Deep Dive on the Climate Transition for France: Macroeconomic Implications, Fiscal Policies, and Financial Risks

Selected Issues Papers, August 1, 2024

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Climate change presents an unprecedented long-term challenge to the French and global economy.
France has made significant progress towards reducing greenhouse gas emissions, but important additional policy efforts will be needed to meet key mitigation targets.
Decarbonization costs and risks can be significant, highlighting the need to identify efficient and equitable fiscal and regulatory policy options to meet emission goals.

France has increasingly relied on green spending measures to accelerate the green transition.
Complementary or alternative instruments discussed include:
- Higher carbon pricing.
- Other revenue-neutral schemes.
Revenue recycling options to protect vulnerable households:
- Recycling of revenues via cash transfers could offset the price impact on lower-income households.
Transportation policy options:
- Over the medium term, new measures for road transportation, such as distance-based charges, could be considered.

Decarbonization entails material costs and risks that require careful fiscal and regulatory design to be efficient and equitable.
The analysis emphasizes balancing green spending with pricing mechanisms and revenue recycling to manage distributional impacts.

Ensuring a timely and orderly climate transition will be critical to mitigate the credit risk impact on banks.
Recommendations for French banks include continuing to mitigate climate transition risks by integrating them into:
- Governance.
- Strategy.
- Risk management processes.