Taxes on “luxury” goods and services could result in more equity and less CO2. According to a study published at the end of June in the academic journal One Earth, a carbon tax on domestic consumption – not standardised across all sectors but with rates adjusted to the type of consumption – could avoid, by 2050, atmospheric emissions totalling 100 gigatonnes of carbon dioxide equivalent. This alone would contribute 75% of what is needed for domestic consumption to remain within a scenario where global average temperatures could remain within the +2 °C target set out in the Paris Agreement.
Such a restructuring of tax contributions would have another benefit relating to its social purpose. Compared to basic consumption categories such as foodstuffs and home heating, things like flights, large SUVs and other luxury goods are the prerogative of the most highly privileged in society. The revenue generated by differentiated rates, according to the researchers at Leeds University, could thus support public housing refurbishment and energy efficiency initiatives.
The reason for a carbon tax on luxury goods
According to the World Inequality Report 2022, 52% of global income goes to the richest 10% of the population. The distribution of CO2 emissions is nearly identical. Starting from this premise, the research group, led by Yannick Oswald, decided to investigate something that previous studies on the distributive implications of carbon taxes essentially left out: in the case of domestic consumption, what would be the consequences of differentiated and non-standardised rates across different economic sectors?
Currently, a carbon tax is in force in 27 countries including Argentina, Japan, China, Japan, Kazakhstan, South Korea, Mexico, and the UK, as well as the European Union, where, in addition to the EU Emission Trading System, the Carbon Border Adjustment Mechanism will come into effect in 2026.
There is, however, one constant: these carbon taxes are applied regardless of the type of product or service being sold. Thus, the researchers developed a model for carbon taxation that distinguishes basic products from luxury products, ascribing a greater cost to the latter and accounting for different perceptions of luxury in the 88 countries in question, which represent approximately 90% of the global population. The outcome? This climate policy instrument, the study shows, could reduce families’ overall yearly emissions by 6% compared to a scenario with no carbon tax, resulting in a 100-gigatonne decrease in CO2 equivalent emissions by 2050. In fact, the same outcome can also be achieved with an undifferentiated carbon tax, but with one key difference: whereas at the international scale, the two models (undifferentiated and differentiated) do not lead to significant differences in terms of income inequality (Gini coefficient), inequality can fall by up to 6 per cent at the national level with the introduction of a “luxury” carbon tax.
The redistribution factor
Additionally, the paper states, in contrast with scenarios where the carbon tax is absent or even undifferentiated, the “luxury” carbon tax would lead to reduced inequalities if the tax revenue were used to retrofit the homes of lower-income families, particularly for energy efficiency interventions. In so doing, a “luxury” carbon tax would impact the sectors of the population most responsible for high-emission consumption in a more equitable way both within individual countries and between countries with different levels of economic prosperity, in the North and Global South.
What remains to be seen, in a highly diversified global context, is if carbon taxation will change from a simple (environmentally-focused) levy to an eco-tax graded according to the necessary or unnecessary nature of consumption. Either way, as the researchers conclude, the implementation of a carbon tax on luxury goods requires much more available data. In particular, the integration of up-to-date and high-quality distributive data on the consumption of families within climate economy models will be the focal point of further research.
Image: Envato Elements