special

appropriation account, which con-

stituted a variation of the first type

of recycling but was abolished on

1 January 2021, there is currently

no explicit system for recycling

energy tax revenues in France.

Differentiated or uniform carbon

taxation?

The French carbon component of

domestic consumption taxes has

many exemptions and reduced rates

depending on the type of energy

product consumed and the contrib-

uting sector, which reflects the

overall situation of energy taxation

in Europe. The role of these reduced

rates and exemptions is ambiguous,

due to their dual effect: by distancing

the carbon tax from an ideal of

uniformity, they can contribute to

a feeling of injustice and inefficiency,

but by specifically reducing the tax

burden for certain stakeholders they

can be a driver of acceptance and

reducing opposition.

Most

economists

believe

that

the low consistency in the distri-

bution of effort is an obstacle to

the acceptability of environmen-

tal taxation, in addition to being

a source of ecological inefficiency:

the uniformity of carbon prices is

implicitly set up as a standard of

justice. However, there is evidence

that not all price differences are

perceived as unfair by tax payers.

On the contrary, in certain limited

cases

and

provided

they

are

justified, the possibilities for exemp-

tions can be a help rather than

a hindrance to the acceptability

of a tax. As such, while the objec-

tive of a uniform carbon tax must

remain an objective, duly justified

adjustments can be introduced on

a transitional basis in certain cases,

in order to remove political oppo-

sition to incentive energy taxation,

thereby creating the conditions for

greater acceptability.

Summary - Council of Mandatory Contributions

Fostering consent to energy taxation

The conditions for

implementing an acceptable

energy tax: three drivers

Given the scale of climate change,

the question is no longer so much

the relevance of environmental tax-

ation as the forms it should take in

order to be effective and accepted

by a large majority of tax payers.

To do this, it is necessary to:

• remove some of the obstacles by

redirecting some of our environ-

mental taxation tools towards

more acceptable instruments;

• create

instruments

that

are

consistent with the socio-fiscal

system and other environmental

policy instruments. In other words,

the creation of viable alternatives

to carbon-based energy sources

and public investment in large-

scale emission reduction plans

ultimately appear to be the main

conditions for the acceptability

incentive

energy

taxation.

Strong energy taxation is neces-

sary, but not sufficient, condition

for reducing our greenhouse gas

emissions;

• create new instruments, adapted

to a globalised economy, notably

by supporting the introduction of

a carbon tax at the EU's borders.

Ultimately, the CPO makes the

following audit recommendations:

To remove the barriers to acceptance

of environmental taxation:

• Audit recommendation 8:

Allo-

cate environmental tax revenues

to redistributive mechanisms and

green investments, promoting the

creation of alternatives to the use

of taxed products and activities.

To ensure the credibility and coher-

ence of environmental taxation:

• Audit recommendation 9:

Link

environmental taxation with envi-

ronmental policy as a whole and

ensure in particular that alterna-

tives favourable to the ecological

transition are developed (research,

innovation, investment, etc.);

• Audit recommendation 10:

Set

objectives for changes in environ-

mental taxation within a predictable

and credible trajectory;

• Audit recommendation 11:

Ensure

consistency

between

environ-

mental tax measures and other

compulsory levies.

To level the environmental playing

field in a globalised economy:

• Audit recommendation 12:

support,

at a European level, negotiations on

energy taxation and the creation of

a border adjustment mechanism.

Summary - Council of Mandatory Contributions

Conclusion

While the outcome of the pan-

demic is still uncertain at the

beginning

2022,

can

already say that the economic

policy challenges will gradually

shift in the near future from the

emergency measures that have

characterised the last two years

to more structural measures

aimed not only at sustaining the

growth potential of the economy,

but also at improving the quality

of growth, making it more inclu-

sive and compatible with the

energy and digital transition.

This report has identified three

main areas of tax policy that

are relevant to the challenges

around exiting the crisis:

- clarifying the redistributive

effects of compulsory levies;

- improving the effectiveness

of innovation taxation for com-

petitiveness and sovereignty;

- fostering consent to energy

taxation.

These three topics are bound to

be among the major tax debates

of the next decade. The audit

recommendations made by the

CPO in this report are intended

to inform these choices without

encroaching

the

political

arena. Indeed, taxation is, through

and through, the place where

policy choices are made: these

concern the desirable level of

public

revenue

and

expendi-

ture, the nature of the incentives

to address to households and

businesses, and the level of

redistribution implemented by

budgets. While it is not the CPO's

role to give a verdict on these

choices, it does have the mission

of identifying the most effective

instruments for achieving cer-

tain objectives and of pointing

out certain clearly ineffective

measures.

Informing the debate on compul-

sory levies in the medium to long

term, as the CPO is mandated to

do, also involves reiterating some

fundamental principles of good

fiscal governance. Therefore:

the

analysis

compul-

sory levies cannot take place

without taking into account the

expenditure they finance;

- the different types of levies

should have a clearly stated

main objective, against which

their results should be assessed;

- tax expenditure should be

regularly assessed and, most

importantly,

the

results

these assessments should be

acted upon;

Summary - Council of Mandatory Contributions

in this

post-crisis

period,

where

government

finances

will continue to be under pres-

sure for a long time to come

and taxes will remain at a high

level, it is more important than

ever to be concerned about the

quality of tax acceptance;

- lastly, predictability remains

an essential quality of any

tax policy. In this respect, the

practice at work in France,

which results in a high degree

of instability in the tax stand-

ard, appears less favourable

than that of many of its part-

ners, particularly those whose

institutional practice subjects

major tax reforms to negoti-

ations conducted as part of

coalition

agreements

that

enable households and busi-

nesses to anticipate upcoming

changes in tax rules during

a legislature.

It is therefore important to make

tax consent the fundamental

value of the social contract,

while

firmly

defending

our

fundamental economic interests

in European and international

negotiations.