Banque de France study finds medium-run macro costs for Fit-for-55 carbon tax
The Banque de France published a study assessing the medium-run macroeconomic effects of the Fit-for-55 carbon tax in France. The research indicates slower output growth and a temporary increase in inflation during the transition.
Modeling the transition's economic footprint
The Banque de France study employs a hybrid modeling strategy to assess the macroeconomic effects of the Fit-for-55 carbon tax in France.
It combines FR-GREEN, a new real dynamic general equilibrium model capturing structural energy transition changes, with FR-BDF, the usual nominal forecasting model for short-term inflation and demand dynamics.
This approach allows for a comprehensive analysis of both supply and non-supply effects.
Under the conservative assumption of no new clean technologies, the carbon tax is modeled to reach approximately €275 per tCO2e by 2030, leading to a 30% reduction in fossil fuel use.
The primary finding indicates a medium-run output growth reduction of 0.2 percentage point at its trough and a peak inflationary effect of 0.5 percentage point, mainly driven by real supply effects from the shift to less efficient clean technologies.
Long-term gains, medium-term pains
The research highlights the clear long-run benefits of climate transition policies, such as avoiding a 30% global GDP decrease by 2100 under inaction scenarios.
However, it focuses on the short and medium-run macroeconomic costs.
The European Union's Fit-for-55 package aims for a 55% reduction in greenhouse gas emissions by 2030 compared to 1990 levels, implying a further 30 percentage point cut for France.
This necessitates a major reallocation of capital, labor, and energy use.
The study's conservative assumption of no green technological innovation during the transition suggests that its findings on inflation and output loss should be considered an upper bound.
"The financial system faces a choice between manageable adjustment costs today and potentially severe disruption tomorrow," the authors conclude.
A necessary, yet costly, transition
This Banque de France study provides a crucial, albeit conservative, look at the immediate economic trade-offs of climate action.
While the long-term benefits are undeniable, policymakers must prepare for tangible medium-run costs in growth and inflation.
The findings underscore the importance of complementary monetary and fiscal policies to manage the transition effectively.