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A Stylized Applied Energy-Economy Model for France

We build, calibrate and simulate a stylized energy-economy model designed to evaluate the magnitude of carbon tax that would allow the French economy to reduce by a factor of four its CO2 emissions at a forty-year horizon. We estimate the substitution possibilities between fossil energy and other factors for households and firms. We build two versions of the model, the first with exogenous technical progress, and the second with an endogenization of the direction of technical progress. We show that if the energy-saving technical progress rate remains at its recent historical value, the magnitude of the carbon tax is quite unrealistic. When the direction of technical progress responds endogenously to economic incentives, CO2 emissions can be reduced by more than that allowed by the substitution possibilities, but not by a factor of four. To achieve this, an additional instrument is needed, namely a subsidy to fossil energy-saving research. The redirection of technical progress, which is a driver of energy transition, comes at a small cost in terms of the overall growth rate of the economy.

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Energy Specializations: Energy and the Environment – Policy and Regulation; Energy and the Environment – Environmental Market Design; Energy and the Environment – Climate Change and Greenhouse Gases; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Q56 - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
Q54 - Climate; Natural Disasters and Their Management; Global Warming
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: CGE model, Energy, Environment, Carbon tax

DOI: 10.5547/01956574.35.4.1

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Published in Volume 35, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.