A balanced policy mix — combining carbon pricing, targeted subsidies, and regulation — offers France a viable path to cutting emissions, protecting debt sustainability, and maintaining public support for the transition.
Global warming is already a reality for France: average temperatures in mainland France rose by 2.1°C during the 2014-2023 period compared to pre-industrial levels. As global temperatures continue to rise, the economic repercussions of climate change are becoming increasingly evident. France has recognized the urgent need to address these escalating challenges and launched an ecological planning strategy to lead the green transition. The French Treasury took a significant step in 2023 in this regard, creating a new unit dedicated to environmental policy analysis. This aims to strengthen the government's capacity to navigate the complexities of green policymaking.
The Directorate General of the Treasury (DGT) presented a new report on the economic challenges of France’s net zero transition. Inspired by the UK's landmark Net Zero Review and drawing from international comparisons and the economic literature, the report explores cross-cutting and sectoral dimensions of the transition to net zero. It outlines the key challenges facing businesses, the labor market, foreign trade, households and public finances, addressing the broad macroeconomic impacts as well as sector-specific implications.
The findings are clear: the road to carbon neutrality involves temporary challenges for economic growth, but they are manageable – and the cost of inaction is far greater. With the right approach, its impact on public finances can be contained.
Analytical tools to measure the impact of economic shocks and policy reforms
The report applies two analytical tools to assess the macroeconomic effects of the green transition. The Mesange Vert macroeconomic model, developed in-house, is used to analyze France’s green transition, while the Oxford Economics’ “Global Economic Model” is used to simulate different scenarios for the global energy transition. At the presentation, particular attention was given to the Mesange model, which highlighted two key economic transmission channels of decarbonization:
An increase in the relative cost of GHG emissions: the analysis shows that implementing climate policies leads to short-term costs, including a moderate and temporary decline in GDP. However, these effects can be mitigated through redistribution policies, such as recycling carbon revenues as transfers to households or a reduction in employers’ social contributions.
Additional investment in decarbonization boosts growth: green investments, particularly in energy and infrastructure, boost GDP, even though this positive impact could be limited by financing needs and by the loss of productivity linked to the additional cost of these investments compared to existing carbon-intensive technologies.
The impact of climate change and transition on public finances
The Treasury highlights three channels through which climate change affects public finances. These channels can directly impact government revenues and expenditures as well as have an indirect macroeconomic impact.
Fiscal impacts related to mitigation policies, including increased public investment and subsidies to support decarbonization efforts. This covers spending on low carbon energy, energy efficiency programs, reducing tax revenues from fuel and carbon tax revenue.
Fiscal impacts from the physical effects of climate change, such as damage to state-owned assets and the costs associated with compensation or cost-sharing mechanisms.
Fiscal impacts from adaptation policies, which include both reactive and preventive public spending aimed at increasing resilience to climate risks.
On the specific fiscal implications of mitigation policies, the analysis underscores that the chosen policy mix affects fiscal outcomes. Strategies reliant exclusively on subsidies increase public debt substantially, whereas purely carbon tax–driven approaches would help reduce debt but can face political resistance and lead to adverse redistributive outcomes. A well-balanced mix of carbon pricing, targeted subsidies, and regulatory measures can achieve emission reduction goals while maintaining debt sustainability and ensuring broader public acceptability. This balanced approach also enables the private sector to contribute meaningfully to financing the transition. The figure below illustrates these different results.
Impact of the net-zero transition on the debt-to-GDP ratio relatively to the counterfactual scenario, by policy scenario
A call for strategic, balanced action
The report conveys a clear message: with a data-driven and balanced policy approach, France can manage the decarbonization costs while minimizing short-term economic disruptions. The climate policy toolkit also includes subsidies for green innovation, regulations to address market failures, and international cooperation to prevent carbon leakage. Together, these efforts can mitigate productivity losses and improve health outcomes through co-benefits of the green transition.
In this endeavor, the Coalition of Finance Ministers for Climate Action is committed to supporting countries in pursuing resilient and low-carbon development pathways. Through different workstreams and by fostering peer-to-peer learning and knowledge exchange, the Coalition seeks to enhance governments' ability to integrate climate considerations into economic and fiscal policymaking. Read more about the priorities and Strategic Work Program 2025-2026 here.