Economic Policies for Affordable, Secure and Clean Energy. Insights from France

The Council on Economic Policies is convening a series of roundtable discussions to explore the prospects and obstacles of fostering a sustainable energy future. The aim is also to build a global community of experts driving progress and seizing synergies across G20 countries. The first roundtable held in Paris in March 2024 identified key insights on fiscal policies and regulatory measures in support of a sustainable energy transformation in France. The following blog provides key take-aways from this first roundtable. A more detailed policy brief is available HERE.

Over the past decades, successive French governments have reformed the country’s energy sector, with notable achievements in maintaining affordable access, ensuring supply security, and reducing carbon emissions. However, the energy crisis triggered by Russia’s invasion of Ukraine in 2022-23 has underscored the imperative for a thorough revision of France’s energy strategy. The convergence of soaring hydrocarbon prices, aging nuclear plants, and hydroelectric facilities grappling with water scarcity has created a formidable challenge. To tackle this challenge, France needs to revamp various fiscal and regulatory policies.

Moving toward electrification

To move toward the electrification of energy uses, France needs to make large-scale investments in its electricity system. Building new nuclear plants, tripling renewables, connecting numerous small-scale power producers, and strengthening the grid will cost hundreds of billions of euros. While public guarantees and subsidized interest rates can significantly reduce financing costs, other options are also available. Contracts for difference, which provide predictable returns to private investors, can play a key role. Creating a more integrated EU electricity market could also drive down costs, e.g., by eliminating duplicate backup facilities.

Reflecting carbon content in energy taxes

France’s energy taxes generate significant government revenue, but their current structure creates distortions that hinder decarbonization efforts. For instance, taxes on electricity are higher than taxes on natural gas, which discourages switching from gas boilers to energy-efficient heat pumps. Various tax expenditures benefit fossil fuel users in sectors like agriculture, road freight and aviation – further slowing the transition to cleaner energy sources. A simple and transparent solution is to implement a tax system reflecting the greenhouse gas content of energy sources. This policy, in the context of reforming the EU Energy Taxation Directive, would strongly promote electrification.

E-mobility for everyone

Transport is the largest source of greenhouse gas emissions in France (Figure 1), with the bulk coming from road transport. Policy reforms to phase out fossil fuel subidies have stalled often due to the lack of acceptability, such as in the case of the “yellow vests” protests sparked by the reduction of tax expenditures on diesel. This highlights the importance of keeping driving costs affordable for vulnerable households, especially as EU-led regulation on zero emission cars becomes more binding, making it mandatory to switch to cleaner cars.

Figure 1: Greenhouse gas emissions by sector (in MtCO2e)

Source: CITEPA, Monthly emissions barometer

The French “leasing social” programme briefly available in early 2024 proved highly successful. It helped low-income households adopt light electric vehicles at a reasonable cost. However, the programme suffered from insufficient funding and a shortage of available cars. It should be relaunched with more funding, and expanded to second-hand electric vehicles, as few households buy new cars.

France could also consider means-testing or even eliminating its “bonus écologique” – a fiscal incentive available to all that reduces the cost of purchasing electric cars. After all, the “bonus écologique” often benefits high-income households who would likely purchase electric vehicles regardless. The budgetary saving should be switched to the social leasing programme.

Greater efforts must also be made to promote train travel as a viable alternative for long-distance journeys. Regional rail networks, often neglected in terms of investment, require modernization to enhance their appeal and efficiency. By contrast, tax expenditures that benefit air travel should be drastically reduced, as they provide an unfair advantage to airlines and underprice the true cost of environmental externalities.

Results-oriented home renovations

Home energy use comes at a significant cost for many French households. With energy prices likely to remain high, improving the energy efficiency of France’s widespread “leaky houses” is crucial. The government’s “MaPrimeRénov'” means-tested subsidy helps pay for insulation, windows, and heat pumps, aiming to address this issue. However, several studies suggest these renovations may not always translate into significant energy bill reductions.

To ensure cost-effectiveness, France could consider re-establishing price signals currently suppressed by subsidies. One approach could be to pay home improvement subsidies directly to contractors contingent upon verifiable energy performance improvements. This would incentivize contractors to prioritize renovations that demonstrably reduce energy consumption for homeowners.

By implementing these reforms, and others with a similar purpose, France would take critical steps towards its energy objectives. The transformation the country aims for necessitates a multi-pronged approach, encompassing tax policy reforms and a reevaluation of subsidies, to design a successful shift to affordable, secure, and clean energy.

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