Higher carbon tax on luxury goods, say researchers

A carbon tax based on the purpose of using goods and services would be fairer and more likely to deliver climate justice, say ecological economists.

It would mean products to meet basic needs such as fuel for heating or cooking food would attract a lower rate of taxation than the tax rate applied to luxury goods, such as a high-performance car or long-haul holiday.

In a paper published today (Tuesday, July 11) in the academic journal One Earth, a team of researchers led by Dr Yannick Oswald from the University of Leeds, argue that a differential carbon tax system has the potential to reduce carbon emissions.

The study - a theoretical assessment of a potential carbon tax system - analyses a range of scenarios but concludes that a differentiated tax on carbon use could reduce global emissions by six percent.

Carbon taxes are uniform

Presently most carbon taxes are uniform across all economic sectors. In the developed nations, their impact disproportionately affects people on lower incomes and are not extensive enough to have a “profound impact on emissions”.

The researchers say a differentiated carbon tax system would be fairer as the tax would set higher rates for users of luxury goods and services, which are predominantly consumed by the better off.

Under the theoretical model described in the paper, the revenues generated from the carbon tax could be used to retrofit insulation in the homes of poorer families to reduce domestic energy consumption.

Dr Yannick Oswald, from the Living Well Within Limits project at the University of Leeds, who led the analysis, said: “Carbon taxation is a vital mechanism to reduce carbon dioxide emissions.

“But a lot of carbon taxation schemes are either applied with the same tax rates across consumption purposes or target only a few energy-intensive ones such as fuel use, industry or residential heating. And whatever mechanism is used, in high-income countries it tends to be people on lower incomes who are disproportionately affected.

“The scheme we are proposing will introduce a higher carbon tax for luxury goods, such as flying long-haul or driving a high-performance car, and a lower carbon tax for goods and services that meet basic human needs, such as providing housing, cooking and healthcare.”

But the study team warn that if a luxury goods taxation scheme is to work and deliver significant reductions in carbon dioxide emissions, in line with those set out in the Paris Agreement, it needs to be introduced "promptly, universally and with high and rapidly rising carbon prices as compared to any policy currently in place”.

The paper differentiates between luxury consumption, undertaken by high-income households and basic consumption, that which takes up the biggest slice of expenditure for lower-income households,

‘Not a sin tax’

Writing in the paper, the researchers stress the study is not seeking to generally discourage a “materialistic lifestyle” – which means they acknowledge that the consumption of modern goods and services has improved the life of many people.

They add: “Luxury carbon taxes are not sin taxes, they are ecologically motivated and are considerate of distributional implications. They originate from a realist’s perspective on global problems.”

A fair and luxury-focused carbon taxation system is needed because technological solutions alone will not deliver the reduction in carbon emissions that are needed to keep global warming within 1.5 °C. If those solutions do come along, the researchers say the taxation system could then be suitably amended.

“It cannot remain status quo to continue environmentally damaging luxury activities unabated while awaiting a technology fix,” they say.

Snapshot of carbon consumption

The academics used economic and social data from 88 countries, enabling them to get a snapshot of carbon use that covered about 90% of the global population.

It reinforced previous studies that have shown the unequal distribution of carbon use, with:

The top 1% of individuals based on income responsible for around 10% of carbon emissions
The top 10 % of people based on income for 45% of carbon emissions
And the bottom 50% produced less than 15% of global emissions

The study - “Luxury-focused carbon taxation improves the fairness of climate policy” - is published in the journal One Earth. The authors are Yannick Oswald, Joel Millward-Hopkins, Julia K. Steinberger, Anne Owen and Diana Ivanova. The paper can be downloaded from the One Earth website.