France struggles with new carbon tax formula

French ministers have been scrambling to come up with a workable system for compensating companies that are already part of a European Union emissions trading scheme, while closing the many loopholes that led to the failure of the first proposal.

"There should be no complete exemption (from the tax)," Chantal Jouanno, junior minister for ecology, said on French radio. "However, there could be compensation for sectors already subject to certain charges corresponding to the carbon tax."

Set at 17 euros per tonne of carbon dioxide and promoted by President Nicolas Sarkozy as a crucial weapon in the fight against climate change, the tax has been criticized by some as hurting big emitters and by others as giving them an easy ride.

Budget Minister Eric Woerth said the government would keep in place exemptions for participants in the EU scheme, as it was not the aim of the tax to hurt French competitiveness.

Others suggested making factories and power plants pay the tax, then deducting it from the price of future carbon emissions permits.

Such permits are free for now. Under the EU's emissions trading scheme, however, power plants will pay for all carbon permits from 2013, and factories will pay for some.

"Let's find a way of making it neutral for big businesses," Gilles Carrez, an influential legislator from Sarkozy's UMP party, told La Tribune newspaper.

"I suggest the tax be deducted from the price of permits once they have to be paid for."

France's constitutional council annulled the original carbon tax two days before it was due to come into force on January 1, arguing that its many exemptions violated the principle of equality among taxpayers.

The loopholes were meant to pacify people whose livelihoods depend on cars or lorries, as well as polluters who feared they would pay the tax on top of paying for permits.

Sarkozy has said he will revisit the tax legislation, and the government is due to present a revised version on January 20. However, he could find it difficult to persuade lawmakers to back the disputed project so close to regional elections in March.