Remi Fraisse, a 21-year-old botany student, died after being hit by the grenade during clashes between the police and opponents of a planned dam in Sivens, near the southwestern city of Toulouse.
His death triggered riots in several French cities.
In 2018, the officer who fired the grenade was cleared of any wrongdoing, with investigating magistrates declaring he had no case to answer and his lawyer saying his use of force "had been proportionate to the situation".
But in Thursday's decision the Toulouse administrative court ruled that the government bore "a reponsibility for the death of Remi Fraisse following the the action of police forces", while not actually being guilty of any wrongdoing.
The court statement said the government had been ordered to pay his family 46,400 euros (around $52,000).
Shortly after Fraisse's death France banned the use of the grenades, which are designed to disorient, not kill people.
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