Vaiju Naravane

Move follows defeat in last Sunday's regional elections at the hands of the Socialists

The tax would have put French companies at a disadvantage to their European counterparts

Paris: Just before facing a crushing defeat in regional election last Sunday, French President Nicolas Sarkozy had said: “These are regional elections and their impact need not be national.” But the extent of the defeat he suffered at the hands of the opposition Socialists and their Green and far left allies have forced him to pause and take stock.

On Wednesday, Mr. Sarkozy said he was scuttling the Carbon Tax, initially presented by him as an environmental measure with long-term fiscal benefits which placed France at the forefront of countries fighting greenhouse gases.

Many environmentalists had praised it as a bold attempt to intervene in the market and directly alter consumer behaviour to benefit the environment. Emissions by households and business were to be taxed at a rate of €17 per ton of carbon dioxide emissions. It was set to come into effect on January 1, by imposing direct levies on gasoline, gas and coal use.

Mr. Sarkozy's UMP Party members were unhappy at the proposal which they said would tax French competitiveness, though it was a mainly UMP-dominated Parliament that passed the law in the first place. France is now in the peculiar position of having passed a law and then abolishing the tax that this law created. The President's position can therefore be said to be outside the law.

Ministers and members of the governing UMP party said the tax would put French companies at a disadvantage compared to their European neighbours, most of whom do not pay anything similar.

But analysts said the drubbing handed to the centre-right government on Sunday in the regional elections, brought about the U-turn from Mr. Sarkozy.

Speaking in Parliament on Tuesday, Prime Minister Francois Fillon said the country's environmental policy needed to be “better coordinated with the European Union,” particularly so that French companies do not lose ground against their German counterparts.

Originally, the carbon tax was supposed to have come into force in January, to raise €3.5 billion by collecting €17 per ton of CO2 emitted. Because of the many loopholes for the big industry, France's highest court struck down the legislation as unconstitutional.

President Sarkozy, however, pledged a reworked law by July. In a speech last year, he said no less than the “survival of the human race” was at stake.

“It's a big climb-down linked to the election; it's political,” Nicolas Bouzou, director of Asteres, a financial consultancy in Paris told Reuters. “There was a lack of preparation and a lot of time and energy was wasted by the government.”

He said that by arguing that the measure needs to be supported by France's European partners, the government is effectively burying the tax. “There's no chance that the 27 members of the EU will agree to this,” he said.

Other European countries, notably Sweden, Denmark, Ireland and Finland have already implemented carbon taxes, but other countries, including Germany and the Netherlands, would probably be reluctant to go along. Britain and Poland are generally opposed to any tax harmonisation at the European level.

The government's latest decision was welcomed by businesses. “We are relieved,” Laurence Parisot, president of the French employers' federation, Medef, said on Tuesday in a statement, “notably for all industry which could not bear this extra competitive handicap.”